TMI Blog2007 (10) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee appeared before the AO in connection with the notice issued in the case of the assessee for the assessment year in question. It is stated that the assessee is a company incorporated inItaly. It has 100 per cent subsidiary in the form of PIL. The managing director of PIL is appointed by the assessee company and received part of the salary abroad. During the year the assessee company supplied machinery to its Indian subsidiary amounting to Rs. 7,74,45,858 and raw-material worth Rs. 11,46,525. The assessee has not filed any return on profit earned by it on these supplies. It has taken a plea that the income is not taxable inIndia. The assessee has taken protection under Indo-Italian Treaty. 3. The AO held that income of the assessee is taxable both under the treaty as well as under the IT Act. The AO observed that the assessee has business connection inIndiaand its income is deemed to accrue and arise inIndiadue to the following reasons: "1. It has supplied machinery on a continuous basis. It started from24th April, 1996and continued till17th March, 1997. The transaction is not an isolated transaction, but is spread over a long period. 2. The managing director and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that in the case of the assessee the managing director of Indian company is an employee of assessee company and further other expatriates posted inIndiawho were providing technical assistance are also employees of assessee company. The assessee submitted before AO that expatriates and technicians cannot become a PE as they are not dependent agents. The AO however did not accept contention of the assessee because these expatriates and technicians were watching the interest of the assessee and are taking decisions on behalf of the assessee company. The AO, therefore, observed that that is why no inter-corporate contract has been executed between the parties. In fact the managing director of the Indian company represents the Indian company as well as the assessee company and therefore it would show close business connection between the Indian company and the assessee company. The AO further observed that in fact the transactions are not based on arm's length principle rather they are carried on in such a fashion that the assessee company gets maximum profit. The AO therefore held that Indian company is a PE of the assessee company because it is just not a subsidiary but has a close ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ten submission filed during the course of appellate proceedings. It was submitted that the finding of the AO that the transactions between assessee and PIL were not conducted at arm's length principle was not based upon any evidence from record and such an observation was made without giving the assessee an opportunity of being heard. It was submitted that such an observation defies reasons because in the case the machinery was over-invoiced, it would mean that it was sold at a price higher than the fair market price, leading to levy of higher amount of customs duty. The assessee in support of its contention that machinery and goods were supplied at fair market value relied on the order dt.23rd Oct., 1997passed by the Commr. of Customs,New Delhi. It was submitted that no violation was noted by the customs authorities and that their assessments were finalized under Customs Act at the same price. It was submitted that customs duty is leviable on the value of the goods imported and the value is deemed to be the price at which such goods or like goods are ordinarily sold or offered for sale in the course of international trade. It was therefore argued that there was positive evidence i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial whatsoever was brought on record by the AO was not confronted to the assessee. It was submitted that PIL acts as independent legal entity even though it is a subsidiary of the assessee company. It takes its own decisions in day to day financial matters. It was submitted that they were importing raw-material and machinery. The learned CIT(A) considering the submission and material on record held that there is no evidence on record to show that the assessee used its dominant position to over-invoicing the goods sold to PIL. The findings of the customs authorities have not been challenged by the AO. The learned CIT(A) observed that it is a matter of fact that assessee holds the majority stake in the joint venture company i.e. PIL. There are four common directors between two companies and as per orders of the customs authorities, the assessee is in a position to control the PIL in the areas of quality control, sub-licensing franchise and management. The learned CIT(A) therefore held that it cannot be said that assessee has no control over the management and affairs of PIL. Learned CIT(A) further observed that it is another matter that control may not be total but partial but tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assists the carrying on that business. In each case the question whether there is a business connection through or from which income, profits or gains arise or prove to the non-resident person must be determined on the facts and circumstances of the case. The assessee submitted before the CIT(A) that the aforesaid expression connotes a real and intimate relation between activity carried on outside the taxable territories and the activity carried on within the taxable territories, which leads to profits etc. directly or indirectly to the non-resident person. The assessee further relied upon Circular No. 23 of the CBDT, which clarified the scope of s. 9 of the IT Act in the light of the decision of Hon'ble Supreme Court in the case of R.D. Aggarwal. It was mentioned therein that the income will not be deemed to accrue or arise under s. 9(1)(i) provided that three conditions are satisfied, namely, that No. (i) the contract to sell the goods is made outsideIndia, (ii) the sale is made on principle to principle basis at an arm's length, and (iii) the subsidiary company does not act as an agent of the parent company. The mere existence of business connection arising out of parent-subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also relied upon decision of the Karnataka High Court in the case of CIT vs. Energomach Exports (1999) 151 CTR (Kar) 71 : 118 Taxation 371 (Kar) in which it was held that merely because the foreign company provided technical personnel and assistance to an Indian company for erection and commissioning of equipment or trading of technical staff, no income can be said to accrue or arise in India. The assessee also relied upon decision of the Madras High Court in the case of CIT vs. Fried Krupp Industries (1980) 19 CTR (Mad) 297 : (1981) 128 ITR 27 (Mad), in which it was held that the term 'business connection' postulates a continuity of business relationship between the foreigner and the Indian. There is no such continuity where machinery is purchased abroad and thereafter used inIndia. The foreigner had played his part wholly outsideIndiaand, therefore, there was no business connection. 12. It was further mentioned that assessee did not carry out any business activity inIndia. PIL placed orders inItalyand sample purchase order was placed before learned CIT(A). The orders were accepted outsideIndia. The bill was drawn on the Indian company inItaly. The goods were shipped atMilanairp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relied upon decision of the Supreme Court in the case of Mahabir Commercial Co. Ltd. vs. CIT 1972 CTR (SC) 875 : (1972) 86 ITR 417 (SC) in which the Tribunal held that the sale took place inPakistanand the income thereon accrued to the assessee. The view of the Tribunal was confirmed by the Hon'ble Supreme Court. It was argued before CIT(A) since the bill of lading was taken in the name of the Indian buyer and no right of disposal was retained by the seller therefore the fact that goods were shipped on CIF basis does not itself lead to the conclusion that the property passed in India, in fact the property in goods passed in Italy only, when the goods were unconditionally handed over for shipment in Milan. 13. The learned CIT(A) considering submissions of the assessee, material on record decided both the issues in favour of the assessee and held that assessee did not have any business connection inIndiaas referred to in s. 9 of the IT Act. The learned CIT(A) further held that art. 5 of DTAA could not be applicable in the case of the assessee because assessee has no PE inIndia. The learned CIT(A) accordingly deleted the entire additions and allowed the appeal of the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t one or more bills were taken in the name of seller and subsequently endorsed the buyer inIndia. In absence of such an evidence or even assertion, it is taken that all the bills of lading were taken in the name of the buyer. The sale of goods on CIY basis does not by itself lead to the presumption that the sale was effected inIndiaif otherwise there was intention to pass property in goods inItaly. It was the case of the learned counsels that as the bills of lading were taken in the name of buyer, the property in goods passed inItalyas per decisions in the cases of aforementioned Gulf Oil and Mahabir Commercial Co. In the case of Gulf Oil, the indents were placed fromIndiaand the goods were shipped fromUKon CIF basis. The decision was that if no reservation is kept in disposal of goods by the seller, the property passed inUK. In the instant case, there could have been no reason to retain any reservation by the seller over disposal of goods for the reason that the machinery was to be used by PI to set up its own plant. The raw material was to be used for manufacture of its goods inIndia. In any case, no such reservation of right was proved or alluded to by the learned AO in the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iain any manner. In this view of the matter, it is held that the appellant does not have any business connection inIndia, and therefore, ground No. 7.1 of the appeal is allowed. 8.12 We may also refer to the provision of s. 92 wherein regarding income from transactions with non-residence, how computed in certain cases, wherein it is enacted that where a business is carried on between a resident and a non-resident and it appears to the AO that, owing to close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profit or less than the ordinary profits which might be expected to arise in that business, the AO shall determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident. It is an admitted fact that there is a close connection between the appellant and the PI. However, it is not known whether the course of business has been arranged in a manner so that no profit or less than normal profits arise to PI. In the course of appellate proceedings, a copy of the assessment order of PI for asst. yr. 1997-98, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t make PI as the PE of the appellant. 9.3 Coming to the dependent agent PE, it was pointed out that PI carries on its own business. It neither sets nor it is entitled to act on behalf of the appellant. It neither maintains stock of goods of the appellant nor it habitually secures orders on behalf of the appellant. The raw material bought by PI from the appellant is used in the process of its own manufacture. PI also does not process or manufacture the goods of the appellant. The fact that it buys its raw material from the appellant will not make it as the PE of the appellant. The arguments of the learned AO in this behalf were same as in regard to the business connection. In fact, s. 9 of the IT Act and art. 5 of the DTAA are similar in contents. Relying on the arguments given in connection with s. 9 of the IT Act, it is held that the appellant does not have a PE inIndia, and therefore, there are no profits attributable the PE, which can be taxed inIndia. In this view of the matter, these grounds of appeal are allowed." 14. The Revenue is in appeal on the grounds mentioned above. Learned Departmental Representative relied upon order of the AO and submitted that assessee obtaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness carried out in India and in fact they indicate how closely controlled and monitored business for all practical business of the assessee. Learned Departmental Representative therefore submitted that the above facts would prove that there is no reason to say that there is no business connection between the assessee and Indian company. Learned Departmental Representative also referred to decision of the Hon'ble Supreme Court in the case of R.D. Aggarwal Co. Ors. and also referred to Barendra Prasad Ray vs. ITO (1981) 22 CTR (SC) 157 : (1981) 129 ITR 295 (SC). Learned Departmental Representative submitted that everything is controlled by the assessee starting from the grant of license upto the selling of the products and therefore there is commonness of interest between assessee and Indian company and that there is a continuation of activities and operations. The assessee also controlled the management and financial affairs of the Indian company. Learned Departmental Representative submitted that assessee company was incorporated inItalyand its 100 per cent subsidiary in the form of PIL and that managing director of PIL is appointed by the assessee company who received part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here its employees were permanently sitting and protecting the interest of the assessee company. Learned Departmental Representative submitted that managing director and other technicians of the assessee company were even appointed in the PIL. Learned Departmental Representative submitted that Indian company has confirmed that it did not make any payments to technicians and mechanics from the assessee company. The learned Departmental Representative submitted that machinery was sold by the assessee company and installation and running work was also carried out by its employees inIndiaand that supply is on CIF basis. The learned Departmental Representative submitted that as per art. 5 part (1) the PE means a fixed place of business through which business is wholly or partly carried out. It is clear from the premises of the PIL, business is carried on. Learned Departmental Representative submitted that it is not necessary that assessee should have a branch or its office to have PE. It is sufficed if it has a place of management. Learned Departmental Representative submitted that this scheme of the arrangement and the activities of the assessee and subsidiary company would indicate ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the machinery. He has submitted that this fact was confirmed by the Indian company in the letter dt.31st Oct., 2000filed before the learned CIT(A). Learned counsel for the assessee submitted that only some of the employees came toIndiato assist in the production quality. Learned counsel for the assessee submitted that AO has not brought any evidence on record as to what business is conducted by the assessee in the year under assessment. Learned counsel for the assessee submitted that assessee never claimed 10 per cent being expenses in respect of sale of the machinery and the raw-material. The learned counsel for the assessee referred to Board Circular No. 23 and submitted that since machinery and raw-material was supplied at arm's length on principal to principal basis and this fact was accepted by the customs authorities, therefore, the AO has no case to make out against the assessee that it was a case of under invoicing of the price of the machinery and the raw-material. Learned counsel for the assessee submitted that since no income was earned during the year and that in this year only machinery and raw-material was supplied and shipment was made inItalyonly, therefore, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of arguments has not disputed the finding arrived at by the learned CIT(A), therefore, in the absence of contrary material on record at the second appellate stage before the Tribunal, it would not be legally correct to disturb the findings of the learned CIT(A), Learned counsel for the assessee submitted that since onus is not properly discharged by the AO in this case to prove income of the assessee is taxable in India and that no contrary material is brought before the Tribunal, therefore, order of the CIT(A) may be confirmed. In support of this contention he has relied upon following decisions of the Hon'ble Supreme Court: 1. Narayan vs. State ofMaharashtraAIR 1977 SC 183 31; 2. Hindustan Ferodo Ltd. vs. CCE 106 STC 214 (SC); 3. Sounds N. Images vs. CCE 117 ELT 538 (SC); 4. Raghubar Mandal Harihar Mandal vs. The State ofBihar8 STC 770 (SC). Learned counsel for the assessee therefore submitted that finding of the CIT(A) may be confirmed and appeal of the Revenue may be dismissed. 16. Learned Departmental Representative in the rejoinder reiterated the same submissions as made earlier and submitted that s. 9 of the IT Act and arts. 5 and 7 of the India-Italian DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould give rise to a tax liability inIndiaas far as the foreign company was concerned and the Tribunal was, therefore, right in its conclusion." 18. The assessee further explained before the learned CIT(A) that sales were made on principal to principal basis and at arm's length. The AO has made out a case that during the year under consideration assessee supplied machinery and raw-material to PIL. The assessee also explained that the machinery and raw-material was supplied to Indian company for which the contract was executed atItalyitself. The AO has not brought any evidence or material on record to prove that machinery or raw-material was having under-valuation. The assessee also brought on record the orders of the customs authorities who have checked the goods when the same were entered intoterritoryofIndiaand have not raised any such objection against the valuation of the goods. The same could therefore, support the contention of the assessee that the goods were supplied to Indian company on principal to principal basis and as such there was no evidence available on record to show that the invoices of the goods were undervalued. The assessee has filed details at p. 74 of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CBDT circular because in this case contract to sale the goods was made at Italy and sale is made on principal to principal basis at arm's length because price was verified by the customs authorities as well as the chartered accountant of the assessee firm and AO has not brought any evidence to prove contrary to this evidence and material on record. The AO has not made out any case that the subsidiary acted as agent of the assessee company. It would therefore prove that findings of the AO are merely based on the existence of business relation which in our view would not give any right to the AO to assess any income inIndia. The fact findings recorded by the learned CIT(A) in para 8.8 of the impugned order as such have not been controverted through any material on record. Likewise we have recorded the specific fact findings recorded by the learned CIT(A) in paras 8.11 to 9.3 above in this order which have not been controverted by the learned Departmental Representative through any material on record. The AO has not brought any evidence on record to prove if assessee is having any PE inIndia. The AO has not brought any evidence on record as to what business is conducted by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... control over the Indian subsidiary company i.e. PIL but no evidence brought on record by the AO as to what business was carried on by the assessee inIndiaand as to what income was earned inIndia. The facts and circumstances noted above legally prove that no income accrues or arises to the assessee company out of any transaction of supply of machinery or raw material. Whatever documents have been referred to by learned Departmental Representative during the course of argument would be of no help to the Revenue because none of the documents would prove as to what business was conducted by the assessee company during the year under consideration. Learned CIT(A) very specifically noted that managing director of PIL was appointed by the board of directors of PIL and the managing director was having total control over the management. The AO has not brought any evidence on record to prove that how assessee company had total control over the management of the assessee (sic-subsidiary) company. 19. As per art. 5(1) of Indo-Italian DTAA for the purpose of convention term PE means fixed place of business through which the business of the enterprise is wholly or partly carried on. As noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some profit/royalty or income but in the year under consideration, assessee did not do any business activity inIndiaand did not earn any income. The assessee only supplied machinery and raw-material on cost to cost basis and such costs have not been disputed even by the customs authorities. Therefore, it was for the AO to bring some evidence on record to prove that assessee undervalued the price of the machinery and raw-material in order to earn profit or income. Therefore in the absence of any material on record, we find that the AO has not made out any such case against the assessee for earning of any income. Merely because assessee was having business connection with the PIL but the assessee did not conduct any business inIndiaduring the assessment year in question therefore, provision of s. 9 of the IT Act would not be applicable against the assessee. Article 5(6) of Indo-Italian Treaty provides "the fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of other Contracting State or which carries on business in that other State (whether through a PE or otherwise) shall not of itself constitute either company a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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