TMI Blog2008 (10) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... the other Contracting State i.e., India in the present case through a PE situated therein. We have noted that there is no PE of the assessee in India, business profits of the assessee, even if any, is taxable only in USA and not in India. Hence, even if it is held that the assessee company was having PE in India, there is no taxable profit of the assessee in India because the assessee has incurred expenses of equal amount for rendering the services. With regard to 1 per cent of the expenses charged by the assessee company as production overhead charges, it may have some element of profit but the same cannot be brought to tax because income does not accrue or arise in India. As per s. 90(2), where there is a DTAA between India and any other country, in relation to the assessee to whom such agreement applies, the provisions of IT Act of India shall apply to the extent that they are more beneficial to that assessee. In the present case, the provisions of DTAA between India and USA are more beneficial to the assessee and hence, provisions of s. 44BB cannot be thrusted upon the assessee. We are of the considered opinion that no interference is called for in the order of ld CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, the assessee company has offered nil income from business after claiming expenditure. It has been contended that the assessee has rendered services on cost to cost basis to EOGIL and payments through debit notes are only reimbursement of expenses. It was also submitted that this is in accordance with the provisions of PSC which EOGIL has entered into with Indian concerns. The assessee vide Note 3 appended to the return of income has offered revenues from work done inside India, work done outside India and allocated overheads. It is also noted by AO in para No. 2 of the assessment order that tax has been paid after computing taxable income at 10 per cent of the revenues relating to work done within India and 1 per cent of revenues relating to work done outside India. It is also noted by the AO in the same para that as per the assessee, this is in accordance with the ratio of Instruction No. 1767, dt. 1st July, 1987 issued by CBDT. In respect of its claim of expenditure, the Authorised Representative of the assessee company submitted before the AO that charges are actual cost of providing services which do not include any element of profit and, therefore, are mere reimbursements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made an addition of Rs. 31,07,966. 4. Being aggrieved, the assessee carried the matter in appeal before learned CIT(A). Learned CIT (A) deleted the first addition and there was no ground taken by the assessee before learned CIT(A) regarding the second addition. The first addition was deleted by learned CIT(A) on the basis that in terms of PSC, the assessee cannot charge a profit from the joint venture partner as it is an affiliated company of EOGIL and in course of appellate proceedings, the assessee has produced the proof of the fact that there is no element of profit. Learned CIT(A) deleted the first addition on this basis. Now, the Revenue is in appeal before us. 5. The learned Departmental Representative of the Revenue supported the assessment order. It was also submitted by him that the assessee company was having a PE in India during this year. It was also submitted that no evidence is produced about lack of profit element. It was also submitted that financial accounts were not submitted before the AO and the agreement was also not produced. Our attention was drawn to clause No. 3.1.4 of PSC as appearing on page Nos. 1 to 28 of the paper book and it is pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. Regarding Clause (1) of Article 5(2), it was submitted that as per this clause, the services have to be rendered in India for a period aggregating more than 90 days within any 12 months period but in the present case, services were not rendered in India and hence, Clause (1) of Article 5(2) is also not applicable. 8. It was also submitted by learned Counsel of the assessee that even if PE is there, profit attributable to PE can be taxed and para 3 of Article 7 of DTAA is to be applied. In this regard, our attention was drawn to clause No. 3.1.4(b)(1) of the PSC as can be seen at page No. 21 of the paper book. It is submitted that as per this clause, charges are to be equal to the actual cost of providing services and it shall not include any element of profit with regard to professional and administrative services and expenses incurred through affiliated company contracts. It is submitted that learned Departmental Representative of the Revenue has referred to Clause (a) of para No. 3.1.4 of the PSC but the same is not applicable because that clause is regarding third party contracts whereas the assessee company is an affiliated company of EOGIL and, therefore, as per PSC, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cited by both sides. We find that the main objection of the AO as per assessment order and as per grounds raised before us and of learned Departmental Representative of the Revenue is that the assessee i.e., EGEPI and EOGIL are two distinct entities and it cannot be accepted that services were rendered by the assessee to EOGIL without profit margin. We are not in agreement with the Revenue on this point because it is the claim of the assessee that the assessee is an affiliate company of EOGIL. In fact, it is noted by learned CIT(A) in para No. 3.4 of his order that EGEPI i.e., assessee company is the parent company of EOGIL. It is also noted by learned CIT(A) in the same para that as per PSC, the parent company can charge 1 per cent as parent company overheads and this amount includes expenditure incurred by EGEPI directly or indirectly and it is difficult to allocate like stationery costs, postage, conference charges etc. In this regard, clause No. 2.6.2 of Appendix 'C of the PSC is relevant and it is appearing on page No. 17 of the paper book. In this para of PSC, it is stated that an annual overhead charge for services rendered by the parent company or an affiliate of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Houses of Parliament as required under Section 42(1) of the IT Act and the payments made by EOGIL to the assessee company has been allowed in the hands of EOGIL, it has to be accepted that such payments were received by the assessee company in line with the requirements of PSC and if that is so, it has to be accepted that such payments were received by the assessee company without any element of profit embedded therein. Under this factual position, we are of the considered opinion, learned CIT(A) has decided this issue in proper perspective and hence, we find no reason to interfere in the order of learned CIT(A) on this issue. 11. Now, we examine other contentions raised by the learned Departmental Representative of the Revenue on this issue. One contention of the learned Departmental Representative of the Revenue is that assessee company is having a PE in India as per cls. (j), (k) and (1) of Article 5(2) of DTAA between India and USA. These clauses of Article 5(2) of DTAA between India and USA are reproduced herein below : (j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds aggregating to more than 90 days during any 12 month period. In view of this, we find that nothing has been brought on record to show that the assessee company was having PE in India. Now, we examine Article 7 of DTAA between India and USA. As per the same, we find that the business profits of an enterprise of a Contracting State shall be taxable only in that State, unless, the enterprise carries on business in the other Contracting State i.e., India in the present case through a PE situated therein. 13. Since, we have noted that there is no PE of the assessee in India, business profits of the assessee, even if any, is taxable only in USA and not in India. It is also worth noting that as per Article 7, even if there is PE in India, only such profit which is attributable to PE can only be taxed in India and for working put profit of PE, as per Clause 3 of Article 7 of DTAA between India and USA, there shall be allowed as deductions expenses which are incurred for the purpose of the business of the PE including a reasonable allocation of execution of general administrative expenses, research and development expenses, interest and other expenses incurred for the purpose of enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for liability to pay tax, the assessee cannot be permitted to turn around and say that the supply of designs and drawing etc. are part of plant and machinery and must be added to the cost. In the present case, the facts are different and in the present case, the dispute is not regarding the nature of services rendered by the assessee. In the present case, the dispute is as to whether the assessee has earned any profit out of services rendered by it to EOGIL as per PSC and hence, this judgment is not applicable in the present case. 16. The next judgment cited by learned Departmental Representative of the Revenue is the judgment of Hon'ble Orissa High Court rendered in the case of Oil India Ltd. v. CIT (supra). In that case, a non-resident firm has entered into an agreement with an Indian company in connection with mineral oil and exploration and under the contract, the Indian company had undertaken the liability to pay the income-tax which was otherwise payable by the non-resident firm. The Indian company filed the necessary IT return as a agent of the non-resident firm and in the said return, it was indicated that as a non-resident firm had rendered its services in connec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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