TMI Blog2013 (12) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... ores by the permanent establishment to the head office is a payment to self and hence cannot be allowed as deduction in the hands of permanent establishment - As a result thereof, the provisions of section 40(a)(i) were held to be not applicable. Since the assessee is a non-resident governed by the provisions of the Double Taxation Avoidance Agreement, it is entitled to the benefits of the Double Taxation Avoidance Agreement, if the quantum of income or the overall tax liability turns out to be less as per the Double Taxation Avoidance Agreement vis-a-vis the domestic law - It is not possible to determine as to whether or not the computation under the Double Taxation Avoidance Agreement is more beneficial to the assessee – The issue was restored for fresh adjudication. Fee for technical services – DTAA – Held that:- Though there is a discussion about article 13(4)(c) of the Indo-U.K. Double Taxation Avoidance Agreement but the decision has been rendered only under the domestic law - There is no finding of the learned Commissioner of Income-tax (Appeals) that the amount is chargeable to tax as per the Double Taxation Avoidance Agreement - The amount is not chargeable to tax in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that the technical expenditure will be taxed in the hands of the head office at the rate of 15%. separate from other income of the permanent establishment. 4. Briefly stated the facts of the case are that the assessee is engaged in providing services relating to shipping industries which, inter alia, include classification, statutory instructions and surveys for all types of ships, crafts and vessels and also issuing statutory certificates in respect of surveys and inspections carried out by it. The assessee is based in the United Kingdom having its branches across the globe including some branches in India, which compositely constitute its permanent establishment. The return of income was filed declaring total income of ₹ 4,38,70,170. In the computation of its total income, the assessee added back a sum of ₹ 8,12,41,923 towards proportion of head office costs and thereafter reduced a sum of ₹ 4,23,83,911 being technical expenses included in head office costs at 52.17%. . Then deduction was claimed under section 44C towards head office administration expenses. The Assessing Officer accepted the assessee's contention in so far as the granting of dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the remand report from the Assessing Officer on the additional evidence and also OH certificate-1 and OH certificate-3 relating to the head office's overheads, initialled by the auditors Ernst and Young for the purpose of identification only, the learned Commissioner of Income-tax (Appeals) observed that Ernst and Young have not taken any responsibility for the computation of overheads totalling to pounds 7,27,79,929 incurred by the society (head office) but have only given their opinion on the distribution on the overheads between the society's exclusive and non-exclusive branches. Since the auditors had not taken responsibility for the computation of proportionate overheads allocable to the Indian branch, the learned Commissioner of Income-tax (Appeals) refused to accept the assessee's contention of mere reimbursement by the Indian branch to the head office of the allocated and apportioned actual technical expenditure as contended through the additional evidence in the shape of certificate. The learned Commissioner of Income-tax (Appeals) also took into consideration the Special Bench order passed by the Kolkata Bench of the Tribunal in ABN Amro Bank NV v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection and service for all types of ships, crafts, vessels and also issuing statutory certificates in respect of the services and inspections carried out. In the case of construction of a new ship, when a ship owner decides to build a ship as per the assessee's classification standards (i.e., Lloyd Register (LR) class), it submits the plans. The plans are verified and approved in accordance with the Lloyd Register rules. After approval, the amended plans are sent to shipyard for construction of the ships. During the course of construction, the Lloyd Register surveyors survey the ship to ensure that it is being built to the plans/standards specified. After the entire survey, reports are sent to the Lloyds Register's head office to enable them to allot appropriate classification. In so far as the periodical services are concerned, the ships are surveyed as per the schedules specified for hull and machinery components to ensure that the ships confine to the standards given by the Lloyd's Register. 8. It is apparent from page 64 of the paper book, being the copy of a letter dated December 9, 2005 addressed to the Commissioner of Income-tax (Appeals) stating that : ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead office is charging at the rate of 40%. of the gross revenue of each branch towards central establishment costs which include both the technical and administrative head office expenses. Such figure at the rate of 40%. of the Indian branch's gross revenue in the current year has been determined at ₹ 8.12 crores which includes a sum of ₹ 4.23 crores towards head office technical expenses. Page 28 of the paper book is a chart showing composition of the overhead expenses incurred by the assessee's head office showing total overheads at sterling pounds 72,779,929. Page 30 of the paper book is a certificate from Ernst and Young showing allocation of the overhead expenditure incurred by head office between exclusive and non-exclusive branches. These expenses are claimed to have been allocated on the basis of the gross revenues by considering total world revenue at pounds 227,252,000 and revenue from non-exclusive branches at pounds 14,296. The overheads attributable to non-exclusive branches have been apportioned at pounds 4,579 in the ratio of the gross revenue of such nonexclusive branches as to the world gross revenue. As per this certificate the percentage of no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entral establishment costs of ₹ 8,12,41,923 have been provided on the basis of amount estimated by the Lloyd's Register of ShippingU.K. and verified by their auditors. We are unable to comment on the adequacy thereof. 11. The reference to the verification by the auditors in such audit report is to the certificates of Ernst and Young. In such certificates, it has been categorically mentioned that these have only been initialed by them on the basis of statements furnished by the assessee. From the above certificates, it is clear that not only the charge made by the head office from the branch at 40%. of gross revenue includes element of income but even bifurcation of such payments between administrative and technical expenses is not based on any relevant criteria. As this percentage of 40%. is ad hoc, the head office could have charged 50%. or 60%. or even still more from the Indian branch towards such expenses, thereby further directing southwards the income chargeable to tax in India and as such depriving the Indian exchequer from the tax rightly due to it. Further, the ratio of 48 : 52 is again ad hoc. It could have been either way. Still further, when we consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Indian permanent establishment and such expenses were allocated on the basis of total number of hours spent by its employees for Indian project. It was in that context that the Tribunal came to hold that the payment of salary to employees for technical job was not hit by section 44C. The position as prevailing before us is radically different. The case is not that a particular employee or number of employees at head office devoted some time for technical job towards Indian permanent establishment. Rather the position is that the head office has charged the Indian branch at the flat rate of 40%. of the gross revenues not for helping the permanent establishment in accomplishing the part of their task but to render the services which commence after the completion of job by the Indian permanent establishment and further this payment also includes profit element. As such, this case is patently distinguishable. 13. The learned authorised representative also relied on Circular No. 649 dated March 31, 1993 ([1993] 200 ITR (St.) 230) to contend that the technical fees remitted to head office of a non-resident enterprise by its Indian branch for certain technical services rendered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions between the permanent establishment and its head office. In that view of the matter, there can be no profit from transactions with self inasmuch as neither there can be any deduction in the hands of the permanent establishment nor there can be any income in the hands of the head office in respect of such mutual transactions. Respectfully following the ratio of these decisions in the context of domestic law, we hold that the learned Commissioner of Income-tax (Appeals) was justified in holding that a sum of ₹ 4.23 crores can neither be allowed as deduction in the hands of Indian branch nor be considered as income in the hands of the head office. Once no deduction is to be allowed, the natural corollary which follows is that there can be no question of application of section 40(a)(i) to such expenditure. We, therefore, uphold the view taken by the learned Commissioner of Income-tax (Appeals). 15. Section 90(2) of the Act provides that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1), for granting relief of tax, or as the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Taxation Avoidance Agreement. The liability to tax on the assessee in respect of the income of the permanent establishment would be fastened by only such of the two computations which is more favourable to the assessee as per the mandate of section 90(2) of the Act. 17. As regards the income of ₹ 4.23 crores in the hands of the head office, the matter ends with the order of the learned Commissioner of Income-tax (Appeals), who has held that such income is not chargeable to tax under the domestic law, which view has been approved by us. Once an amount is not chargeable to tax under the domestic law, there can be no question of examining the taxability of such amount under the Double Taxation Avoidance Agreement. It goes without saying that the role of the Double Taxation Avoidance Agreement is to reduce, if possible, the tax burden cast under the provisions of the domestic law. It is axiomatic that the Double Taxation Avoidance Agreement cannot cast a fresh obligation of tax independent of any provision under the domestic law in this regard. As such, the ground raised by the Revenue urging us to uphold the taxability of the amount as income of the head office, cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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