Income Tax Appellate Tribunal - Mumbai
Nippon Kaiji Kyokai, Mumbai vs Department Of Income Tax on 4 March, 2015
आयकर अपील
य अ धकरण "L" यायपीठ मब
ंु ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "L" BENCH, MUMBAI
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER &
SHRI VIVEK VARMA, JUDICIAL MEMBER
आयकर अपील सं./I.T.A. No.6240 to 6242 /Mum/2011
( नधा रण वष / Assessment Years: 2005-06, 2006-07 & 2008-09
Dy. Director of Income Tax बनाम/ Nippon Kaiji Kyokai,
(IT)-4(2), 706-710, B-Wing,
Vs.
R. No. 11, Shre Nand Dham
Gr. Flr, Scindia House, Sector -11, Plot No. 59,
Ballard Pier, CBD Belapur,
Mumbai - 400 038. Navi Mumbai - 400614.
थायी ले खा सं . /PAN : AAAN 0124F
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Revenue by Shri Vivek A. Perampurna
Assessee by : Shri Nitesh Joshi
ु वाई क तार ख / Date of Hearing
सन : 26-2-2015
घोषणा क तार ख /Date of Pronouncement : 04-03-2015
[
आदे श / O R D E R
PER R.C. SHARMA, A.M. :
These are the appeals filed by the Revenue against the orders of ld. CIT(A) -11, Mumbai all dated 27-06-2011 for the assessment years 2005-06, 2006-07 & 2008-09 in the matter of order passed u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961.
2. Common grounds have been taken in all these appeals. The ground raised by the Revenue in A.Y. 2005-06 reads as under:-
"On the facts and in the circumstances of the case and in law, the Id, CIT(A) erred in holding that only 10% of the fee received by the Head Office for services rendered in India through independent surveyors as attributable to procedural role played by the Permanent Establishment 2 ITA 6240 to 6242/M/11 (PE) ignoring the fact that such services are not effectively connected with the permanent establishment (PE) as required under Para 5 of the Article 12 of the treaty between India and Japan and instead the same is taxable at 20% on gross receipt under Article 12(2) of the treaty."
3. At the outset, the ld. Counsel for the assessee placed on record the order of the Tribunal in assessee's own case for assessment years 2000-01, 2002-03 and 2003-04 in ITA No. 6329, 6330 & 6331/Mum/2007, ITA No. 7661/M/07 for A.Y. 2004-05, CO 191/M/03 & CO 129, 130, 39/M/08, 200/M/10, ITA No. 5086/M/03 for AY 99-2000, ITA 6370 to 72/M/07 for AYs. 2000-01 to 2003-04, ITA No. 7511/M/07 for A.Y. 2004-05 & ITA No. 2322/M/10 for AY 2007-08, wherein issue with regard to taxing the fees received by Head Office for services rendered in India as attributable to the role played by Permanent Establishment have been decided in favour of assessee. He ld. D.R. fairly conceded that the issue has been decided by Tribunal consistently in assessee's favour.
4. We have considered the rival contentions and perused the records. We find from the record that the ld. CIT(A) has decided this issue by following the order of his predecessor in assessee's own case for A.Y. 2007-08 and allowed the appeal. We also find that this issue has been consistently allowed by the ld. CIT(A) since A.Y. 2001-02 and the Revenue has filed further appeal before the Tribunal challenging the order of ld. CIT(A) and the Tribunal have dismissed the appeals of Revenue vide order dated 29-7-2011.
5. We have carefully gone through the order of the Tribunal dated 29-7- 2011 as placed on record wherein exactly similar issue has been dealt with by the Tribunal and decided in favour of the assessee after having following observation:-
"Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record, we hold as follows:-
On facts, the learned Departmental Representative has not disputed the procedure stated to have been followed by the assesse and its PE in India. The procedure followed by the assessee is brought out at page 5 3 ITA 6240 to 6242/M/11 and 6 of the Commissioner (Appeals), which is reproduced above, vide para 7 of this order. From this procedure of business, it can be observed that the PE on receiving a copy of the application wherever required, directs the acting surveyor to carry out the survey and allot them a job number. The acting surveyor follows the instructions of the PE. Thereafter, the invoice is forwarded by the acting surveyor to the PE which in turn, adds its expenses incurred for communication etc. and forwards bill to the Head Office. The expenses incurred by the P.E. are reimbursed. Thus it cannot be denied that the P.E. has a functional connection, though limited, wherever survey work is assigned to the said to have effective connection with this activity for survey. The assessee admits that the branch does not render services to the customers wherever independent surveyor are appointed. The fact remains that even before the Assessing Officer it is not stated by the assessee that no service was rendered by the Branch to the customers. There is a difference between the words "substantial services" used by the assessee by filing a note dated 31st March 1999 and the words "effective connection' used in Article-12(5). The note, in our considered opinion, has been mis-interpreted by the Assessing Officer.
18. Coming to the issue as to whether the FTS is effectively connected with the PE, we find that the commentaries relied upon by the learned Departmental Representative discuss the issue of royalties and not FTS and the assests test has been suggested for royalties. As far as FTS is concerned, the test to be applied is "activity test" or "functional test". In the present case, the P.E., either conducts the survey with its exclusive surveyor or in the alternative, appoints acting surveyors. The P.E. also adds its expenses and sends the billing survey fees to the Head Office. In such circumstances, factually, we are of the considered opinion that the FTS in question is effectively connected with the P.E. When a service is rendered through own staff, it is accepted as service of the P. E. When so, if service is rendered through an Acting Surveyor, who is a free lancer, due to shortage of staff or otherwise, it cannot be held otherwise. Both the services, one by own staff and one through off-loaded system, cannot, in our view, be held differently. At this stage, we mention that both parties have agreed that the fee in question is in the nature of FTS and the issue is limited to the 45% share retained by the Head Office. With this factual finding, that there is an effective connection of the FTS with the P.E., we examine the issue.
19. We now extract Article-7(1) and 12(1), 12(2), 12(4), 12(5), as follows:-
"7(1) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent 4 ITA 6240 to 6242/M/11 establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment."
12(1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State be taxed that other Contracting State.
12(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, if the recipient. is the beneficial owner of the royalties or fees for technical services" the tax so charged shall not exceed 20% of the gross amount of the royalties or fees for technical services.
12(4) The term "fee for technical services" as used in this article means payment of any amount to any person other than payment to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or other personnel.
12(5) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services being resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply. "
20. Perusal of Article -12(5), takes us to a conclusion that, when the payment for FTS is effectively connected with the P.E., in such case, provisions of Article -7 will apply. In view of our factual findings, we agree with this interpretation of the Commissioner (Appeals) in all the cases. Study of Article 7(1) shows that, only such amount of profits of an enterprise be directly or indirectly attributable to the P.E. is taxable in other contracting state where the P.E. is situated. The Commissioner (Appeals) has estimated 10% as business profits which are directly or indirectly attributable to the P.E. This figure is not disputed by the Revenue. Thus, we uphold the finding of the first appellate authority.
5 ITA 6240 to 6242/M/11
21. Coming to the argument of the learned Departmental Representative that the balance amount other than 10% should be taxed under Article 12(2), we find that Article 12(5) of the OTAA, excludes the said from Article-12(1) and 12(2), if the receipt has an effective connection with the P.E. The argument that when a part is to be taxed under Article 7 and balance under Article-12, is devoid of merit. The DTAA does not contemplate the same. Such an interpretation sought to be placed by learned Departmental Representative is incorrect and, hence, we reject the same. When certain FTS is effectively connected with the P.E.; then so much of the fees directly or indirectly attributable to the P.E. is to be taxed under Article-7. In view of the above discussion, we uphold the findings of the first appellate authority and dismiss this ground of the Revenue in all the appeals.
22. Now, coming to ground no.2, raised by the Revenue for assessment year 1999-2000, we find that what was paid to the landlady is advance of "leave and licence fee" for a period of five years. As pointed out by the learned Departmental Representative, in the agreement entered, neither the assessee nor the landlady had the right to unilaterally terminate the agreement. In this case, the assessee unilaterally terminated the agreement leading to a litigation and this litigation was ultimately resolved by way of consent terms agreed to on 7th October, 2003, before the Hon'ble Bombay High Court. On entering on these terms, the assessee has, in its return of income for assessment year 2004-05, offered the amount received from the landlady to tax. The Revenue has also taxed this amount. On these facts, we are of the considered opinion that the sale issue is the year of taxation, as well as, whether the loss in question is in the revenue field or in the capital field. What is paid was advance of leave and licence fee and no enduring benefit accrues to the assessee. Advance Rent paid, in our opinion, is not capital expenditure. On the issue as to whether the expenditure is contingent in nature, we hold that the loss is real and it does not depend on the happening of any event, as in the case of contingency. In any event, as the assessee has already offered to tax the amount on settlement of dispute and as the Revenue has accepted the same, we are of the opinion that as there is no loss to the Revenue. Thus, the findings of the first appellate authority on this issue has to be upheld. Ground No. 2 is, thus, dismissed."
23. In the result, all grounds of Revenue are dismissed.
6. We find that the Tribunal has dealt with the issue in detail and held that ld. CIT(A) was justified in holding that only 10% of the fee received by the Head Office was liable to tax as "business income" attributable to India. As 6 ITA 6240 to 6242/M/11 the facts and circumstances in all the years under consideration are same, respectfully following the order of the co-ordinate Bench of this Tribunal in assessee's own case as cited supra, we dismiss all the appeals filed by the Revenue.
7. In the result, appeals of the Revenue are dismissed.
Order pronounced in the open court on 4th March, 2015.
आदे श क घोषणा खल ु े #यायालय म% &दनांकः 04-03-2015 को क गई ।
Sd/- sd/[
(VIVEK VARMA) (R.C. SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
मंब
ु ई Mumbai; &दनांक Dated 04-03-2015
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व.6न.स./ RK , Sr. PS
आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आय7 ु त(अपील) / The CIT(A) -8,, Mumbai
4. आयकर आयु7त / CIT --4, Mumbai
5. :वभागीय 6त6न<ध, आयकर अपील य अ<धकरण, मंब ु ई / DR, ITAT, Mumbai H Bench
6. गाड@ फाईल / Guard file.
ु ार/ BY ORDER, आदे शानस स या:पत 6त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai