TMI Blog2009 (12) TMI 593X X X X Extracts X X X X X X X X Extracts X X X X ..... income - the reopening of the assessment u/s. 147 and issuance of notice u/s. 148 by the AO in year under consideration is justified and are valid In the assessment year 1998-99, the ten percent of total income from producing and sale of parent hybrid seeds is to be considered or recorded as agricultural income and the balance is to be assessed as business income liable to be taxed under the Act DTAA - e addition on account of apportionment of profit attributable to PE in India for use of research activity carried out in India by HO can be made in the present reassessment notwithstanding the fact that no specific reason relating to this issue were recorded by the AO while reopening the assessment u/s. 147 of the Act or at the time of issuance of notice u/s. 148 of the Act - Item "e" of para (3) of Article 5 of Indo-US Treaty provides that the term "permanent establishment" shall not include the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information for scientific research or for other activities which has a preparatory or auxiliary character, for the enterprise - the two activities are completely interlinked, interlaced and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting proceedings u/s. 147 of the Act. In response to notice issued u/s. 148 of the Act, Mr. Ajay Kumar Sood and Mr. K.K. Singh, Authorized Representative of the assessee attended and appeared before the AO and submitted various details. After hearing and considering all materials on record, the AO completed the assessment on 28.03.2003 determining the total income of the assessee at Rs. 9,26,70,000/- u/s. 147/143(3) of the Act. 7. Being aggrieved with the AO's order, the assessee preferred an appeal before the learned CIT(A). 8. Before the ld. CIT(A), the assessee had taken a ground that the initiation of reassessment proceedings u/s. 147 of the Act and issue of notice u/s. 148 of the Act was bad in law and without any jurisdiction as the assessment has been re-opened without any fresh material or information having come to light and specially when the assessee had disclosed fully and truly all material facts necessary for the assessment. The assessee submitted before the ld. CIT(A) that resorting to the provisions of the section 147/148 by the AO was bad in law and unwarranted. The assessee further contended before the ld. CIT(A) that the assessee specifically requested the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation of belief that the income has escaped assessment as the reopening was made with a view to examine the issue as clear from the reasons given by the AO where the AO has mentioned that "the same issue needs to be examined this year". 12. The assessee also submitted before the ld. CIT(A) that the reasons recorded has clearly established that no new facts came to the possession of the AO, and the AO had proceeded summarily and arbitrarily to issue notice u/s. 148 merely because her predecessor for another assessment year assess the income of the assessee from producing the seeds as business income as against agricultural income claimed by the assessee. He further argued before the ld. CIT(A) that there is no finding of the AO in the reasons that income of the assessee is business income and not agricultural income. He further submitted before the ld. CIT(A) that just because the AO had held that in A.Y. 1998-99 that income of the assessee is business income and not agricultural income, that by itself cannot be a sufficient and valid reason to believe that income had escaped assessment unless the reasons clearly states that facts during this year were identical to that of A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was accepted u/s. 143(1) of the IT Act and only when in A.Y. 1998-99 the case was not empowered to issue notice for the A.Y. 1997-98 and 1999-2000 as it amounts to change of opinion and the Rule of Consistency is also violated. I do not find any merit in the contentions of the appellant. Only the assessment for A.Y: 1993-94 was completed in scrutiny and thereafter no assessment was completed under scrutiny and the returns were accepted u/s. 143(1) of the IT Act meaning thereby that the AO had not applied his mind in the A.Ys, 1994-95 to 1997-98 as only intimation was sent to the appellant. In sending the intimation u/s. 143(1) no opinion is formed by the AO. It cannot be said that the AO had made opinion and the same was changed later on while reopening the assessment. In A.Y. 1998-99 the case was thoroughly examined by the AO and after analyzing the judgment of the Hon'ble Delhi ITAT in the case of Proagro Seeds Co. Ltd. vs. JCIT (126 Taxman 37) AO reached to the conclusion that appellant's income is not agricultural income and is a business income. The judgment of Hon'ble ITAT in the case of Pro Agro was not available while completing the case for A. Y. 1993-94. The principle of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relief in the return, the same will be considered as a case of deemed escapement of income. From the perusal of Explanation 2 it is clear that it enacts certain deeming provisions where, in any of the circumstances stated above, income is deemed to have escaped assessment giving jurisdiction to the AO to act u/s. VXL India Ltd. vs. ACIT, (1997) 215 ITR 295, 27 (Guj.); Birla VXL Ltd. vs. ACIT (1996) 217 ITR 13 (Guj.) } In other words, in the aforestated deemed cases of escapement of income, the AO can initiate the proceedings on finding or discovering such cases and no debate whether they constitute cases of escapement of income would be permissible. The appellant had claimed the total income as exempt which was not agricultural income which means the appellant had understand the income and has claimed excessive, allowance or relief in the return. 2.5 Considering the above facts, arguments and legal position, it is clear that the AO had proper reason to believe that the income chargeable to tax had escaped assessment for both the assessment years and she has followed the proper procedure of recording the proper reasons for issuing the notice u/s. 148. In reopening the case n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded by the AO do not express any view or opinion on the assessee's claim of exemption of agricultural income u/s. 10(1) of the Act as there is absolutely no allegation in the reasons that the assessee has not carried out basic agricultural operations and, therefore, the claim for exemption u/s. 10(1) was wrong. He, therefore, submit as the reasons do not contain such satisfaction, the reopening is invalid. He further submitted that assessment order u/s. 143(3) for the initial A.Y. 1993-94, was made after detailed enquiry, which had become final and, therefore, it is clear that at the time of issuing the notice u/s. 148, the AO had two contradictory orders i.e. assessment order for A.Y. 1993-94 where assessee's claim was accepted and the assessment order for the A.Y. 1998-99 where assessee's claim was rejected by taking a different view than that of A.Y. 1993-94, and that is why the AO felt the need to make the further enquiry for which purpose a notice u/s. 148 was issued. 17. It was further contended by the ld. counsel for the assessee that there was no application of mind by the AO while re-opening the assessment u/s. 147 of the Act, and the last sentence of the reasons re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was material on the basis of which the Income-tax Officer could proceeded to reopen the case, it is not a case of mere change of opinion. We are not inclined to interfere with the decision of the High Court merely because the case of the assessee was accepted as correct in the original assessment for this assessment year. It does not preclude the Income-tax Officer to reopen the assessment of an earlier year on the basis of his findings of fact made on the basis of fresh materials in the course of assessment of the next assessment year. This appeal is dismissed. No order as to costs." 19. The ld. standing counsel for the department further drew our attention to the decision of Hon'ble Gujarat High Court in the case Bharat V. Patel vs. Union of India 268 ITR 116 where it has been held that mere acceptance of return and adjustment of return against the earlier demand u/s. 143(1)(a) is not regular assessment and, in the liberalized and simplified tax collection regime, mere acceptance and acknowledgment of return and issuance of refund cannot be elevated to the status of regular assessment and formation of opinion about the incidence of tax on a particular income or item mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore have reason to belie that income of more than Rs. 1 lakh has escaped tax. Hence, the case is fit for reopening under section 147 of the I. T. Act 1961". 23. It is not in dispute that there was no regular assessment made by the AO in pursuance to the return filed by the assessee before the notice u/s. 148 was issued. The return of income filed by the assessee was merely processed u/s. 143(1)(a) of the Act. From the reasons recorded by the AO, it is seen that the AO has recorded or had taken in the account the following facts for entertaining the belief that income has escaped assessment within the meaning of section 147 of the Act:- (i) that assessee company is in the business of research and development of parent seeds, which are supplied and sold to SPIC (joint venture company) for development and production of hybrid seed, which are then sold to farmers by joint venture. (ii) Assessee's claim that its income is agricultural income. (iii) However, the AO held in A.Y. 1998-99 that assessee's said income is business income and not agricultural income, and hence not exempted from tax under the Act. (iv) The assessment for assessment order 1998-99, was under appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d seeds, which are then used by fanners and this observation of the AO in the background of decisions taken in the assessment order for the A.Y. 1998-99 makes it very clear that over all activities of the assessee in producing and supplying parent seeds have been taken into account by the AO, while recording reasons for issuance of notice u/s. 148 of the Act. 26. Further, the AO had also taken not of the amount of turnover as well as the net profit shown by the assessee in the year under consideration, which goes to show that AO has looked into statement of account filed by the assessee alongwith the return of income. Having regard to the amount involved, which has been claimed by the assessee as exempted, the AO, therefore, stated that he had reasons to believe that income of more than Rs. 1,00,000/- had escaped assessment. This belief of the AO cannot said to be merely empty verbiage as contended by the ld. counsel for the assessee in as much as this belief has been recorded by the AO after considering the nature of the activity carried on by the assessee, the amount of the profit and turnover involved in the present assessment year. Therefore, it would be wrong to say that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initiation of action u/s. 147 (a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceedings is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only issue whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the material would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction ( see ITO vs. Selected Dalurband Coal Co. P. Ltd. [1996] 217 ITR 597 (SC) ; Raymond Woollen Mills Ltd. vs. ITO [1999] 236 ITR 34 (SC) . The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction. 30. In the light of the aforesaid position of law laid down by the Hon'ble Supreme Court with regard to the scope and effect of section 147 and with regard to the meaning of expression "reason to believe" used in section 147 of the Act, we have to examine and analyze the fact of the present case to decide as to whether the Assessing Officer had any relevant material on which a reasonable person could have formed a requisite belief i.e. reason to believe that income has escaped assessment within the meaning of section 147 of the Act. 31. From the said decision, it is clear that at the stage of issuing notice u/s. 148 of the Act, the only question that arises for consideration is whether there was relevant material on which a reasonable person could have formed the requisite belief, and materials would concussively prove the escapement of income is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction, and it is not necessary that at the time of recording reason u/s. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is undoubtedly a relevant material on which reasonable person could have formed a requisite belief required u/s. 147 of the Act. The Hon'ble Supreme Court in the case of Ess Ess Kay Engineering Pvt. Ltd. vs. CIT (supra) has categorically held that reopening of the assessment u/s. 147 on the basis of finding of facts made on the fresh material obtained in the course of assessment for the next assessment year is justified. In the present case, the AO has taken into consideration the finding of facts on the basis of the material obtained in the course of assessment for the A.Y. 1998-99 that income from parent seeds is not an agricultural income but a business income. In this view of the matter, we, therefore, hold where there were relevant material stated in reasons recorded by the AO to entertain a belief that income had escaped assessment u/s. 147 of the Act in as much as assessee's claim that its income is agricultural income is not justified in the light of the view taken in the assessment for A.Y. 1998-99. Further, the words used by the AO in the reasons recorded "the same issue needs to be examined this year also" cannot be read in isolation but have to be read together with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rately discussed and decided upon. The CIT(A) has rejected these grounds raised by the assessee by observing as under: "3. As per various ground the appellant for all the four years has mentioned that the AO has erred in law in bringing to tax the agricultural income of the appellant as business income by wrongly disallowing the appellant's claim for exemption u/s. 10(1) read with section 2(1A) of the IT Act. The AO has erred in wrongly interpreting and applying the provisions of section 10(1) read with section 2(1A) of the IT Act. The appellant has given detailed arguments which are same arguments as were given in A. Y. 1998-99. 3.1 This issue has been elaborately discussed in my order for the A.Y. 1998-99 dt. 8.9.2004 in Appeal no. 60/01-02 in the appellant's own case. After considering all the submissions of the appellant and facts of the case, I have held in the aforesaid order that the appellant was not carrying on agricultural activities within the meaning of section 2(1A) and, therefore, AO was justified in treating the income of the appellant as business income. As during these four years, the facts are entirely similar, following the same order, I hold that, the AO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voidance of Double Taxation (DTA) entered into between India and the United States of America. That, the Commissioner of Income Tax (Appeals) XXIX erred in arbitrarily disregarding categorical information and evidence regarding income of the head office of the appellant filed by the appellant in response to specific query/ directions of the Commissioner of Income Tax Appeals XXIXand holding that: a. "the appellant has simply mentioned that it has not earned any income of any nature from sale of research activities per se carried in India. But the use of research activities carried out in India at other BO or HO and to produce seeds at other places by use of this research is not ruled out which has also not been denied by the appellant." b. "the actual utilization of the research carried in India and income generated out of production/ sale of seeds of various crops by use of this research was not submitted by the appellant." c. "The basis of estimation of income adopted by the AO is justified in absence of any other details provided by the appellant." 41. Connecting to the ground nos. 16 to 19 raised by the assessee, the department has also raised one solitary ground in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore not. possible to quantify or assign any value in any manner to the information exchanged between the HO and the RU." 43. The assessee further stated before the AO that Article 7(3) of the Indo-US DTAA provides that no estimate of attributable profits shall be made in respect of the information that is share bilaterally between the H.O. and the PE, and because of the fact that the research expenses incurred by the Indian Branch has been fully reimbursed by the HO, the assessee would not claim the same as deduction from the income of the Indian Branch, and, accordingly the assessee has already withdrawn such claim. 44. Further, the AO has observed in his assessment order as under: - From above it is clear that the assessee has not furnished the detail of utilization of research information obtained by head office from its branch office and is utilized world over, nor it has furnished how much income has been earned by the head office there from. As narrated in detail in the preceding paragraphs, these activities are carried out in Indian branch office but the benefits are reaped out side India. No income from utilization of these information has been shown or attributated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses which has been reimbursed by the HO is allowed for deduction to arrive at the net profit from such attribution, despite the claim by the assessee to the contrary." 46. Being aggrieved, the assessee preferred an appeal before the CIT(A). 47. The assessee's submissions and arguments made before the CIT(A) on this issue has been reproduced by the CIT(A) in para 4.2 of his order. The assessee objected to the additions made by the AO for three reasons: - I. The Research Unit in India is not a permanent establishment (PE) falling under the exclusionary clause of Article 5(3)(e) of the Indo-US Double Tax Avoidance Treaty. II. Without prejudice, the Assessing Officer has wrongly applied the provisions of Article 7(2) reads with Article 7(3) by attributing profits to the Head Office on pro-rata basis. III. Without prejudice, the Assessing Officer has wrongly rejected the claim that any income attributable for services rendered by the PE to the Head Office is exempt under Art. 7(3) of the treaty. 48. The first contention of the assessee that research unit of the assessee in India is separate and independent to the parent seeds production unit, and, therefore, it doesn't const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India is totally incorrect. The appellant's arguments that it had two PE is totally misleading and beyond any legal comprehension. The appellant has its branch office in India which is carrying on two activities namely research activities and production and sell of parent and hybrid seeds. The appellant itself in his reply to AO vide submission dt. 28.03.03 stated that the appellant had one PE which is carrying on two activities. Therefore it is undisputed fact that the appellant had PE in India in the form of branch office which is carrying on research activities and is also involved in preparation and sale of parent seeds. As per report of AO, from the website of the appellant it is also clear that the appellant was the first to commercialize rice hybrids in India, with the 1993 release of PHB 31. The major hybrid, Pioneer sell today is PHB71, released in 1995. The company also markets and sells hybrid of improved varieties of sorghum, sunflower, soybean, alfalfa, canola and wheat as well as forage and grain additives. It has been mentioned by the appellant on the website that worldwide, Pioneer sells products through a variety of organizations, including wholly owned subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derived from the assets and activities of the PE in India. In the appellant's case the income is generated only when the seeds prepared on the basis of research are sold. The income from sale of seed in India has been taxed separately. When the income is generated outside India or HO by use of research carried out in India, then all the activities are not taking place in India. The preparation of seeds and its sale has taken place outside India. Therefore, only the profit which is attributable to activities i.e. research will be taxable in India. Considering these facts and circumstances and legal position only 50% of incomer estimated by AO can be confirmed. Therefore, these grounds are partly allowed. 50. Still aggrieved, the assessee is in appeal before us. 51. The ld. counsel for the assessee at the very outset has submitted that this item about apportionment of HO income to Indian operations cannot be considered in the present assessment in as much as while reopening the present assessment u/s. 147 of the Act, the AO has not recorded any reason to entertain a belief that income earned by the HO is attributable to operations carried out in India and is assessable in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nary objection raised by the assessee against the validity of AO's action whether the addition on account of apportionment of profit attributable to PE in India for use of research activity carried out in India by HO can be made in the present reassessment notwithstanding the fact that no specific reason relating to this issue were recorded by the AO while reopening the assessment u/s. 147 of the Act or at the time of issuance of notice u/s. 148 of the Act. Without going to deliberate upon the various contention raised by both the parties on this issue, this issue is no more debatable in the light of the insertion of Explanation 3 below section 147 by the Finance no 2 (Act), 2009 with retrospective effect from 01.04.1989, where it has been provided that for the purpose of assessment or reassessment u/s. 147, the AO may assess or reassess the income in respect of any issue, which has escaped assessment and such issue comes to his notice subsequently in the course of the proceedings u/s. 147, notwithstanding that the reasons for such issue have not been included in the reasons recorded under subsection 148 of the Act. Therefore, in the light of the provisions contained in Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up company. He, therefore, submitted that the research activity are preparatory and auxiliary to the main business of assessee, and are thus, covered by exclusionary clause of Article 5(3)(e) of the treaty between India and USA. 57. The ld. Sr. counsel for the assessee further submitted that in the light of the provisions contained in Article 5(3)(e) of the DTAA between India and USA, it is clear that scientific activities are auxiliary activities, and as such, doing agri-genetic research by Indian branch of assessee company cannot be considered to be a permanent establishment as contemplated under Article 5(3)(e) of the Treaty between India and USA. In support of this contention, the assessee relied upon the following decisions:- I. In Morgan Stanley and Co. 292 ITR 416 II. U.A.E. Exchange Centre Ltd. vs. Union of India (2009) 223 CTR (Del) 250 58. In this connection, the ld. counsel for the assessee further submitted that research unit is an independent and distinct unit of which entire cost was borne by the Head Office in USA, and it is solely engaged in scientific research. He, therefore, submitted that the research activity of the Indian Branch do not constitute perman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. It is important to note that functions performed, assets employed and risk borne by the PE in India have remained static for all these years. He further pointed out that for all the years starting from A.Y. 1993-94 upto date, the Head Office has been reimbursing the entire expenditure on research, and no attribution was made by the revenue on account of business connection or PE right upto and including A.Y. 1998-99. He further contended that the present action of the AO in this assessment year is contrary to the stand taken by the AO in earlier years. 61. With regard to the fact that assessee has made an application under MAP, the ld. counsel for the assessee has submitted that mere because the assessee has made an application under MAP cannot be a ground to assume that there is an admission on the part of the assessee that income of Head Office is also taxable in India being attributable to the activities carried out by it at branch office in India. He further submitted that business profit of assessee company can only be taxed in India only if there is a PE in India, and there is no admission by the assessee that there exist a PE in India so as to attract provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been adjusted against the expenses incurred towards the research operation activities of developing and producing hybrid breeder seeds, and only the net expenses are being reimbursed by the Head Office. This makes it clear that the products produced by the assessee are being sold in India. He, therefore, submitted that the assessee company's activities of developing and producing hybrid breeder seeds, which are used as input for producing parent seeds, are core activity of assessee's business. He further pointed out a fact that determination of the price of seeds sold by the assessee to the joint venture company is also made by the HO. He, therefore, submitted that the decision of Hon'ble Delhi High Court in the case of UAE Exchange Industry, Morgan Stanley etc. are not applicable to the present case, in as much as the present case is a case where primary and core business activity are being carried out by the branch office of the assessee company. 65. With regard to the interpretation of Article 7, he further submitted that the manner in which the profit has been attributed to the operations carried out in India, by the AO is proper and justified and, thus, the addition made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 90 days within any twelve-months period; or (ii) the services are performed within that Slate for related enterprise (within the meaning of paragraph of article 9 (associated enterprises) 3. Notwithstanding the preceding provisions of this article, the term "permanent establishment" shall be deemed not to include any one or more of the following:- (a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the Branch office of the assessee company exist solely for scientific research and for other activities, which have preparatory or auxiliary character. The ld. Standing counsel for the department, on the other hand, submitted that the branch office of the assessee company in India does not exist solely for scientific research or for other activities, which have preparatory or auxiliary character for the enterprise. Having regard to the nature of the activities carried out by the branch office of the assessee company in India, we, therefore, have to see whether the assessee is maintaining Branch office for India solely for scientific research or for other activities which have a preparatory and auxiliary character for the assessee company. The clause (e) of Article 5(3) can be expanded item-wise as under:- (i) The maintenance of a fixed place of business solely for the purpose of advertising, for the enterprise; (ii) The maintenance of a fixed place of business solely for supply of information, for the enterprise; (iii) The maintenance of a fixed place of business solely for scientific research, for the enterprise; (iv) The maintenance of a fixed place of business so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee as an ongoing research and development programme taking about 8-10 years for developing the successful hybrid breeder seeds of desired quality. These hybrid breeder seeds are developed and produced by the assessee as an ongoing research and development programme, and are used as input or as seeds for the purpose of producing and multiplying parent seeds, which are then sold to the joint venture company. In the light of the very activities of developing and producing hybrid breeder seeds by the assessee and then using them as input or as seeds for producing parent seeds, it is clear to us that all the aforesaid activities undertaken by the assessee are nothing but one composite integrated activity intended to be carried out by the assessee for the purpose of producing parent seeds, which are being supplied to the joint venture company as per the approval granted by the RBI. It was the dominant object and purpose of the assessee company to make available parent seeds to joint venture company. It is also clear that the assessee would not be in a position to make available parent seeds to joint venture company unless and until the assessee develops and produces hybrid breeder s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being supplied to joint venture company for a price. The assessee undertakes the production of parent seed through multiplication of breeder seed, which are developed by the assessee after a long drawn process of combining two or more traits of different seeds into one seed. The assessee was allowed permission under section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 for opening a branch office in India by the Reserve Bank of India vide letter dated 18 November, 1992. It is important to note that this permission was granted to the assessee in pursuance to assessee's application dated 22nd October, 1992. The assessee was granted permission for conversion of its liaison office at New Delhi into a branch office for the purpose of undertaking the following activities:- v. "to represent the parent company (PCC) on commercial and business matters in India; vi. to conduct agri-genetic research for the development of new products and to make available parent seed to Joint Venture Company under a parent seed charge arrangement provided the results of these research work are made available to Indian companies; vii. to undertaken export and import of PCC's products; viii. to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al and relevant, and it does not change the very dominant and primary object and intention of the assessee to conduct agri-genetic research for the development of new products and to make available parent seed to joint venture company under a parent seed charge arrangement. It is very common and usual in any industry that various activities necessary to manufacture or produce any article or thing or goods are carried out by that industry at different places or factories or workshop or sites and mere because various stages or steps necessary to manufacture any item or things or goods or articles are performed or carried out at different places, sites, workshops, factory it would not mean that all such activities carried out to manufacture a final product are independent and distinct to each other. It is well settled that in order to determine the true and correct nature of any activity, the treatment or label or name given by the assessee in its books or documents or papers is not conclusive and what is conclusive and relevant is the true nature and substance of the activity having regard to the intention of the party coupled with all relevant surrounding circumstances of a given ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvested individually and thereafter two seeds of different traits are hybrided by way of process where two plants or seeds are crossed over number of generations of crops until the two traits of desired result are fixed in one hybrid seed, and hybrid parent seed are then multiplied to obtain a large quantity of hybrid parent seeds for the purpose of supplying it to joint venture company. The whole process of sowing and planting a vast variety of seeds individually, and raising crops year after year, producing hybrid parent seeds of desired result, multiplication of hybrid parent seeds and then supplying the same to Joint venture company is nothing but one single integrated activity where all operations are undertaken or carried out by the same assessee with a view to supply multiplied parent seeds to its joint venture company as per object and intention of the assessee specified in the approval granted by RBI. 50. In this view of the matter, we are in agreement with the CIT(A) 's finding that the two activities are completely interlinked, interlaced and dependent on each other, and cannot be divorced or dissociated from each other. The production of parent seeds is undoubtedly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the books. The information or results or datas collected during the course of developing and producing hybrid breeder seeds are being supplied to the HO and in turn o various group companies over the world. Having regard to the various stages of developing and producing breeder seeds and then producing parent seeds from breeder seeds, it is clear beyond any doubt that the activity of developing and producing breeder seeds by doing extensive research is an "essential" and "significant" part of the activity of the branch office in supplying parent seeds to its joint venture company. In this view of the matter, we find ourselves in full agreement with the learned CIT(A) in observing and holding that the assessee 's two fold activities of conducting the research and utilization of the research in preparation or production of parent/hybrid seeds of high quality of various crops and sales thereof are interwoven, inter-related, coordinated, inter-linked and inter-dependent, and the research activity of the assessee is not the sole activity of its branch office in India but the research conducted by the assessee is the main core activity, which is commercially exploited by the assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and produced by the assessee is used as raw material or input or as seed for the purpose of producing hybrid parent seeds which are in turn sold and supplied to the joint venture company by the assessee. The information or data or result collected by the assessee during the course of developing and producing breeder seeds are used or applied by the Head Office and other branches of the assessee company all over the world for the purpose of producing hybrid seeds. We further find that all the information or data or results obtained by the assessee in the course of developing and producing hybrid breeder seeds or hybrid germplasms are accessible to any other branch office or Head Office of the assessee company. There exist a pool of research available at Head Office which is used by other branch offices all over the world. Hence, the research activity carried out by the branch office in India in the course of developing and producing hybrid breeder seeds is to be considered for the purpose of determining income accruing to the assessee company in India, and the quantum is to be ascertained on the basis of the profit of the Head Office attributable to the branch office in India. It, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of article 5(1) is not attracted." The Supreme Court further observed (P. 177/PB/IV) "There is one more aspect which needs to be discussed namely, exclusion of P.E. under article 5(3). Under article 5(3)(e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a P.E. Article 5(3) commences with a non obstante clause. It states that notwithstanding what is a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliaiy in character. In the present case we are of the view that the above mentioned back office functions proposed to be performed by MSAS in India fall under article 5(3)(e) of the DTAA. Therefore, in our view in the present case MSAS would constitute a fixed place P.E. under article 5(1) of the DTAA as regards its back office operations. " 78. However, in the light of the view we have taken above holding that research activities carried out by the branch office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishment. 81. Article 7(2) of the Treaty provides that subject to the provisions of article 7(3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as that enterprise. 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 a reasonable basis. The estimate adopted shall, however, be such that the result shall be in accordance with the principles contained in Article 7. 82. In the light of the Article 7(1) (2) of Indo-US Treaty, the Indian permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to accrue or arise to him in India during the previous year. Sec. 9 specifies the incomes which are deemed to accrue, or arise in India. The relevant section is s. 9(1)(i) is reproduced as under: "9. Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India; Explanation 1: For the purpose of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; (c) in the case of a non-resident, being a person engaged in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished that the present case is an unusual one. but, on the other hand, after the insertion of Transfer Pricing Provisions in the Income Tax Act effective from A.Y. 2002-03, the AO has determined the arm's length price of the services rendered by Indian branch office i.e. Indian P.E. to the US Head Office, at a percentage ranging from 12.5% to 18% of the cost of the services. We are in agreement with this contention advanced by the ld. counsel for the assessee, and in the light of the provisions contained in Article 7(2), we hold that the arm's length principle would be applied for attribution of profit of the US Head Office to the PE in India in respect of the services rendered by the Indian PE to the HO, and the manner of computation of profit attributable to the operations carried out in India adopted by the AO, as partially confirmed by the Ld. CIT(A), is not in order. In the present case, the Indian branch office must be treated as a distinct and independent entity and profit center, and the attribution of profit under Article 7(1) and (2) can be made only on the basis as to what an outsider would charge the Head Office for providing the result of research at arm's length. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. The AO shall decide the issue as per law, in the light of the facts and circumstances of the present case, and after considering the assessee's submissions by passing a speaking and reasoned order. We order accordingly. ITA no. 1869/Del/2005 2290/Del/2005, A.Y. 1999-2000 87. Now, we shall come to the appeal filed by the assessee as well as by the revenue pertaining to the A.Y. 1999-2000. 88. In the assessee's appeal, the first issue raised in ground no. 1 to 5 is against the initiation of re-assessment proceedings u/s. 147 of the Act by the AO. 89. In this assessment year the assessee filed original return of income on 29.12.1999 declaring total income at Rs. 4,99,000/-. The AO thereafter initiated re-assessment proceedings u/s. 147 of the Act and issued notice u/s. 148 on 11.01.2002. On an appeal, the CIT(A) confirmed the AO's action in initiating proceedings u/s. 147 and in issuing notice u/s. 148 of the Act for the reasons similar to the reasons given by him in the A.Y. 1997-98, this position that issue with regard to the validity of reassessment proceedings u/s. 147 is identical in both the assessment years i.e. A.Y. 1997-98 and A.Y. 1999-2000 is not in dispute. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee as well as by the revenue in the A.Y. 1997-98 and 1999-2000. The issues has been decided by us in the A.Y. 1997-98, which has been followed by us in the A.Y. 1998-99, vide this common order. Therefore, this issue no. 2 stand decided accordingly. ITA no. 1871/Del/2005 2292/Del/2005, A.Y. 2001-02 98. In this A.Y. 2001-02, the assessee has raised identical two issues as raised in the A.Y. 2000-01. The department has also raised one issue about extent of allocation of income to the branch office, which is identical to the ground raised by the revenue in the A.Y. 1997-98, 1999-2000 and 2000-01. The issues raised in this assessment years are identical to the issues raised by the assessee as well as by the revenue in the A.Y. 1997-98, 1999-2000 and 2000-01, and these issues has been decided by us in the A.Y. 1997-98, which has been followed in the A.Y. 1999-2000 and 2000-01, vide this common order. Therefore, the issues raised in A.Y. 2001-02 stand decided accordingly in the terms of our order for the A.Y. 1997-98. 99. In the result, all the assessee 's appeal as well as the revenue's appeal for all these assessment years i.e. A.Y. 1997-98, 1999-2000, 2000-01 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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