TaxTMI 
TaxTMI 
2009 (12) TMI 593
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....raised in the cross objections being same and identical to the issues raised by the assessee in the above referred appeals filed by the assessee, rendering the cross-objections as redundant. ITA no. 1868/Del/2005 & 2289/Del/2005, A.Y. 1997-98 4. We shall first take the appeals pertaining to the A.Y. 1997-98. 5. In appeal filed by the assessee, ground no 1(a), 2, 3, 4 and 5 are directed against the CIT(A)'s order in holding that the AO has correctly and rightly initiated proceedings u/s. 147 of the Income Tax Act, 1961 ("the Act") 6. In this year, the assessee filed its return of income on 05.12.1997 declaring total income at Rs. NIL. The return of income was processed u/s. 143(1) of the Act. Thereafter, the AO issued notice on 11.01.2002 u/s. 148 of the Act by initiating proceedings u/s. 147 of the Act. In response to notice issued u/s. 148 of the Act, Mr. Ajay Kumar Sood and Mr. K.K. Singh, Authorized Representative of the assessee attended and appeared before the AO and submitted various details. After hearing and considering all materials on record, the AO completed the assessment on 28.03.2003 determining the total income of the assessee at Rs. 9,26,70,000/- u/s. 14....
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.... has stated that on the specific request of the assessee, he perused the assessment records and the AO was asked to submit the copy of the reasons recorded u/s. 148 of the Act. From perusal of the record, it was found by the ld. CIT(A) that the AO has recorded the proper reasons before issuing the notice u/s. 148 of the Act and the copy of the reasons which were recorded by the AO was duly supplied to the assessee by the ld. CIT(A). The ld. CIT(A), therefore, stated that reasons were actually and duly recorded by the AO, which were supplied to the assessee by him. 11. Having received the copy of the reasons recorded by the AO, the assessee submitted a detailed reply stating that besides the arguments already made, the reasons recorded by the AO would indicate that there was no formation of belief that the income has escaped assessment as the reopening was made with a view to examine the issue as clear from the reasons given by the AO where the AO has mentioned that "the same issue needs to be examined this year". 12. The assessee also submitted before the ld. CIT(A) that the reasons recorded has clearly established that no new facts came to the possession of the AO, and the A....
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....notice u/s. 148 which is a prime condition u/s. 148 for issue of notice. The order of GKN Driveshafts Ltd. of Hon'ble Supreme Court is dated November 25, 2002 while the AO has recorded the reasons on 8.1.2002 that is much before the judgment of Hon'ble Supreme Court. In spite of that as explained by Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. the reasons were duly supplied to the appellant at the appellate stage which clearly showed that reasons were recorded by AO before issuing of notice u/s. 148. The appellant's assertion that the reasons were not recorded by the AO are baseless. The appellant has raised his objections mainly on the facts that in the A. Y. 1993-94 the appellant's claim was allowed under scrutiny and thereafter till 1997-98 the appellant's view was accepted u/s. 143(1) of the IT Act and only when in A.Y. 1998-99 the case was not empowered to issue notice for the A.Y. 1997-98 and 1999-2000 as it amounts to change of opinion and the Rule of Consistency is also violated. I do not find any merit in the contentions of the appellant. Only the assessment for A.Y: 1993-94 was completed in scrutiny and thereafter no assessment was completed under scr....
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....rect assessment might have been based in the first instance, and whether it is an error of the or law that has been discovered or found out justifying the belief required to initiate the proceedings. Thus, the words 'escaped assessment' where the return is filed, are apt to cover the case or due to its non consideration, or, caused by a mistake of law applicable to such transfer or transaction even where there has been a complete disclosure of all relevant facts upon which is correct assessment could have been based. Explanation 2 to section 147 also clarifies that where a return of income has been furnished by the assessee but no assessment has been made and it is notified by the AO that the assessee has understand the income or has claimed excessive loss, deduction, allowance or relief in the return, the same will be considered as a case of deemed escapement of income. From the perusal of Explanation 2 it is clear that it enacts certain deeming provisions where, in any of the circumstances stated above, income is deemed to have escaped assessment giving jurisdiction to the AO to act u/s. VXL India Ltd. vs. ACIT, (1997) 215 ITR 295, 27 (Guj.); Birla VXL Ltd. vs. ACIT (1996) 217....
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....t state that the present AO has agreed with the view taken by the AO in the assessment for A.Y. 1998-99 but the AO states that she need to examine the issue. The reasons so recorded by the AO do not even state that facts of the case in this year are same as for the A.Y. 1998-99 and are not the same as to the facts for A.Y. 1993-94. Therefore, need to examine the issue was only the reasons stated by the AO in entertaining the belief that income had escaped assessment. He further submitted that since recording of reasons for issuance of notice u/s. 148 of the Act is not a mere formal ritual, the assessment proceedings initiated by the AO u/s. 147 of the Act, in the light of the reasons recorded by the AO, is not valid. 16. Ld. counsel for the assessee further submitted that the reasons recorded by the AO do not express any view or opinion on the assessee's claim of exemption of agricultural income u/s. 10(1) of the Act as there is absolutely no allegation in the reasons that the assessee has not carried out basic agricultural operations and, therefore, the claim for exemption u/s. 10(1) was wrong. He, therefore, submit as the reasons do not contain such satisfaction, the reopening....
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....held to be invalid. He further submitted that having regard to the reasons recorded by the AO, it is clear that the reopening was done by the AO on the basis of assessment order for the A. Y. 1998-99, where assessee's claim of parent seeds produced by the assessee as agricultural income has been rejected after giving elaborate reasons. He further submitted that in the light of the decision of Hon'ble Supreme Court in the case of Ess Ess Kay Engineering Pvt. Ltd. vs. CIT (2001) 247 ITR 818 (SC), it doesn't precludes the AO to reopen the assessment of earlier year on the basis of fresh material found in the course of assessment of next assessment year. The order of the Hon'ble Supreme Court in this case runs as under:- "This is a case of reopening. We have perused the documents. We find there was material on the basis of which the Income-tax Officer could proceeded to reopen the case, it is not a case of mere change of opinion. We are not inclined to interfere with the decision of the High Court merely because the case of the assessee was accepted as correct in the original assessment for this assessment year. It does not preclude the Income-tax Officer to reopen the assessment of....
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....21. We have heard both the parties and have carefully gone through the orders of the authorities below. We have deliberated upon the decisions cited by both the parties. 22. The reasons recorded by the AO on 08.01.2002 for issuance of notice u/s. 148 for the assessment year under consideration are as under: "The 'a' Co. is in the business of research and development of parent seeds which are supplied to other Cos. Such as SPIC for devt. Of hybrid seeds which are then used by farmers. 'A' claims that its income is agricultural income. However, Assessing Officer held in A.Y. 98-99 that A' income is business income and not agricultural income. The case is in appeal. The same issue needs to be examined this year also (turnover this year is Rs. 47,4,91,000 net profit Rs. 37,6,00,000). I therefore have reason to belie that income of more than Rs. 1 lakh has escaped tax. Hence, the case is fit for reopening under section 147 of the I. T. Act 1961". 23. It is not in dispute that there was no regular assessment made by the AO in pursuance to the return filed by the assessee before the notice u/s. 148 was issued. The return of income filed by the assessee was merely processed ....
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....SPIC for development of hybrid seeds is the inferences of law drawn by the AO from the facts found and discussed in the A.Y. 1998-99. Therefore, this observation made by the AO in the reasons cannot said to be irrelevant for the purpose of forming an opinion or belief that income had escaped assessment within the meaning of section 147 of the Act, in as much as for the reasons given by the AO, the assessee's claim of agricultural income has not been accepted by the AO in the A.Y. 1998-99. Therefore, the contention of the ld. counsel for the assessee that the first statement of the reasons recorded is incorrect and irrelevant has no merit. 25. In the reasons, the AO has stated in brief the activity of the assessee of developing and producing parent seeds, which are supplies to SPIC for development of hybrid seeds, which are then used by fanners and this observation of the AO in the background of decisions taken in the assessment order for the A.Y. 1998-99 makes it very clear that over all activities of the assessee in producing and supplying parent seeds have been taken into account by the AO, while recording reasons for issuance of notice u/s. 148 of the Act. 26. Further, the....
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....ssing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income has escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of-fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. vs. ITO [1991] 191 ITR 662, for initiation of action u/s. 147 (a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceedings is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issu....
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...." 29. From the said decision of Hon'ble Supreme Court, it becomes clear to us that if the A.O. has cause or justification to know or suppose that income has escaped assessment, it can be said to have reason to believe that an income had escaped assessment. At the time of recording reasons for initiating proceedings u/s. 147 of the Act, it is not necessary that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. At that initial stage, what is required is "reason to believe" but no established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction. 30. In the light of the aforesaid position of law laid down by the Hon'ble Supreme Court with regard to the scope and effect of section 147 and with regard to the meaning of expression "reason to believe" used in section 147 of the Act, we have to examin....
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....s were not specifically provided by the AO to the assessee at the assessment stage though the reasons were duly made known to the assessee's authorized representative by the AO. 33. In the aforesaid case of Rajesh Jhavery Stock Brokers Pvt. Ltd., the Hon'ble Supreme Court has categorically stated that only issue is to be considered is to see whether there was relevant material on which a reasonable person could have formed a requisite belief that income has escaped assessment within the meaning of section 147 of the Act. The fact that the assessee's claim that its income is agricultural income has not been accepted in the regular assessment made u/s. 143(3) for the A.Y. 1998-99, where the matter was thoroughly analysed and discussed and the AO held that the assessee's claim of agricultural income is incorrect, is undoubtedly a relevant material on which reasonable person could have formed a requisite belief required u/s. 147 of the Act. The Hon'ble Supreme Court in the case of Ess Ess Kay Engineering Pvt. Ltd. vs. CIT (supra) has categorically held that reopening of the assessment u/s. 147 on the basis of finding of facts made on the fresh material obtained in the course of asse....
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....lysed and deliberated upon by the Hon'ble Supreme Court. 35. For the reasons given above, we, therefore, uphold the decision of CIT(A) in holding that the reopening of the assessment u/s. 147 and issuance of notice u/s. 148 by the AO in year under consideration is justified and are valid. Thus, the ground no. 1 (a), 2 to 5 raised by the assessee are rejected, and the issue involved therein is decided in favour of the revenue and against the assessee. 36. Now we shall come to the ground nos. 1(b) and 7 to 15 revolving around the issue as to whether the assessee's income from sale of alleged parent seeds is agricultural income or business income. 37. This issue has been decided by the CIT(A) against the assessee in the light of his order dated 08.09.2004 for the A.Y. 1998-99, where the issue has been elaborately discussed and decided upon. The CIT(A) has rejected these grounds raised by the assessee by observing as under: "3. As per various ground the appellant for all the four years has mentioned that the AO has erred in law in bringing to tax the agricultural income of the appellant as business income by wrongly disallowing the appellant's claim for exemption u/s. 10(1)....
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....he Commissioner of Income Tax (Appeals) XXIX contravenes the Rule of Consistency and the provisions of Article 7 of the Convention for Avoidance of Double Taxation (DTA) entered into between India and the United States of America. That, the Commissioner of Income Tax (Appeals) XXIX erred in arbitrarily confirming 50% of addition of Rs. 8,41,96,000/- made by the learned Assessing Officer by attributing, on an estimated, arbitrary and ad-hoc basis, business income of the Head Office to the India Branch Office by reason of the probable/alleged use of the research information and data placed in a common pool by the Head Office/ Branch Offices of the appellant. That, on the facts of the case, the Commissioner of Income Tax (Appeals) XXIX erred in not correctly applying the provisions of Article 7 of the Convention for Avoidance of Double Taxation (DTA) entered into between India and the United States of America. That, the Commissioner of Income Tax (Appeals) XXIX erred in arbitrarily disregarding categorical information and evidence regarding income of the head office of the appellant filed by the appellant in response to specific query/ directions of the Commissioner of Income....
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....ery raised by the AO vide order sheet entry dated 26.03.03 reads as under as reproduced by the CIT(A) in his order: "Pool of information collected from research units of all branches at the head office is shared amongst all branches. This information includes current and archived information. It may be noted that the HO has a library of research information going back to 1926 and all information is freely available for referencing at al time to the Indian Research Unit. This information is catalogued and may be referenced for further research and development. In such a work environment, no specific information is available regarding the utilization of the research data by the Head Office in other parts of the world of regarding any amount earned by the HO by utilizing the research/seeds in other parts of the world. It is therefore not. possible to quantify or assign any value in any manner to the information exchanged between the HO and the RU." 43. The assessee further stated before the AO that Article 7(3) of the Indo-US DTAA provides that no estimate of attributable profits shall be made in respect of the information that is share bilaterally between the H.O. and the PE, a....
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....ized by HO and other branches abroad and no quantification of income earned therefrom is made. Article 7(2) has been relied upon once again for estimation of profit attributable to PE. In order to estimate the deemed income attributable to PE, it is assumed that the income from utilization of research information would be in the same ratio w.r.t. research expenses, as gross sale to gross expenses relating to the production of seeds in India. Accordingly, the income attributable to the branch office in this A.Y. is estimated as under:- Income from Utilization of Research Data which is attributed to Branch Office:=(Sale/Net production expenses)*(Research expenses) = Rs.(47,491,000/13,402,000)*(21,651,000)=Rs. 7,67,21,000 However, from the estimated income attributable to PE as arrived above, the expense relating to research expenses which has been reimbursed by the HO is allowed for deduction to arrive at the net profit from such attribution, despite the claim by the assessee to the contrary." 46. Being aggrieved, the assessee preferred an appeal before the CIT(A). 47. The assessee's submissions and arguments made before the CIT(A) on this issue has been reproduced by ....
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....ried on by the appellant at the branch office (PE) in India itself forms an essential and significant part of the activity of the enterprise as a whole. The research activities are interrelated, coordinated, interdependent and interwoven with the preparation and sale of hybrid-seeds. In any case, a fixed place of business whose general purpose is one which is identical to the general purpose of the whole enterprise does not exercise a preparatory or auxiliary activity. Accordingly the appellant's case is not covered in articles 5(3)(e) of the DTAA. The appellant is investing lot of money in India for conducting these research which are being utilized not only in India but at other places also. The AO has also mentioned in his submission that contention of the assessee that the appellant is not earning any income from the research carried out in India is totally incorrect. The appellant's arguments that it had two PE is totally misleading and beyond any legal comprehension. The appellant has its branch office in India which is carrying on two activities namely research activities and production and sell of parent and hybrid seeds. The appellant itself in his reply to AO vide submiss....
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....ch has also not been denied by the appellant. The appellant has admitted that research carried out is accessible to any BO or HO. The appellant has also admitted that there is pool of research at HO which is used by all BO. The various crops by use of this research was not submitted by the appellant. Therefore, keeping reliance on the provisions of article 7(2) of DTAA the income has to be estimated on the reasonable basis as there are exceptional difficulties in determination of the profits attributable to PE on account of utilization of expenditure on research activities and expenditure on production on total sales. The basis of estimation of income adopted by the AO is justified in absence of any other details provided by the appellant. However, as per the provisions of Article 7(5) of DTAA only that much profit can be attributed to the PE as derived from the assets and activities of the PE in India. In the appellant's case the income is generated only when the seeds prepared on the basis of research are sold. The income from sale of seed in India has been taxed separately. When the income is generated outside India or HO by use of research carried out in India, then all the act....
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....ile deciding the basic issue as to whether income from parent seeds is agricultural income or not. Therefore, the research undertaken by the assessee to develop or producing breeder or hybrid seeds is undoubtedly closely connected to the very basic issue about the taxability of income from sale of parent seeds, and, thus, the issue about the apportionment of profit to PE in India because of use of research activity carried out in India by HO is closely connected or related to the issue in respect of which the AO has recorded the reasons for issuing notice u/s. 148 of the Act. He, therefore, submitted that even in the light of the decision of Hon'ble Delhi High Court in the case of Jai Bharat Maruti Ltd. vs. CIT (supra), the AO's action in considering the issue in the present reassessment is valid. 53. We have heard both the parties on this preliminary objection raised by the assessee against the validity of AO's action whether the addition on account of apportionment of profit attributable to PE in India for use of research activity carried out in India by HO can be made in the present reassessment notwithstanding the fact that no specific reason relating to this issue were reco....
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....either sold nor licensed or otherwise transferred to any third party including Production unit of the Indian branch. Research unit is vertically integrated to the Research unit of the Head office in USA, and the expenditure of research are separately recorded in the books of accounts and are fully reimbursed by the Head Office. He further submitted that the assessee is not in the business of selling, licensing, or otherwise transferring research material/know-how to any outside party nor does it carry out research for third party on job basis. He, therefore, submitted that the research activity is nothing but preparatory and auxiliary activity to the main business of assessee company, which is production and sale of hybrid parent seeds. In India, the assessee's Branch office is engaged in the production and sale of hybrid parent seeds to Joint Venture group company. He, therefore, submitted that the research activity are preparatory and auxiliary to the main business of assessee, and are thus, covered by exclusionary clause of Article 5(3)(e) of the treaty between India and USA. 57. The ld. Sr. counsel for the assessee further submitted that in the light of the provisions contai....
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....Ltd. (291 ITR 482and in the case of Morgan Stanley & Co. (292 ITR 416) and the decision of Hon'ble Bombay High Court in the case of Set Satellite (Singapore) Pvt. Ltd. (218 CTR 452). 60. He, therefore, submitted that the formula adopted by the AO and by the CIT(A) for determining the deemed income in India "through research activities is arbitrary, whimsical and contrary to the facts of the case and as well as contrary to the Explanation 1 to section 9(1)(i) of the Act. It was further submitted by the ld. counsel for the assessee what can be at best be taxed as income arising from operation in India, which by applying arm's length principle can only be a certain percentage of the cost of research activities as mark-up, as has been done by the AO in the later year starting from A.Y. 2002-03 onwards on the basis of transfer pricing adjustment u/s. 92 CA (3) of the Act. It is important to note that functions performed, assets employed and risk borne by the PE in India have remained static for all these years. He further pointed out that for all the years starting from A.Y. 1993-94 upto date, the Head Office has been reimbursing the entire expenditure on research, and no attribution....
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....velopment and production of hybrid breeder-seed is a necessary input to produce hybrid parent seeds, and therefore, both the activities cannot be said to be distinct and independent to each other. He, therefore, submitted that the assessee's activities of making agri-genetic research to develop and produce hybrid breeder seeds and then producing parent seeds, which are supplied to the joint venture company, are the core business activities of the assessee and not a mere preparatory or auxiliary activities as contemplated under article 5(3)(e) of the Indo-US Treaty. In this respect, the ld. Special Counsel for the department relied upon the findings and observations made by the CIT(A) in para 4.6 of his order. 64. He further submitted that seeds produced in any one crop are mostly discarded and then sold in the market, and the sales proceeds of discarded seeds has been adjusted against the expenses incurred towards the research operation activities of developing and producing hybrid breeder seeds, and only the net expenses are being reimbursed by the Head Office. This makes it clear that the products produced by the assessee are being sold in India. He, therefore, submitted that ....
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.... or related activities are carried on; (i) a store or premises used as sales outlet; (j) an installation or structure used for exploration or exploitation of natural resources, but only if so used for period of more than 120 days in any twelve-months period; (k) a building side or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period; (l) the furnishing of services, other than included services as defined in Article 12 (royalties and fees for included services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-months period; or (ii) the services are performed within that Slate for related enterprise (within the meaning of paragraph of article 9 (associated enterprises) 3. Notwithstanding the preceding provisions of this article, the term "permanent establishment" shall be....
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.... the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is resident of the other Contracting State, or which carried on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other." 69. Item "e" of para (3) of Article 5 of Indo-US Treaty provides that the term "permanent establishment" shall not include the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information for scientific research or for other activities which has a preparatory or auxiliary character, for the enterprise. The ld. counsel for the assessee has submitted that the Branch office of the assessee company exist solely for scientific research and for other activities, which have preparatory or auxiliary character. The ld. Standing counsel for the department, on the other hand, submitted that the branch office of the assessee company in Indi....
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....company under a parent seed charge arrangement provided the results of these research works are made available to Indian companies, and to undertake export and import of parent companies product, and to supervise and promote parent company's financial and technical collaboration with Indian companies. From the overall activities of the assessee earned out by its Branch office in India, as so explained by the assessee before the authorities below, it is seen that the assessee company in India is engaged in the business of production and sale of various variety of parent seeds, which are sold to its joint venture company. For production of parent seeds in large quantities, the first requirement is the availability of 'hybrid breeder seeds' or 'hybrid germ plasm', which would be sown for raising crops of parent seeds. It is the claim of the assessee that the hybrid breeder seeds are developed or produced by the assessee as an ongoing research and development programme taking about 8-10 years for developing the successful hybrid breeder seeds of desired quality. These hybrid breeder seeds are developed and produced by the assessee as an ongoing research and development programme, and a....
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....d, i.e. breeder seed, and activity of multiplication of parent seed by sowing breeder seed, are totally distinct and separate to each other as so claimed by the assessee. It is the case of the assessee that research unit developing breeder seed is a self-contained unit and its object is to develop elite germplasm seeds or hybrid parent seeds know as breeder seeds, which are capable of producing commercial hybrid seeds. The assessee has explained before the authorities below the various components and stages of its activity of developing hybrid parent seeds, which has been reproduced by the CIT(A) in pare 3.3 to 3.7 of his order. The relevant portion of CIT(A) 's order has already been reproduced above herein by us. 48. From the nature of activity carried out by the assessee, it is clear that the breeder seeds developed or produced by the assessee are sown to obtain large quantities of parent seeds, which are being supplied to joint venture company for a price. The assessee undertakes the production of parent seed through multiplication of breeder seed, which are developed by the assessee after a long drawn process of combining two or more traits of different seeds into one seed.....
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....taining permission from RBI to undertake the certain activities, it is more than clear that the assessee's activity of developing breeder seeds by research and producing parent seeds in large quantity for the purpose of supplying the same to joint venture company cannot, by any stretch of imagination, be said to be to totally distinct, separate and independent to each other so as to consider the activity of producing parent seeds being dissociated from activity of developing breeder seeds. This sort of contention advanced the assessee is totally misconceived and baseless. The activity of developing breeder seed is nothing but apart of one and composite integrated activity of producing parent seeds of desired results for the purpose of supplying it to the Joint Venture company. The assessee's contention that breeder seeds are developed in different field or plot of land than that of producing parent seed is not material and relevant, and it does not change the very dominant and primary object and intention of the assessee to conduct agri-genetic research for the development of new products and to make available parent seed to joint venture company under a parent seed charge arrangem....
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....ucing parent seeds in large quantity after sowing breeder seeds as narrated or stated by the assessee, it is noticed by us that the breeder seeds are developed through fixation of desired traits by raising successive generations of crops to arrive at pure in bred lines (elite germ plasma or breeder seeds or hybrid parent seeds, by whatever name it may be called) which are then hybrided with in bred lines or elite germ plasma of another set of desired traits and so on and so forth taking about 7-10 years to develop a successful hybrid parent seed, and only then it can be used for commercial production of parent seed for supply to assessee's joint venture company. The assessee has incurred huge expenditures in developing a successful hybrid parent seed or elite hybrid germ plasma. The different breeder seeds of distinct traits are produced by sowing and planting a vast variety of seeds individually and each plant is harvested individually and thereafter two seeds of different traits are hybrided by way of process where two plants or seeds are crossed over number of generations of crops until the two traits of desired result are fixed in one hybrid seed, and hybrid parent seed are the....
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...., manufacturing transportation and sales. Sales activities includes pre-sales activities, such as solicitation and negotiation of sales. In the case on hand, there is a combination of developing and producing breeder seeds and sales of parent seeds to assessee's joint venture company, which would undoubtedly lead the branch office to PE status. It is not the case where mere and/or sole scientific research is being carried on by the branch office but it is the case where the assessee carries on agri-genetic research to develop and produce breeder seeds, which are used as input and/or seeds for producing parent seeds, which are in turn sold to joint venture company. Even the discarded seeds produced during the course of developing and producing breeder seeds are being sold in India, and the proceeds realized therefrom are adjusted against the research expenses in the books instead of showing the same separately as income in the books. The information or results or datas collected during the course of developing and producing hybrid breeder seeds are being supplied to the HO and in turn o various group companies over the world. Having regard to the various stages of developing and pro....
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.... on by the LO in India did not in any manner, whatsoever contribute directly or indirectly to the earning of profits or gains by the petitioner in UAE. Commission for the services of remittance offered by the petitioner was also earned in UAE. Now from the above it is clear that if the activity carried out in India contributes directly or indirectly to the earning of profits or gains by the non-resident then extent of contribution is to be taxed in India. In the instant case before us, it is not in dispute that the assessee has engaged in the activity of developing and producing breeder seeds by doing extensive research over a number of generations of crops from year to year and the information or data or results found during the course of such activities of developing and producing breeder seeds are transferred to the Head Office, which is accessible to other branches all over the world, and the breeder seeds so developed and produced by the assessee is used as raw material or input or as seed for the purpose of producing hybrid parent seeds which are in turn sold and supplied to the joint venture company by the assessee. The information or data or result collected by the assessee....
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....ld with reference to the Article 5(3)(e) of the Treaty as under:- ""In our view, the second requirement of article 5(1) of the DTAA is not satisfied as regards back office functions. We have examined the terms of the agreement along with the advance ruling application made by MS Co. inviting the AAR to give its ruling. It is clear from a reading of the above agreement/application that MSAS in India would be engaged in supporting the front office functions of MS Co in fixed income and equity research and in providing IT enabled services such as data processing support center and technical services as also reconciliation of accounts. In order to decide wither a P.E. stood constituted one has to undertake what is called a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of the AAR that in the present case article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5(1) is not attracted." The Supreme Court further observed (P. 177/PB/IV) ....
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....f article 5 of DTAA between India and USA, and the income of the PE is, thus, to be taxed in India as per provisions of Article 7 of DTAA. 80. Article 7(1) of the DTAA between India and USA provides that the profits of an enterprise of a Contacting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein and if the enterprise carries on business in other Contracting State through a permanent establishment situated there in, the profits of an enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment; or sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment. 81. Article 7(2) of the Treaty provides that subject to the provisions of article 7(3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shal....
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....oreign country for avoidance of double taxation as envisaged under section 90 to the contrary, if any, and such an agreement will act as an exception to or modification of section 4 and 5 of the Income Tax Act. The provisions of such agreement cannot fasten a tax liability where liability is not imposed by a Local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act as is clear from the provisions of s. 90(2) of the Act. Hence, we have to see first as to whether any tax liability is imposed on the present assessee (a non-resident company) under the Act. 84. As per s. 5(2) of the IT Act, the total income of a non-resident also includes income which accrues or arises or is deemed to accrue or arise to him in India during the previous year. Sec. 9 specifies the incomes which are deemed to accrue, or arise in India. The relevant section is s. 9(1)(i) is reproduced as under: "9. Income deemed to accrue or arise in India. (1)....
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.... which yield profits or gains and the activity of providing result of research conducted by Branch office in India which contributes directly or indirectly to the earning of those profits or gains. There exists a PE in India, and the assessee company has a business connection in India. Thus, such part of profits or gains earned in USA as is reasonably attributable to the operations or activities carried out in India, shall be taxable in India. 86. As already discussed above, in the light of the Article 7(1) and (2) of Indo-US Treaty, the Indian permanent establishment is to be treated as a separated profit center, and profits to be attributed to it should be worked out by following arm's length principle. In this connection as to the method of determining profit attributable to PE in India, the ld. counsel for the assessee has submitted that the revenue authorities below have not made out any case for any exceptional difficulty or has not established that the present case is an unusual one. but, on the other hand, after the insertion of Transfer Pricing Provisions in the Income Tax Act effective from A.Y. 2002-03, the AO has determined the arm's length price of the services rend....
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....d the mark-up on the cost incurred by the branch office. Since the AO as well as Ld. CIT(A) has not determined the profit attributable to the branch office in India in the manner provided under Article 7(2) subject to the provisions of Article 7(3), and since in subsequent assessment years from the A.Y. 2002-03, the AO did not find any difficulty at all in determining the arm's length price of the services rendered by the Indian branch office to the US Head Office, we restore this part of the issue about the determination of the price of the services rendered by the Indian branch office to the Head Office at arm's length price to the file of the AO after providing reasonable opportunities of being heard to the assessee. The assessee shall produce and furnish all the details and particulars before the AO in order to determine the profit attributable to the research activity carried out in India, and used by the HO for its business carried on there. The AO shall decide the issue as per law, in the light of the facts and circumstances of the present case, and after considering the assessee's submissions by passing a speaking and reasoned order. We order accordingly. ITA no. 1869/De....