TMI Blog2007 (8) TMI 374X X X X Extracts X X X X X X X X Extracts X X X X ..... was a foreign company within the meaning of s. 2(23A) of the Act. The appellant had undertaken a sub-contract for dredging, which was executed in Haldia Port near Kolkata in the year 1999-2000. The work commenced on 26th Feb., 1999 and ended on 28th July, 1999. Thus, the appellant had a project office in India for a period of 153 days, which was less than six months, the maximum period available according to the DTAA between Netherlands and India for not being treated as 'PE'. It is a settled law that the provisions of the DTAA would always override the provisions of the Act. Sec. 90(2) of the Act also provides as follows: "where the Central Government has entered into an agreement with the Government of any country outside India under sub-s. (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee." In view of this binding legal situation, the AO ought to have held that the appellant did not have any PE in India, and therefore, no taxable income had arisen in the hands of the appellant in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as not admissible and not sustainable on merit, and dismissed the grounds of appeal in its totality. 5. Before us, the learned counsel for the appellant, Sri S.K. Tulsiyan, argued that the learned CIT(A) erroneously held that the issue regarding 'PE' did not emerge out of the assessment records, when the nature of business and the source of income were disclosed by the appellant in the return of income along with supporting evidences. In para 4 of the assessment order, the AO categorically stated that the "assessee is a non-resident foreign company of Netherlands who was awarded a sub-contract by HAM, another non-resident foreign company of Netherlands, to carry out maintenance dredging work at Kolkata for Calcutta Port Trust. HAM was the main contractor for this project. In order to carry out the contractual work, a dredging ship 'Volvox Atlanta' was brought into India by the assessee on 26th Feb., 1999. The said dredger sailed from Haldia in West Bengal on 28th July, 1999 to leave India." The learned counsel strongly contended that after this categorical statement of the AO, the learned CIT(A) should not have concluded that the issue regarding 'PE' did not emerge out of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant that by overlooking these important judicial decisions the learned CIT(A) acted against the principles of natural justice, and that in all fairness the learned CIT(A) should have admitted all the grounds of appeal on the basis of the above judicial decisions. 5.2 Coming to the merits of the case, Sri Tulsiyan argued that both the learned CIT(A) and the AO wrongly interpreted the definition of 'PE' as given in art. 5 of the DTAA between Netherlands and India. Our attention was drawn to the provisions of s. 90(2) of the 'Act, which clearly indicated that the provisions contained in the DTAA overrode the provisions of the Act. This fact was overlooked by the lower authorities, it was submitted. The learned counsel explained before us that art. 5 of the convention stated that "the term 'PE' means a fixed place of business through which the business of the enterprise is wholly or partly carried on". Firstly, there had to be a fixed place of business, and secondly, there had to be business carried on from that fixed place. It was submitted by the learned counsel that in the appellant's case, the dredger sailed off on 28th July, 1999, after which the appellant did not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place of business which is fixed; and - through which the business is carried on. A PE begins to exist when the enterprise commences to carryon its business through a fixed place of business. This is the case once the enterprise prepares the activity for which the facility is permanently to be used. The same principles apply when determining the points of time at which a PE ceases to exist. If the enterprise ends its business activities for good, its PE will also cease to exist. According to the learned counsel, this decision is squarely applicable in the appellant's case. As pointed out by him, the second ingredient was missing, as no business was carried on through the project office after 28th July, 1999. 5.4 The learned counsel contended that the argument that RBI's approval was mandatory for closure of the project office was misplaced. The permission letter issued by RBI would show that there was no such clause in that letter. It only stated that HBI was agreeable to opening of a project office at Calcutta upto February, 2000 for the purpose of executing the sub. contract. A copy of the RBI's letter dt. 15th March, 1999 was submitted before us. It was stated that the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the learned Departmental Representative in the course of his arguments. 7. In the rejoinder, the learned counsel stated that taxes under the IT Act are imposed by the Union under the Constitution as per Art. 265. Art. 265 of the Constitution says-"No tax shall be levied or collected except by authority of law". Thus, the learned counsel argued that Art. 265 requires that-(i) there must be a law; (ii) the law must authorize the tax; and (iii) the tax must be levied and collected according to law. It is also argued by him that tax illegally levied must be refunded. He further stated that the Hon'ble apex Court's decision in the case of Sun Engineering Works (P) Ltd. touches upon such relief of the item of income which is not a subject-matter of escaped assessment and it is in that context that the Hon'ble Supreme Court says that such a relief cannot be claimed in a reopened proceeding under s. 148 of the Act. Whereas the case of the appellant is that there being no PE of the appellant in India, in terms of art. 5 r/w art. 7 of the DTAA. the beneficial provision, which in absence of PE does not provide for charging of tax on a non-resident foreign company in India due to s. 90 sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is chargeable to tax but has 'escaped assessment' and the ITO's jurisdiction under the section is confined only to such income which has escaped assessment. It does not extend to reconsidering generally the concluded earlier assessment. Claims which have been disallowed in the original assessment cannot be permitted to be reagitated on the assessment being reopened for bringing to tax certain income which has escaped assessment, because the controversy on reassessment is confined to matters which are relevant only in respect of the income which had not been brought to tax during the course of the original assessment. A matter not agitated in the concluded original assessment proceedings also cannot be permitted to be agitated in the reassessment proceedings unless relatable to the items sought to be taxed as 'escaped income'. Indeed, in the reassessment proceedings for bringing to tax items which had escaped assessment, it would be open to the assessee to put forward claims for deduction of any expenditure in respect of that income or regarding the non-taxability of the items at all. Sec. 147, being for the benefit of the Revenue and not the assessee, the assessee cannot be per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the provisions contained in art. 5 of the DTAA between India and Netherlands. On both the issues, the learned counsel for the appellant placed his arguments to our satisfaction. The judgments in the Jute Corporation case and also the NTPC case are squarely applicable in the case of the appellant. In view of the above, we are of the considered opinion that due to the distinction drawn earlier in this para, the judgment in the case of Sun Engineering Works (P) Ltd., relied on by the learned Departmental Representative, is not applicable to the case before us. We are, therefore of the view that it was erroneous on the part of the CIT(A) not to have admitted the grounds of appeal. 9. As regards the merits of the case, we find sufficient force in the arguments of the learned counsel for the appellant. The basic ingredients of a PE, as indicated in art. 5 of the DTAA are (i) a fixed place of business and (ii) carrying on of a business from that fixed place. From the facts available on record it transpires that the appellant did not have any fixed place of business after 28th July, 1999 when the dredger left the Haldia Port. After the dredger left the port there was no activity which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the initial year or any other assessment year. 3. The learned CIT(A) failed to appreciate that the appellant was resident of the Netherlands and therefore governed by the Agreement for Avoidance of Double Taxation (ADT) between India and the Netherlands, and since the appellant had a fixed place of business in India. only for 153 days, it did not have a PE in India, hence the profit from contract was not taxable in India in view of art. 7 r/w art. 5 of ADT. So also the amount of bad debts written off in the earlier years which were recovered during the previous year could not be taxed in the hands of the appellant, because the appellant did not have a PE in India in any of the years. 4. The learned CIT(A) failed to appreciate that all the relevant facts establishing that the appellant did not have a PE in India were on the records of the AO, hence he ought to have held that the profits earned by the appellant were not taxable in India. 5. The learned CIT(A) failed to appreciate that a fresh plea concerning a legal issue could be raised at the appellate stage and was maintainable." 11. Ground Nos. 1 and 5 are of general nature and do not require any separate discussio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant in the three years, the addition of Rs. 1,14,21,336 on account of recovery of bad debts was deleted. 13.3 In this connection, we may reiterate that the basic ingredients of a PE as indicated in art. 5 of the DTAA are (i) a fixed place of business and (ii) carrying on of a business from that fixed place. From the facts available on record it transpires that the appellant did not have any fixed place of business after 28th July, 1999 when the dredger left the Haldia Port. After the dredger left the port there was no activity which could be termed as 'business carried on' from the 'fixed place of business'. Further, if there was a project office without any business being transacted through that office, it could not be called a PE within the definition in art. 5 of the convention. Maintenance of books of account or bank account cannot be a factor for determining a fixed place of business as PE. At best, these can be termed as activities of auxiliary character, which have been specially exempted from the definition of PE in cl. 4(e) of art. 5 of the convention. In view of the above, the question of treating the recoveries in . three years, as indicated by the learned CIT(A), as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us had to be written off during the asst. yr. 2000-01. However, the appellant made persistent efforts in subsequent years to recover the bad debts. The matter was handled even at diplomatic levels between India and Netherlands, and ultimately the said amount was paid in the next three years. As and when the amount was received from HAM, the appellant voluntarily informed this fact to the AO and paid income-tax on the same in each subsequent year of receipt of dues. The reconciliation of turnover offered to tax in all the three years was given as under: Assessment Year-2000-01 Rs. Project turnover 41,89,43,626 Less: Bad debts w/o 25,76,00,029 ------------ Turnover offered to tax 16,13,43,598 Assessment Year-2001-02 Bad debts recovered 6,81,39,305 (Expenses incurred Rs. 1,80,805) Exchange difference 3,82,49,336 Addl. amount recovered 12,35,69,650 ------------ Turnover offered to tax 22,99,58,291 Assessment Year-2003-04 Bad debts recovered 6,58,91, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own during the material point of time as narrated above and the assessee had a project office in India for a period of 153 days only. Simply because the assessee filed a loss return, the AO proceeded with the assessment. The AO in our considered opinion is not only a tax collector or tax gatherer, he is also treated as a quasi-judicial authority. As a quasi-judicial authority, he is to safeguard the interest of law in the right perspective, even if a wrong return has been filed or no claim has been made due to the assessee. He is bound to allow such due claim or not to entertain a wrong return in case there does not accrue any liability on the part of the assessee. In the impugned case the assessee although filed a loss return, it was not liable to file any return at all. Therefore, the wrong return filed by the assessee was to be treated as a non est return. The AO should not have proceeded with the non est return but he proceeded with the same. This part of the action on the part of the AO itself is in contradiction to its role as a quasi-judicial authority. He has to apply the proper law whether it goes against the assessee or' goes in favour of the assessee. Our this view find ..... 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