TaxTMI 
TaxTMI 
2018 (6) TMI 1318
X X X X Extracts X X X X
X X X X Extracts X X X X
....effect to the directions of the Hon‟ble ITAT it toto. 2. The ld CIT(Appeals) has erred on facts and in law in upholding the method adopted by the Assistant Director of Income Tax, circle2(1), International Taxation, New Delhi while allocating indirect expenses against „commission income from other group companies‟ based upon sales made by other group companies in India." 3. Brief facts of the case is that the coordinate bench has decided the issue in case of the assessee in ITA NO. 1725 to 1727 for Assessment Year 2002-03 to 2004-05 dated 27.12.2010. The coordinate bench has set aside the issue to the file of the ld AO vide para No. 14 directing the ld AO to allow deduction to the assessee on expenses incurred by it in connection with earning of commission from group companies and other income which are brought to tax on gross basis. The coordinate bench further directed that the working of the assessee should be verified and expenses should be allowed as deduction to that extent. It is found that expenses are allowable towards earning of these two incomes. The coordinate bench further held that after allowing the deduction the income results lower tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot been followed by the ld lower authorities is reproduced as under:- "3. Brief facts are that the assessee company is a company incorporated in Singapore on 14.8.2001. The assessee is primarily engaged in the business of trading of industrial products such as compressors, semi-conductors, machinery and batteries. The assessee established a branch office in India which received the necessary 3 ITA-1725 to 1727/D/2009 approval from RBI on 7.9.2002. A certificate of establishment of place of business in India was granted by the Registrar of Companies on 26.9.2002. Reassessment proceedings were initiated by the AO against the assessee for this assessment year alongwith three earlier assessment years i.e. AY 1999-2000, 2000-01 & 2001-02. The AO asked the assessee to file the return of income for the present assessment year as well as the earlier three years. In reply, the assessee submitted before the AO that it cannot file any return of income since the assessee company was not in existence during AY 1999-2000, 2000-01 & 2001-02 and regarding AY 2002-03 i.e. the present assessment year, it was submitted that the assessee was in existence in Singapore but it did not have a tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
....seen that from the appellant's own admission that initially AO framed an assessment for AY 2003-04 and came to the conclusion that the appellant had a PE in India and accordingly he brought income to tax in terms of the provisions of the Indo-Singapore DTAA. The relevant observations of the AO with regard to existence of PE as well as the attribution of profits are as under: "Taxability under the Income Tax Act The branch office of the assessee is business connection of MEI group in India as this office is responsible for identifying the customers of the group, making presentation to them, undertaking negotiation and finalisation of deal. Supervision of supplies to be made from overseas, support in custom clearance, after-sales services, receipt of payment are undertaken by the branch in India. There was no dispute with regard to the fact that the branch office of the assessee is business connection of the group though which the group is in receipt of income 5 ITA-1725 to 1727/D/2009 from India. Therefore, it is held that the branch of the assessee in India does constitute "business connection" within the meaning of section 9 of the Income Tax Act, 1961 and accordingly....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pose of reopening of assessment. Considering these facts, we are of the considered opinion that the reopening in the present case is valid. 7. Regarding this objection of the assessee that copy of reasons recorded by the AO have not been provided to the assessee, we find that as per the judgment of Hon'ble Apex court rendered in the case of GKN Drive Shafts (supra), the assessee can ask for reasons only after filing the return of income u/s 148 and since in the present case, the assessee had not filed his return of income as required by the AO as per notice u/s 148, the assessee cannot claim copy of reasons recorded by the AO and this cannot be the basis to allege that the reopening is not valid. 8. The third objection of the assessee is that no such order can be passed u/s 144 where the assessment has been reopened by the AO u/s 148. We are not in agreement with the learned AR of the assessee on this aspect because as per provisions of Section 144, best judgement assessment u/s 144 can be resorted to by the AO if the assessee fails to file return of income u/s 139. As per the provisions ofSection 148, the return filed or to be filed in response to notice u/s ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ding claim for expenses against commission income from other group companies and other income because these two incomes have been assessed by the AO on gross basis and deduction of expenses against these incomes was not allowed. He submitted a working as per which, the assessee is eligible for deduction on account of expenses to the extent of Rs. 63,09,531/- in AY 2003-04 and Rs. 2,01,70,190/- in respect of AY 2004-05 after which the taxable income will come down to Rs. 19,85,596/- in AY 2003-04 and Rs. 46,18,078/- in AY 2004-05 as against the returned income of Rs. 14,21,810/- and Rs. 48,37,180/- respectively. It is also submitted that since in AY 2004-05, the returned income is more, the final income may be determined as per returned income. It is submitted by him that for the purpose of factual verification regarding quantification of allowability of these expenses, the matter may be restored back to the file of the AO for fresh decision. Learned DR of the Revenue also agreed to this broad proposition put forward by the learned AR of the assessee and he also requested that the matter may be restored back to the file of the AO for fresh decision after allowing deduction of expens....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arts to the extent of Rs. 16,24,519/- should be considered for allowing deduction against income on account of sale of goods of Rs. 24,93,372/- in AY 2004-05. It is also contended that income considered on account of subsidy of Rs. 14,17,132/- in AY 2003-04 and Rs. 32,53,654/- in AY 2004-05 are actually reimbursement of expenses incurred by PIA, Singapore to branch office on training of employees. If the same is considered as income, then actual expenses incurred on that account have to be allowed as expenses after verifying the details and evidences regarding incurring of those expenses. In addition to this, the assessee has claimed deduction of Rs. 63,09,531/- in AY 2003- 04 and Rs. 2,01,70,190/- in AY 2004-05 being proportionate allocation of indirect expenses. Such allocation has been made after deducting the direct expenses from total expenses and then allocating the same in proportion to receipt considered as income in India. The working regarding such allocation of expenses is available on pages 4 & 5 of the submissions of the assessee before us dated 1.11.2010 and for the sake of ready reference, these workings are reproduced herein below:- S.No. Particulars Assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o incomes. If the net income after allowing deduction of expenses is lower than returned income in any year, then the final assessed income should be the returned income which means that deduction on account of expenses should be restricted to that extent which result into net income to the extent of returned income. The AO should pass necessary order as per law as per above discussion after providing adequate opportunity of being heard to the assessee in AY 2003-04 and 2004-05. Regarding AY 2002- 03, it has been submitted by the assessee that no working can be made available regarding expenses of this year. Hence, for AY 2002-03, we confirm the order of CIT(A) because in this year only commission from PIA, Singapore has been brought to tax and no income on account of commission from group companies and other income has been brought to tax in this year and therefore, no deduction is to be allowed in this year on account of expenses. As a result, the appeal of the assessee for AY 2002-03 is dismissed whereas the remaining two appeals for AY 2003-04 & 2004- 05 are partly allowed for statistical purposes." (Underline supplied by us) 7. On careful reading of the order of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e and other group companies. In reference to above, on behalf and under instructions of our subject client, we submit as under: PIAPL is a company incorporated in Singapore and was established on 14 August 2001. PIAPL is primarily engaged in the business of trading for industrial products such as compressors, semiconductors, machinery and batteries. PIAPL established a Branch Office („BO‟) in India which received approval from Reserve Bank of India („RBI‟) on 7 September 2002. As per the approval granted by the RBI, the activities of BO were restricted to marketing and technical support and research activities. Thus, activities of the BO are restricted to provisions of said services only. The BO is not allowed to carry trading activities in India. In view of the fact that the BO has earned income in India from provision of services only, it is respectfully submitted that allocation of indirect expenses should be made based upon service / commission income i.e. income generated from provision of services. Further, it is a fundamental principle of cost allocation that cost is allocated to cost objective that cause i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Company A is rendering marketing support services to company B. As part of marketing support services, Company A does market research and supplies a list of prospective customers say Customer C,D,E,F,G to Company B. Based on such list of prospective customers provided by Company A, Company B approaches to those customers. However, Company B is able to materialize the sales only to Customer C and D. Therefore, Company B pays commission to Company A based on sales made to Customer C and D only. It may be noted that Company A has earned commission in respect of sales made to Customer C and D only. However, the market research activities and relative indirect expenses incurred by Company B cannot be identified specifically to Customer C and D. Company A had incurred indirect expenses in indentifying others customers as well. Therefore, indirect expenses cannot be allocated based upon sales made to Customer C and D only. In light of above discussion, we request your good self to allocate the indirect expenses based upon service income / commission income only. We hope your goodself would find the above in order and to your satisfaction. Please do let us know in ....