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TMI Blog2013 (12) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Commissioner of Income-tax (Appeals) has erred in treating the sum of Rs. 4,23,93,911 as fees for technical services as per the Double Taxation Avoidance Agreement between India and the U.K. He ought not to have done so. 3. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in confirming the Assessing Officer's action in levying interest under section 234B and under section 234C. He ought not to have done so." 3. The only ground taken by the Revenue is as under : "On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the Assessing Officer's finding 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 inspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t wrong in taxing a sum of Rs. 4.23 crores in the hands of head office at 15%. by treating the same as fees for technical services and further in not allowing deduction of Rs. 4.23 crores in the hands of the Indian branch by taking shelter of the provisions of section 40(a)(i). Here it is relevant to mention that the assessee submitted an additional evidence before the learned Commissioner of Income-tax (Appeals) in the form of a certificate dated December 7, 2005 issued by the group financial controller certifying that the amount charged from the Indian permanent establishment was "reimbursement of actual expenses incurred and disbursed by the society". After 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer's finding that the amount of Rs. 4.23 crores should be taxed in the hands of head office at the rate of 15%. independent of the income of the permanent establishment. 7. We have heard the rival submissions and perused the relevant material on record. Before proceeding to decide the grounds raised in these appeals, we consider it expedient to elaborately set out the assessee's activity vis-avis the role played by the head office in this regard as apparent from the orders of the authorities below and the assessee's submissions made before them. The main activity of the assessee is that of classification, statutory inspection 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 constructio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vivid that every survey held in India inherently requires the direct involvement of the head office. A report on each survey is sent to head office where it is examined by a special staff of surveyors before submission to the Committee who, if satisfied, confirm continuation of class and then make appropriate entry in the register book. In other words, the work undertaken by the permanent establishment cannot be completed without the direct and substantial involvement of its head office. 10. From page 33 of the paper book, which is a copy of the certificate of Ernst and Young dated June 10, 2002, it is manifest that the head 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 Rs. 8.12 crores which includes a sum of Rs. 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 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept the assessee's contention that the head office merely recovered the costs incurred from the Indian branch for which it was charged Rs. 8.12 crores in total. It is further observed that the said expenditure has been bifurcated between administrative and technical expenses in the ratio of 48 : 52. Except for relying on the audit report, the learned authorised representative could not draw our attention to any material to indicate the basis of such allocation. Even the auditors of the company, namely, S.R. Batliboi & Co. have qualified the report on this issue by mentioning in para (d) as under : "Central establishment costs of Rs. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 318 ITR (AT) 42 (Mum) in support of the contention that such expenses for technical services should be allowed as deduction independent of section 44C. In our considered opinion this contention does not hold water. In the case of Stock Engineer, the Tribunal has held that the payment by way of salary for technical job done by the engineers in India is neither for executive job nor for general administrative expenses of head office, hence not hit by section 44C. It is relevant to note that in that case the disallowance represented the payment of salary to the employees working in head office 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 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the later decision of the Larger Bench, the principle of mutuality, as applied in the earlier decision of the Special Bench under the domestic law, has been held to be applicable. It is different matter the deductibility of interest in the hands of the permanent establishment in the latter case was granted under the provision of the relevant Double Taxation Avoidance Agreement. In so far as the position under the domestic law is concerned, it is apparent that the consistent view in both the abovereferred Special Bench decisions is that the principle of mutuality applies in respect of 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 Rs. 4.23 crores can neither be allowed as deduction in the hands of Indian branch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Double Taxation Avoidance Agreement is more beneficial to the assessee. In our considered opinion the ends of justice would be adequately meet if the impugned order is set aside and the matter is restored to the file of the Assessing Officer for computation of income of the assessee as per the Double Taxation Avoidance Agreement as well after allowing a reasonable opportunity of being heard to the assessee. We order accordingly. After such computation, the Assessing Officer will compare the income of the permanent establishment as per domestic law and the Double 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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