TMI Blog2011 (7) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... the above discussion, we uphold the findings of the first appellate authority and dismiss this ground of the Revenue in all the appeals. Advance Rent - Capital or Revenue expenditure - Assessee 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 - What is paid was advance of leave and licence fee and no enduring benefit accrues to the assessee - Advance Rent paid, is not capital expenditure - As to whether the expenditure is contingent in nature, held that the loss is real and it does not depend on the happening of any event, as in the case of contingency - Thus, appeals of the Revenue are dismissed. - 5086(MUM.) OF 2003 6329 TO 6331, 6370 TO 6372, 7511 & 7661 (MUM.) OF 2007 & 2322 (MUM.) OF 2010 - - - Dated:- 29-7-2011 - J. SUDHAKAR REDDY, V. DURGA RAO, JJ. Rajesh B. Gupte for the Appellant. Mrs. Malthi Shridharan for the Respondent. ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .E. in his appellate order vide Paras-2.1 to 2.4 and Para-5.2, which are extracted below for ready reference:- "2.1 The appellant Nippon Kaiji Kyokai (NK) is a classification society formed as an Association of Persons and established in Japan in 1889, engaged in the business of providing inspection and certification services to the marine industry. In accordance with the statutory requirements of the relevant national authorities of various countries, ships are required to be classified by a Classification Society approved by the said authority for the purpose. Such classification is done at the instance of the shipowner but on behalf of the respective Govt. While in some cases, the findings pursuant to the classification are reported directly to the ship owner, in other cases the reports are submitted to the respective Govt. which after examination hands it over to the ship owner. 2.2 In India, for the purpose of inspection / certification, the necessary survey activities are carried out by the branches set up by NK at Mumbai and Chennai (NK-IB) and reports are issued by them upon completion thereof. Thus, NK-IB as such constitutes a Permanent Establishment (PE) in India of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd acceptable by the A.O. and a sum of Rs. 42,38,519 received by the H.O. directly from surveying activity carried out in India was brought to tax at the rate of 20 per cent on gross amount as "fees for technical services" under Article 12 of the DTAA. 2.4 Apart from this, the A.O. also rejected the appellant's claim for deduction of a sum of Rs. 36,48,840 being loss of leave and licence deposit, treating it as capital loss and hence not allowable. 5.2 In view of the claim of change in the manner of conducting work of survey through independent surveys, the authorised representative of the appellant was asked to file a note on the procedure of the business performed in assessment year under appeal with particular reference to the role of the P.E. in India. Accordingly, the A.R. filed a note vide letter dated 14-1-2003, the relevant portion of which is extracted below:- "Procedure of business performed for A.Y. 1999-2000 is as follows:- Ship owners are given survey application forms by NKK H.O. which is a classification society. Owner of the ship makes an application on the form writing his name and address along with name of the Co. who will be responsible for making paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Acting Surveyor as well as staff of the P.E. and keep them upgraded with all literature by supplying latest information on development of survey operations and also supply certain technical know how for which the H.O. bears all direct as well as indirect expenses in maintaining their quality of surveys. Hence, the entire business of survey is controlled by the H.O." 8. The Assessing Officer accepted the contentions of the assessee that the activities in respect of surveys carried out through independent acting, surveyors cannot be substantially attributable to the Permanent Establishment (hereinafter for short "P.E"), which is the assessee's branch in India. He relied on Article-12(5) of the Double Taxation Avoidance Agreement (hereinafter for short "DTAA") between India and Japan and came to a conclusion that since the Fee for Technical Services (hereinafter for short "FTS") is not connected effectively to the P.E. situated in India, the same should be taxed in India at the rate of 20 per cent of the gross amount in terms of Article-12(2) of the said DTAA. On the provisions of doubtful deposits, the Assessing Officer held that the same is not incurred wholly and exclusively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner (Appeals) has erred in relying on Article-12(5) of the Indo-Japan DTAA. She elaborated by submiting that for attracting the provisions of Article-12(5), the following conditions are to be fulfilled viz., (i) the beneficial owner of the FTS should carry on the survey through a P.E. in the other State and the FTS is paid for the services effectively connected, with the P.E. She vehemently contends that when there is only a procedural role for the P.E., it cannot be said that the FTS is effectively connected with the P.E. She submits that there is no dispute that fee received for the FTS and that 55 per cent of the same is taxed in India and what is in dispute is only 45 per cent belonging to the Head Office. She further submits that it is nobody's case that provisions of Article 12(6) comes into play. She filed a paper book in which commentaries from OECD, Model Tax Convention and U.N. Model Convention are enclosed and made extensive reference to them to drive home her argument that there is no effective connection in this case. Under the OECD model, commentary states that the P.E. can be said to have been effectively connected it an amount is paid in respect of rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that once Article-7 comes into play, what is taxable is such portion of profits of the enterprise which are directly or indirectly attributable to the P.E. He relied on the order of the Commissioner (Appeals) and supported the finding that 10 per cent of the fee could be attributable to the role of the P.E. He opposed the contention of the Learned Counsel for the Revenue that the balance has to be brought to tax under Article-12(2), by submitting that the DTAA does not contemplate the same. 15. The learned Counsel for the assessee, referring to ground no.2, submits that what was given was rent in advance and it was loosely termed as "security deposit". He referred to the correspondence and submits that the landlady refused to return the amount and in such a situation, as the recovery was bleak and as the assessee never got any asset of enduring nature, the amount was written-off and claimed as expenditure. His case is that only the year of allowability is in question and when the arbitration proceedings attains finality, the amount received by the assessee was offered to tax and that the Assessing Officer accepted the same. He relied on the order of the Commissioner (Appeals) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch 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 separately. 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 with the fee in question is in the nature of FTS and the issue is limited to the 45 per cent 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 establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectly attributable to the P.E. This figure is not disputed by the Revenue. Thus, we uphold the finding of the first appellate authority. 21. Coming to the argument of the learned Departmental Representative that the balance amount other than 10 per cent should be taxed under Article-12(2), we find that Article-12(5) of the DTAA, excludes the entire receipt from Article-12(1) and 12(2), if the receipt has an effective connecting with the P.E. The argument that Port 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 said 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 i.e., 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" ..... X X X X Extracts X X X X X X X X Extracts X X X X
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