1. These cross appeals by the assessee and the revenue for the Assessment Year 2001-02 are directed against the order of the CIT(A).
These are being disposed of with this consolidated order.
2. The Appellant M/s. Van Oord Dredging And Marine Contractors BV (formerly known as BALLAST HAM DREDGING BV)) is a company incorporated in The Netherlands and is an International Dredging Contractor. The assessee is a tax resident of The Netherlands. During the accounting period relevant to the assessment year 2001-02 the assessee executed contracts in India and for this purpose the assessee has maintained project/site offices in India established with the approval of the RBI.The assessee has filed its return of income for the Assessment Year 2001-02 on 30.10.2001 returning a loss of Rs. 12.80 Crores. In the return of income, in computing the returned loss of Rs. 12.80 Crores the income of Rs. 30,78,70,463/- received in relation to the New Mangalore Port Trust (NMPT) project was reduced on the basis that the said project was completed earlier in the Financial year 1995-96 and accordingly in the absence of a permanent establishment (PE) in relation to the NMPT project in the relevant Assessment Year 2001-02 the said amount was not taxable as per the various Clauses of the Indo Netherlands Tax Treaty. The assessee had in the Assessment Years 1995-96 and 1996-97 a contract with the NMPT dated 5.12.1994 for carrying out maintenance and capital dredging services in connection with the development of additional facilities at the New Mangalore Port. The services were rendered at the site by the assessee by bringing its dredgers (ships) for carrying out its dredging activities.
The assessee was deemed to have a PE under Article 5(3) of the Treaty namely a construction site or project which continued for more than a period of six months. In the Assessment Year 1996-97 the project of the assessee at New Mangalore Port was completed and completion certificate granted by NMPT and the PE of the assessee at the New Mangalore Port ceased to exist. After the completion of the contract in the period relevant to Assessment Year 1996-97 the assessee made claims on NMPT aggregating to Rs. 89,25,79,385/- for additional work performed by it NMPT made counter claim aggregating to Rs. 13,85,00,039/- for loss of revenue due to delay in completion of the contract. This resulted in arbitration proceedings followed by appeal to the Court of additional district Judge against the order of the arbitration Tribunal. On 30.3.2000 the additional district Court of Mangalore upheld the claim of the assessee against which NMPT filed an appeal with the Hon'ble Karnataka High Court. Thereafter during the Financial period 2000-01 relevant to Assessment Year 2001-02, NMPT withdrew its appeal filed with the Hon'ble Karnataka High Court and paid a claim of Rs. 30,78,70,463/- to the assessee in September 2000. It is not disputed between the parties that the income accrued to the assessee in respect of this amount of Rs. 30.78 Crores only in the Assessment Year 2001-02 when the order of the Mangalore District Court has become final. The Assessing Officer while framing the assessment of the assessee for the Assessment Year 2001-02 made the addition of this amount of Rs. 30.78 Crores received by the assessee in relation to the NMPT project and this amount was treated as income from its discontinued business Under Section 176(3A) of the IT Act, 1961, apart from certain other additions and disallowances. The appeal to the CIT(A) was also unsuccessful and the main additions made by the Assessing Officer were confirmed by the CIT(A). Against this order of the CIT(A) the assessee is in appeal before the Tribunal.
3. The Ld. Counsel for the assessee submitted that the grounds of appeal number 1 and 2 since relates to the same issue may be taken together.
1. The Ld. CIT(A) erred in holding that the arbitration award of Rs. 307,870,463- received by the Appellant from new Mangalore Port Trust project is taxable under Article 7 of the India Netherlands tax treaty, despite the fact that there is no Permanent Establishment in existence during the said year.
2 The Ld. CIT(A) has erred in taxing the arbitration award under Section 176(3A) of the Act. Your Appellant submits that the said section has no application to the facts of their case and cannot apply under the India Netherlands tax treaty.
5. The Ld. Counsel for the assessee submitted that after the completion of the project at NMPT during the period relevant to the Assessment Year 1996-97, the PE of the assessee at NMPT ceased to exist. He submitted that the revenue has not disputed this fact that the assessee does not have the PE in relation to the NMPT during the Assessment Year 2001-02. He submitted that despite the absence of PE in India of the assessee for Assessment. Year 2001 -02, the revenue has held the amount of Rs. 30.78 Crores chargeable to tax by wrongly invoking the provisions of Section 176(3A) of the Act. He submitted that once the project was completed the machinery (ships) were sent back out of India and therefore there was no PE in India with regard to the project at New Mangalore Port. He referred to various clauses and articles of the treaty between India and Netherlands in support of his arguments that the amounts received by the assessee can be taxed in India only if there is a permanent establishment in India. He referred to the provisions of Section 176(3A) of the Act and submitted that once Treaty is there between India and Netherlands and there is no permanent establishment of the assessee in India, the provisions of Section 176(3A) has no application. He submitted that there is no discontinuation of business by the assessee as the assessee is still in the business of dredging in India at sites other than New Mangalore Port during the period relevant to the Assessment Year 2001-02. He submitted that there is no Article in DTA with Netherlands which permits the levy of tax in India even when the PE is closed. The source of income of Rs. 30.78 Crores received by the assessee company is the order of the Court for which there was no PE in India. He submitted that there is no discontinuation of business of dredging by the assessee during the period relevant to the Assessment Year 2001-02 and therefore the provision of Section 176(3A) relating to discontinuation of business have been wrongly invoked. He has relied on series of decisions reported in: CIT v. Merwanji Kola & Co. 68 ITR 663 (Bom); CIT v. Saurashtra Packagng P. Ltd. 259 ITR 520 (Bom.); CIT v. Poison (PE.) 13 ITR 384 (PC); Banyan and Berry v. CIT 222 ITR 831 (Guj.) and CIT v.Stepwel Industries Ltd. 228 ITR 171(SC); 91 ITD 354 (Del.).
6. He submitted that to tax business profits as per various Articles of DTA with Netherlands there should be a PE for the project during the relevant period and that the profits should be attributable to the PE in India. He submitted that relevant article of DTA with Netherlands in relation to the taxing of business profits is Article 7 of DTAA. This Article namely Article 7(1) is identical to the OECD Model convention and not based on the UN Convention. It is a narrow definition than the UN Model. He submitted that the OECD Model Commentry would be useful in determining the meaning to the words in the convention as held by several decisions including that of Hon'ble Andhra Pradesh High Court in CIT v. Vishakapattanam Port Trust 144 ITR 146 (AP) which has been confirmed by the Hon'ble Supreme Court in Union of India v. Azadi Bachao Andolan 263 ITR 706 (SC). He submitted that once the PE is terminated, business profits cannot be brought to tax, as there must be a PE to which the source of income can be attributable. Where there is no PE the question of determining profits attributable to the same cannot arise. He submitted that when damages are received through a Court order the source of income is the order of the Court as held by Bombay High Court in Princess Maheshwari Devi of Pratapgarh v. CIT 147 ITR 258 (Bom.). He submitted that this position of the OECD has not been accepted by one of its members namely. The United States of America, which in para 45 has added a reservation to the commentary on Article 7. Under the US Model convention the US differs from the other countries in seeking to tax payment which are deferred, to a point of time after the PE has ceased to exist. He submitted that in DTAA between India and USA after signing of the convention a protocol was signed adding a new provision. He submitted that in DTAA with Netherlands not only there is no clause which permits the taxation of profits after a PE has ceased to exist but instead under a protocol an addition is made specifically providing that profits of a PE are only taxable in respect of actual activity carried out by the PE in that State. Therefore once there is no PE in India the question of taxation of profits under Article 7 does not arise. He submitted that irrespective of Section 176(3A) of the Act whether the tax treaty provides to the contrary, it will prevail and in case of a conflict between tax treaty and domestic law, the tax treaty shall prevail as held by Hon'ble Supreme Court in Union of India v. Azadi Bachao Andolan 263 ITR 706 (SC). The Ld. Counsel for the assessee submitted that the revenue is seeking to tax the order of a Civil Court in India. The source of income of the assessee company is the order of the Court and for this source there being no PE, the same cannot be taxed under the provision of DTAA between India and The Netherlands. He submitted that the AO has in fact for this very assessment year 2001-02 computed income from the assessee's dividends, business carried out in India from different sites and therefore the provision of Section 176(3A) of the Act cannot be applied where the business of the assessee is not totally discontinued. In support of its preposition that where the assessee itself ceased to exist, but the business in its generic sense (like solicitor etc.) is continued, the Courts have held that the provisions of Section 176(3A) does not apply, he relied on series of decisions in CIT v. Merwanji Kola and Co. 68 ITR 663 (Bom.) ; CIT v.Saurashtra Packaging P. Ltd.CIT v. Poison (P.E.) 13 ITR 384 (PC); O. Ram. M.Sp S.V. Meyyappa Chettiar v. CIT 11 ITR 247 (Mad.); CIT v. Figgies (A.W.) and Co 24 ITR 405(SC); 43 ITD 272(Ahd.); 91 ITD 354 (Del.); and 92 ITD 202 (Pune)(TM) 7. The Ld. DR submitted that for taxing the assessee company incorporated in the Netherlands only 2 conditions should be satisfied namely there should be a permanent establishment of the assessee in India and income should be attributable to the PE. He submitted that there is no condition that in the year of receipt of income there shall be a PE in India. He referred to the language of Explanation 2 to Section 5 and Section 5(2) and Section 9 of the IT Act 1961 in support of taxability of income of the assessee company during the relevant period. He submitted that there are four types of model of agreement and we are concerned with UN model of agreement wherein "residence " and "sources " is relevant. He referred to various articles of DTAA between India and Netherlands, a copy of which is filed in the compilation before the Tribunal. He submitted that in the facts of the case the provision of Section 176(3A) of the Act are applicable and relied on decision of Hon'ble Bombay High Court in 208 ITR 573(Bom). He submitted that the assessee has declared the income of Kakinada Port Trust even after the close of PE for Kakinada Port Trust venture. Hence there is no reason that why the income of Rs. 30 78 crores received during the year by the assessee from NMPT project be not taxed in this year. He relied on decision in 215 ITR 573 (Bom) and 234 ITR 682(Bom).
He also referred to the commentary by K. Vogul in support of the argument that even if PE is liquidated during the relevant period, the income received by the assessee is still taxable. He submitted that the PE of the assessee company was in existence during the assessment year 1995-96 and 1996-97 in India and that the income of Rs. 30.78 crores received in Sept. 2000 is attributable to the PE in India and therefore, the assessee has been rightly taxed on this amount of income by the A.O. He supported that in this case we are not concerned with the US model of treaty. He referred to the notes to the financial statements for the year ending 31/3/01 of the assessee wherein it is specifically mentioned "claims, if any by the assessee company are recognised upon realisation". The ld. D.R submitted that if the plea of the assessee that to tax its income the PE should be in existence during the relevant assessment year is accepted then it can lead to anomaly since the assessee would be entitled to deduction of all expenses and income received in the subsequent years shall not be taxable due to non existence of the PE. He submitted that in fact the PE of the NMPT was existent even in assessment year 2001-02 as the assessee was pursuing the arbitration proceedings before the Hon'ble Karnataka High Court. He argued that even if for argument sake it is assumed that there was no PE in financial year 2000-01 relevant to assessment year 2001-02 still the income which is attributable to PE of NMPT is taxable in India as per provisions of Section 5(2) of the IT Act. He submitted that the assessee has received income attributable to PE and that it was not offered earlier on accrual basis and, therefore, the same is chargeable to tax Under Section 5(2)(a) r.w. explanation-2 to Section 5 and also Section 9(1)(i) of the IT Act.
8. He submitted that the assessee company has claimed expenditure in respect of this income of arbitration award that was received from NMPT Project, therefore, in view of the matching concept as discussed in Taparia Tools case by Hon'ble Bombay High Court reported in 260 ITR 102, the income is also required to be taxed in India. He referred to para 412 of CIT(A)'s order where the CIT(A) has mentioned that by assessee's own admission in the statement of fact that the assessee has made claim at NMPT aggregating to Rs. 89.25 Crores for additional work performed and for this additional work performed the assessee company has claimed all expenses and now at the time of offering income which was received on account of those expenditures, the assessee has taken the argument that the same is not taxable in view of the provisions of Article - 7 of Indo Netherlands treaty, which is not correct. He submitted that there are only two conditions for taxability of the income in India as per the treaty with Netherlands and they are that the PE should exist in India and profit is required to be taxed to the extent which is attributable to the PE. He submitted that there is no other condition that the particular PE should be in the year in which the amount has been received. In this case when the income was earned PE was very much there and income is attributable to that PE (NMPT) only. The assessee has claimed all expenses incurred for earning this income and the same has been allowed as a deduction and therefore, the A.O has rightly taxed the arbitration award amount during relevant year. He submitted that there are four types of model conventions which were prepared with context to the requirement of those organisations, which are, OECD Model, UN Model, US Model and ANDEAN Model. He submitted that the arguments of the ld. Counsel for the assessee in respect of certain provisions of US Model and Indo American Treaty is not relevant for the issue under reference to DTAA between India and Netherlands. He submitted that the arguments of the ld. Counsel for the assessee which is based on provision of OECD Model convention is also not relevant. The ld. D.R submitted that if as per assessee's argument that the present PE independent of NMPT ceased to exist since financial year 1995-96 onward, then definitely there is discontinuation of business of that particular PE which itself is independent unit for taxation purpose and therefore, in that context the provision of section 176(3A) of the Act is squarely applicable in the present case.
In support of his argument of taxability of the amount Under Section 176(3A), the ld. D.R has relied on the following decisions. Star Andheri Estate 208 ITR 573 (Bom); CIT v. Cockanardt Pvt. Ltd. 215 ITR 793 (Bom) and Dhanamal Silk Mills v. CIT 234 ITR 682(Bom).
9. He argued that the provision of Section 176(3A) is acting as a legal fiction created by law and it therefore, follows that once something unreal is assumed as real, such assumption is to be carried to its logical end and the consequence or incidence following from such assumption will also to be assumed as real. He submitted that the fiction is to be carried to its logical end and that all the facts necessary for giving effect to the fiction are also to be assumed. He argued that on this ground also the addition made by the Assessing Officer may be upheld.10. We have considered the rival submissions and perused the orders of the AO and the CIT(A). We have also perused copies of various documents filed in the compilation before us including the DTAA between India and The Netherlands and also the written submissions filed by both the parties. The only issue in the grounds of appeal No. 1 and No. 2 is regarding the taxability of the amount of Rs. 30.78 Crores received during the period relevant to the assessment year 2001-02 by the assessee company from NMPT. Before proceeding to decide the issue we consider it relevant to reproduce Article 5 and Article 7 of DTAA between India and The Netherlands as under: 1. For the purposes of this convention, the term " permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a warehouse in relation to a person providing storage facilities for others; (i) an installation or structure used for the exploration of natural resources provided that the activities continue for more than 183 days 3. A building site or construction, installation or assembly project constitutes a permanent establishment only where such site or project continues for a period of more than six months 1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of one of the States carries on business in the other State through a permanent establishment situated therein, there shall in each State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this Article.
3 (a) In determining the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purpose of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. Provided that where the law of the State in which permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or over-ridden by any Convention between that State and a third State which enters into force after the date of entry into force of this Convention, the competent authority of that State shall notify the competent authority of the other State of the terms of the corresponding paragraph in the Convention with that third State immediately after the entry into force of that Convention and, if the competent authority of the other State so requests, the provisions of this sub-paragraph shall be amended by protocol to reflect such terms.
(b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments, in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to the permanent establishment. Likewise, no account shall be taken in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees, or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise by way of interest on monies lent to the head office of the enterprise or any of its other offices.
4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by the permanent establishment of goods or merchandise of the enterprise.
5. For the purpose of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
6. Where profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article.
11. A reading of the relevant Article 5 and Article 7 of the DTAA between India and Netherlands shows that there are only two conditions for taxing an amount received by the assessee in India and they are that there should be a PE of the assessee in India and that the income should be attributable to the PE. In this case the PE was admittedly in existence in India in the earlier assessment years 1995-96 and 1996-97 and that the income of Rs. 30.78 Crores received by the assessee company during the assessment year 2001-02 is attributable to the PE in India of the assessee company. As per the various Articles in the DTAA between India and Netherlands, we find that there is no condition therein for taxability of the income received by the assessee company in India that in the year of receipt of that income there shall be a PE in India. In fact in this case the assessee company was carrying on its business of dredging contract at various other sites in India during the period relevant to the assessment year 2001-02 and it cannot be said that the assessee was having no PE in India during the relevant assessment year 2001-02. There is also no condition that for taxability of the amount the assessee company shall have a separate PE for each of its projects in the year of receipt of income by the assessee. We are not impressed by the argument of the Ld. Counsel for the assessee that the source of income of Rs. 30.78 Crores received by the assessee company is the order of the Court for which there was no PE in India.
Although the assessee has received this amount of Rs. 30.78 Crores in consequence of order of the Court but the fact remains that this amount relates to the business of the assessee of dredging operations for which the assessee company was having a PE in India. The US model convention is not much relevant to the issue before us relating to DTAA between India and Netherlands. The assessee company has declared the income of Kakinada Port Trust even after the closure of PE for Kakinada Port Trust venture. The Ld. Counsel has explained that the assessee has by mistake declared the income of Kakinada Port Trust even after closure of PE. We find that the act of the assessee company in declaring the income of Kakinada Port Trust even after the closure of PE thereof, may not be decisive of the issue but notes to the Financial Statements for the year ending 31.3.2001 of the assessee company wherein it is specifically mentioned "claims, if any by the assessee company are recognised upon realisation", makes the accounting system of the assessee clear to some extent. We find force in the argument of the Ld. DR that if the plea of the assessee that to tax its income the PE should be in existence during the relevant assessment year is accepted then it can lead to anomaly since the assessee would be entitled to deduction of all expenses and income received in the subsequent years shall not be taxable due to non existence of the PE.The CIT(A) has mentioned in its order that by assessee's own admission in the statement of fact that the assessee has made claim at NMPT aggregating to Rs. 89.25 Crores for additional work performed and for this additional work performed the assessee company has claimed all expenditure and now at the time of offering the income which was received on account of those expenditure the assessee has taken the argument that the same is not taxable in view of provision of Article 7 of Indo Netherlands Treaty, which is not correct. We find that the language of Article 7(1) of DTAA between India and Netherlands is unambiguous and clearly lays down that if an enterprise carries on business in the other State through a Permanent Establishment situated therein, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that Permanent Establishment. Here in this Article there is no mention of any condition of there being a PE in that other State to be in existence in the year of receipt of income by the enterprise. In these facts since the assessee was having a PE in India and also the income of Rs. 30.78 Crores received from NMPT being attributable to the PE in India and there being no condition that PE should be in existence in India in the year of receipt of the amount by the enterprise, we hold that the arbitration award of Rs. 30.78 Crores received by the assessee company from NMPT project has rightly been taxed by the AO as income of the assessee company for the assessment year 2001-02. In view of our finding that the assessee was having PE in India and the income of Rs. 30.78 Crores was attributable to PE in India and accordingly taxable in the hands of the assessee for the relevant assessment year 2001-02, we consider that the issue of applicability of provision of Section 176(3A) of the Act is not relevant. Accordingly, the issue is decided in favour of the revenue and the Grounds of appeal No. 1 and 2 of the assessee are dismissed.
The Ld. CIT(A) has erred in taxing the arbitration award on a gross basis.
The Ld. Counsel for the assessee submitted that income in the hands of the assessee cannot be taxed on a gross basis and has relied on a series of decisions CIT v. United Construction Contractors 218 ITR 914; CIT v. Foresole Ltd. 153 ITR 349 (Raj.) ; ACIT v. Justice Motilal B.Naik 91 ITD 384 and ITO v. Dipson & Co. 49 ITD 125.
13. The Ld. DR submitted that as per the provision of Section 176(3A) sum received after discontinuation of the business is required to be taxed as deemed income of the recipient and charged to tax accordingly in the year of receipt and therefore the AO has rightly taxed the amount of arbitration award on gross basis. He has relied on the order of the CIT(A).
14. We have considered the rival submissions. The language of Section 176(3A) lays down that the amount received will be taxed as income in the like manner as if such sum were received before such discontinuation of business. Accordingly, it cannot be said that as per the wording of Section 176(3A) of the Act such income can be taxed in the hands of the assessee on a gross basis. We direct the AO to tax the receipt of arbitration award of Rs. 30.78 crores, not on gross basis and to allow the allowable deductions thereon, if had not been allowed already in the earlier assessment years. We order accordingly.
The Ld. CIT(A) has erred in not allowing set off of unabsorbed depreciation and current year's depreciation against the assessed income of Assessment Year 2001-02.
The Ld. Counsel for the assessee submitted that the provision of Section 176(3A) specifically provides that the amount taxable Under Section176(3A) is to be treated in the like manner as if they had been received prior to discontinuation. The Ld. DR has relied on the order of the CIT(A). He submitted that the assessee is also assessed in the country of residence i.e. in Netherlands where the assessee can claim the loss of Indian project against income of its Head office as per the provisions of Netherlands. He submitted that if these losses have been claimed and set off against the world income in Netherlands on the basis of residence then the same should not be allowed to be set of against the Indian income for this year or for any other year as this will amount to double dip, which is not permissible in international law.
16. We have considered the rival submissions. We direct the AO to verify whether the assessee has claimed the loss of Indian Branch against the income of head office as per provision of the Netherlands and if these losses have been claimed and set off against the world income in Netherlands, the same should not be allowed to be set off against the Indian income of this year or any other year and if the assessee company has not claimed these losses in Netherlands then to allow the set off of losses Under Section72 of the IT Act, 1961. We direct accordingly.
The Ld. CIT(A) has erred in not allowing deduction of arbitration proceedings related expenses incurred by the Appellant against the arbitration award.
The Ld. Counsel for the assessee submitted that taxing the arbitration amount on gross basis is not valid and the expenses incurred by the assossee company against arbitration awaid amount should be allowed as an allowable deduction. He relied on the decision in 93 TTJ 232 (Jodh.), 63 ITR 766 (AP); 82 ITR 136(AII); 188 ITR 532 (Ker); 161 ITR 82 (Bom.).
18. The Ld. Departmental Representative submitted that the Assessing Officer has rightly taxed the sum received on gross basis Under Section 176(3) of the IT Act for the reason that there is no provision of allowing the deduction of expenses in relation to the arbitration award amount Under Section176(3A) of the Act.
19. We have considered the rival submissions. We find no justification for not allowing the genuine expenses incurred by the assessee in relation to the arbitration award amount received by it. While deciding the Ground of appeal No. 1 and 2 in this appeal, we have held that the assessee was having a PE and the amount of Rs. 30.78 crores received by the assessee is attributable to the PE in India and accordingly the allowable expenses in relation to this amount of Rs. 30.78 crores have to be allowed as allowable deduction to the assessee. Accordingly the Assessing Officer is directed to examine and allow the genuine and allowable expenses incurred by the assessee in relation to the arbitration award amount received by the assessee. We direct accordingly.
The Ld. CIT(A) erred in upholding the levy of interest of Rs. 3,401,534/- under Section 234D of the Act.
The Ld. Counsel for the assessee submitted that the provision of Section 234 D was inserted by Finance Act 2003 with prospective effect from 1.6.2003 and was not given retrospective effect. He submitted that this provision was not on the statute book for the Assessment Year 2001-02 and that was not there when the order Under Section 143(1)(a) was made on 25.2.2003. The President's accent was received only on 14/5/2003 and the section came into force w.e.f. 1.6.2003. He relied on the decision of Delhi Tribunal in 97 TTJ 108 (Del.) wherein it is held that the section cannot be applied to Assessment Year prior to 2003-04.
He relied on a series of decisions in support of his arguments reported in 254 ITR 772(SC), 60 ITR 262 (SC); 241 ITR 312 (SC); 261 ITR 721 (Ken); 241 ITR 545 (Mad.). He submitted that the Bombay Tribunal has taken a view in favour of the assessee in case of Randil Trading Co. v.ITO in ITA No. 8854/Mum/04 and in the case of Ms. Clea Advertising and Marketing Ltd. v. ACIT in ITA No. 2139/M/02. Reliance was also placed on the decision of Hon'ble Supreme Court in the case of Sedco Forex International Drill Inc. v. CIT Dehradun in Civil Appeal No. 351-355) of 2005.
21. The Ld. Departmental Representative has opposed the submissions of the Ld. Counsel for the assessee. He submitted that there is a decision from Ahmedabad Bench in the case of Sardar Sarovar Narmada Nigam Ltd. 93 ITD 321, 389 (Ahd.) in which the Hon'ble Tribunal has allowed the revenue's appeafand has held that what we have to see is the date when the excess grant of a fund was found/determined. He argued that if the assessee's arguments are accepted interest Under Section234D shall not be levied if the assessments are made for the first time under the provisions of Section 147 or 153A of the IT Act after 1.6.2003 which is not the intention of the legislature. He submitted that the provisions of interest Under Section234 A,B, C are compensatory in nature as held by Hon'ble Karnataka High Court in 232 ITR 62 (Kar).
22. We have considered the rival submissions. The provision of Section 234D was not in the statute book during the relevant period and was inserted by the Finance Act, 2003 w.e.f. 1.6.2003. In this case the processing Under Section143(1)(a) was made on 25.2.2003 wherein the order was passed granting refund to the assessee and on which date the provision of Section 234 D had not come on the statute. In these facts of the case we are of the view that the decision of the Delhi Tribunal in 97 TTJ 108 (Del.) is applicable and accordingly the interest Under Section234D of the Act is not chargeable to the assessee and the ground of appeal No. 6 of the assessee is allowed.
The Ld. CIT(A) ought not to have directed the Ld. Assessing Officer to reopen the assessment of the past years, which are not subject matter of appeal.
The Ld. Counsel for the assessee submitted that the CIT(A) has no jurisdiction to give direction with regard to earlier years which are not the subject matter of appeal before him. He relied on decision in 63 ITR 766 (AP) and 93 TTJ 232. The Ld. Departmental Representative submitted that the CIT(A) is within his powers to give his finding which is necessary for disposal of the case before him. He relied on decision in Rajendra Nath v. CIT 120 ITR 14 (SC) and Bhagwandas Sitaram (HUF) 143 ITR 563(SC).
24. We have considered the rival submissions. We find that the CIT(A) has not given any direction to reopen any of the earlier years assessments of the assessee and he has only observed that "He (Assessing Officer) may also consider reopening any of the prior years assessments, given that based on the documents submitted in course of the appeal proceedings it appears that there is a significant tax arbitrage by shifting of income from the appellant to NOB". Thus the CIT(A) has only asked the Assessing Officer to consider the issue and cannot be said to be a direction by him and accordingly we hold that there is no merit in this ground of appeal of the assessee and the ground of appeal No. 7 of the assessee is dismissed.
The assessee has requested for admission of the following 2 additional grounds of appeal: 1. The Ld. CIT(A)XXXI has erred in considering a tax rate of 48 percent for the purpose of determining the tax liability of the appellant.
2. The Appellant respectfully submits that in accordance with the provision of Article 24 of the India-Netherlands tax treaty, the tax rate applicable to the Appellant for computing its tax liability should be the rate applicable to India Companies.
The Ld. Counsel for the assessee submitted that the issue involved in the additional grounds of appeal is pure question of law not involving any investigation of facts and therefore as per Supreme court decision in the case of National Thermal Power Ltd. reported in 229 ITR 383(SC), the additional grounds of appeal preferred by the assessee may be admitted. He submitted that under Article 24(2) of the DTAA between India and Netherlands, it is provided that the taxation of an enterprise of Netherlands shall not be less favourably levied in that other State than taxation levied on enterprise in India carrying on the same activity. He submitted that the assessee company being a resident of Netherlands is entitled to invoke Article 24 of DTAA. He relied on the decision of Mumbai Tribunal in the case of ITO v. Decca Survey Overseas Ltd. ITA No. 384/Bom/94. He also relied on decision of Mumbai Tribunal in the case of Toyo Engg Corpn. v. CIT ITA No. 600/Mum/02 wherein on identical issue the assessee had "not pressed" the issue before the appellate authority and then raised the same before the Appellate Tribunal. The Tribunal has held that as this issue is pure question of law including the interpretation of Explanation the assessee was entitled to raise it even if not pressed before the lower authority. The Ld. Counsel for the assessee submitted that the additional grounds of appeal may be admitted and sent to Assessing Officer who should consider and decide the same in accordance with law.
26. The Ld. Departmental Representative submitted that there is no reason for admitting these additional grounds of appeal as action of the Assessing Officer is as per the provision of the Act and there is no ambiguity in the language of the provision of Section 90 of the Act.
Further the Explanation to Section 90 inserted by the Finance Act 2001 with retrospective effect from 1.4.1962 making it clear that charge of tax in respect of foreign company at a higher rate than the rate at which domestic company is chargeable shall not be regarded as less favourable charges in respect of such foreign company. He relied on decision of Hon'ble Supreme court in the case of Stepwell Industries reported in 228 ITR 171(SC). On merits the Ld. Departmental Representative submitted that this issue has been decided by the Bombay Tribunal in the case of Decca Survey Overseas Ltd. ITA No. 5261/B/1992 dated 1.4.2005. He relied on decision of Hon'ble Supreme Court in the case of Electronic Corporation of India Ltd. 183 ITR 43, 55(SC). He submitted that Mumbai Tribunal in the case of Toyo Engg. Corpn. ITA No.6600/M/02, cited by the assessee, has not considered the amendment made by Finance (No.2) Act, 2004 which has modified the amendment made by Finance Act, 2001 retrospectively. He relied on decision in 94 ITD 401 (Mum), 254 ITR 31(ker), 240 ITR 341 (SC), and also Bombay Tribunal in the case of Grevek Investment and Finance Ltd, ITA No.(SS) 82/M/02 for Assessment Year 1998-99 dated 27.12.05 27. We have considered the rival submissions regarding the issue of admissibility of additional grounds of appeal preferred by the assessee. The issue sought to be raised in the additional grounds of appeal is legal in nature and accordingly has to be admitted as per decisions relied upon by the assessee. However since the issue was not adjudicated upon by the lower authorities, we consider it justified to remit the issue in the additional grounds of appeal to the file of the Assessing Officer after admitting the same with direction to consider and decide the same on merits in accordance with law. We order accordingly.
Whether on the facts and in the circumstances of the case and in law, the CIT(A) was right in deleting interest Under Section 234B of the IT Act, 1961 in this case.
The Ld. Departmental Representative submitted the assessee had not paid advance tax as per provision of Section 209(1)(d) of the IT Act, therefore the Assessing Officer is right in charging interest Under Section234B of the Act. The CIT(A) has deleted the interest Under Section234B by observing that since all payments made to non residents are subject to TDS Under Section195 of the Act and the assessee company is not liable for payment of advance tax therefore interest Under Section234B is not leviable. The Ld. Departmental Representative submitted that the NMPT who has paid arbitration award of Rs. 30 78 crores has deducted tax @ 7% only as against normal rate of deduction @ 48% in the year 2000-01. He submitted that the assessee company had applied for certificate Under Section 197(1) for deduction of tax at lower rate to the Assessing Officer. On the basis of assessee's application, the Assessing Officer had issued a certificate Under Section197(1) dated 22.5.2000 for TDS @ 7% in respect of payments which were made by NMPT. He submitted that since the assessee itself has made the request for deduction of tax at a lower rate and ultimately entire amount is found chargeable to tax, in absence of payment of advance tax as per provision of the Act interest Under Section234B is chargeable.
He submitted that the assessee will get deduction as per provision of Section 209(1)(a) to the extent of amount @ 7% of the TDS payment and not the full amount of tax on assessed income and submit that the decision of Special Bench of the Tribunal in Motorola Inc. case is not applicable to the case of the assessee.
29. The Ld. Counsel for the assessee submitted that the issue is covered in favour of the assessee with the decision of the Tribunal in Special Bench case of Motorola Inc. 95 ITD 267(Del.)(SB).
30. We have considered the rival submissions. All payments made to a non resident are subject to tax deduction at source Under Section195 of the Act and accordingly it cannot be said that the assessee company was liable to payment of advance tax. The case law cited by the CIT(A) in his order supports the case of the assessee. Merely because the assessee has requested the Assessing Officer for issue of certificate for tax deduction at a lower rate of tax, shall not make the assessee liable for payment of interest Under Section234B of the Act. We find no mistake in the order of the CIT(A) in holding that since all payments made to non residents are subject to tax deduction at source Under Section195 of the Act, it is held that the appellant was not liable for advance tax and therefore the interest Under Section234B is not liable on the applicant. Accordingly we hold that no interference in the order of the CIT(A) is called for on this issue and accordingly the ground of appeal No. 1 of the revenue is dismissed.
On the facts and circumstances of the case and in law, the Ld.
CIT(A) erred in setting aside the disallowance of the payment of Rs. 3,99,33,348/- as lease rent and directing the Assessing Officer to determine the fair value of the hire of the dredger by adopting pricing between unrelated parties for a similar transaction and then determine the excessive payment. He should not have restricted the priving based on transaction between unrelated parties.
The Ld. Departmental Representative submitted that the CIT(A) has erred in setting aside the disallowance of payment of Rs. 3.99 crores as lease rent and directing the Assessing Officer to determine the fair value of the hire of the dredger by adopting pricing between unrelated parties for a similar transaction and then determine the excessive payment. He submitted that the CIT(A) should not have restricted the pricing based on transaction between unrelated parties. He argued that there is no reason for not considering the transaction between related parties also. The Ld. Counsel for the assessee has opposed the submissions of the Ld. Departmental Representative and has relied on the order of the CIT(A).
32. We have considered the rival submissions. The only issue in this ground of appeal of the revenue is whether the amount paid by the assessee for the lease of dredger can be considered to be excessive and hence liable for disallowance. In this case the parties are related to each other as per Section 40A(2)(b) of the IT Act. We find that CIT(A) has observed that one cannot use related parties comparables to determine if the payment is excessive and that one has to test it against the payment that would be exchanged with Third parties. The CIT(A) directed the Assessing Officer to determine the fair value of the hire of the dredger by adopting pricing between unrelated parties for a similar transaction. We find no mistake in the order of the CIT(A) in directing the fair value of the hire of the dredger by adopting pricing between unrelated parties with similar transactions and then to determine the excess payment. There is no valid reason to consider the transaction between related parties also in order to decide this issue. Accordingly the CIT(A)'s order on this issue is upheld and the ground of appeal No. 2 of the revenue is dismissed.
33. In the result, the appeal of the assessee is partly allowed and that of the revenue is dismissed.