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M/s Consulting Engineering Corporation India Branch Office, D-6, Pamposh Enclave, New Delhi-110048 204, Vs JDIT(OSD) Circle-1(1), International Taxation, Drum Shape Building, New Delhi.
November, 07th 2014
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

               IN THE INCOME TAX APPELLATE TRIBUNAL
                      DELHI BENCH `B' NEW DELHI

            BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
                               AND
           SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER

                              I.T.A.No.1597/Del/2009
                             Assessment Year : 2003-04

                              I.T.A.No.1598/Del/2009
                             Assessment Year : 2004-05

M/s Consulting Engineering Corporation vs JDIT(OSD)
India Branch Office, D-6,                      Circle-1(1),
Pamposh Enclave,                              International Taxation,
New Delhi-110048                             204, Drum Shape Building,
                                             New Delhi.
                         I.T.A.No.1275/Del/2009
                          Assessment Year : 2003-04

                              I.T.A.No.1172/Del/2009
                             Assessment Year : 2004-05

ADIT                          vs Consulting Engineers Corporation,
Circle-1 (1),                     D-6, Pamposh Enclave,
New Delhi.                        New Delhi.
(Appellant)                           (Respondent)
      Appellant by: Shri M.P. Rastogi, Adv. & Smt. Lalita Krishnamoorty CA
   Respondent by :S/ Shri Sanjeev Sharma, CIT DR & Vivek Kumar Sr.DR

                                    ORDER


PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

       The above captioned appeals of the assessee as well as of the revenue

have been preferred against the order of CIT(A)-XXIX, New Delhi dated

10.12.2008 for AY 2003-04 and 2004-05.
                                                                             1
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

Revised ground in ITA 1597/Del/2009 for AY 2003-04 of the assessee

       "1. The assumption of jurisdiction under section 148 of the
       Income Tax Act, 1961 is without authority of law and is void.
        2. That the Id. Assessing Officer has no valid material to
        assume jurisdiction under section 147 of the Income Tax Act,
        1961 and consequentially reasons so framed is null, void and
        bad in law. In the absence of valid material available on record
        for formation of reason to believe that there has been an
        escapement of income by the Id. Assessing Officer the
        reopening is bad in law.
        3. That there was no reason to believe as contemplated under
        section 147 of the Income Tax Act, 1961 that income chargeable
        to tax had escaped assessment and hence the assessment as
        framed by the Id. Assessing Officer is not valid in law and
        deserves to be quashed.
        4. That the reasons alleged to have been recorded are not
        based on facts but on suspicion which cannot be the foundation
        for formation of reason to believe as contemplated under the
        provisions of section 147 of the Income Tax Act, 1961 and
        hence the reopening is bad in law and reassessment as framed
        deserves to be quashed.
        5. The Id CIT (Appeals) had erred in holding that the
        Assessing Officer had validly invoked and had rightly assumed
        the jurisdiction under section 147 of the Income Tax Act, 1961.
         6. That in the absence of any PE in India in terms of DTAA
        (Double Taxation Avoidance Agreement), no profits alleged to
        have accrued to the appellant are there and consequently the
        levy of tax as made by the AO is arbitrary, unjust and bad in
        law.
        7. That the appellant functions as a Branch of the US Non-
        resident involving only in preparatory and auxiliary activities
        for US Non-resident the cost whereof is reimbursed by US
        hence there could be no income accrued to the appellant and
        consequently the assumption of income at Rs.19,62,250j - as
        business income is arbitrary, unjust and bad in law. Even in US
        where the firm has HO and is based, even they are not making
        even a part of this profit %. How can a branch who is simply

                                                                           2
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

        doing a small portion of the job such as drafting and
        engineering can be deemed as making so high % of profit, when
        the most of the crucial job of the project lies with the HO,
        including the liabilities of the design if the building fails at any
        given time.
        8. That in the absence of any income embedded in the amount
        reimbursed by US Nonresident to its Branch (appellant), acting
        as a pure a cost centre the assessment at a figure of
        Rs.19 ,62,250 / - as business income is bad in law.
        9. That there is no international transaction with an
        Associated Enterprise (AE) as contemplated under Section 92C
        of the Income Tax Act, 1961 hence no income ought to have
        been deemed under Section 92C of the Income Tax Act, 1961.
        10. That the provisions of Section 92C in terms are not
        applicable and consequently the assessment made at
        Rs.19,62,250/- as business income as made by the AO is
        arbitrary, unjust and at any rate very excessive.
        11. Without prejudice to grounds above the AO ought not to
        have taken into consideration the figure of profits from the US
        Return for the calendar year 2003 but should have taken the
        figures for the calendar year 2002 for the determination of
        attributable profits and subjected it to a further downward
        adjustment for functions performed, assets employed, working
        capital available and risk assumed and consequently the
        adoption of global profit rate of 8.50 % is very high.
         12. That the CIT (Appeals) had erred in directing the AO to
        calculate attributable profit at 50% of the figure arrived at by
        the AO after applying the profit rate of 8.5% representing the
        global profit ratio of the assessee.
        13. That the authorities ought to have adopted the status of the
        appellant as individual instead of Foreign Company. CEC is a
        firm and not a company even in us. It is 100% owned by the
        single individual hence does not fall in the category of a
        Company."







                                                                               3
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

Revised grounds in ITA No. 1598/Del/2009 for AY 2004-05

        "1. That in the absence of any PE in India in terms of DTAA
        (Double Taxation Avoidance Agreement), no profits alleged to
        have accrued to the appellant are there and consequently the
        levy of tax as made by the AO is arbitrary, unjust and bad in
        law.
        2. That the appellant functions as a Branch of the US
        Nonresident involving only in preparatory and auxiliary
        activities for US Nonresident the cost whereof is reimbursed
        by US hence there could be no income accrued to the
        appellant and consequently the assumption of income at
        Rs.23,89,345/ - is arbitrary, unjust and bad in law.
         3. That in the absence of any income embedded in the
        amount reimbursed by US Nonresident to its Branch
        (appellant), acting as a pure a cost centre the assessment at a
        Rs.23,89 ,345 / - is bad in law.
        4. That there is no international transaction with an
        Associated Enterprise (AE) contemplated under Section 92C of
        the Income Tax Act, 1961 hence no income ought to have been
        deemed under Section 92C of the Income Tax Act, 1961.
        5. That the provisions of Section 92C in terms are not
        applicable and consequently the assessment made at
        Rs.23,89,345/ - as made by the AO is arbitrary, unjust and at
        any rate very excessive.
         6. Without prejudice to grounds above the AO ought to have
        adopted the correct figure of the profit from US Return for the
        calendar year 2003 for the determination of attributable
        profits and subjected it to a further downward adjustment for
        functions performed, assets employed, working capital
        available and risk assumed and consequently the adoption of
        global profit rate of 10 % is very high.
        7. That the CIT (Appeals) had erred in directing the AO to
        calculate attributable profit at 50% of the figure arrived at by
        the AO after applying the profit rate of 10.6% representing the
        global profit ratio of the assessee.
        8. That the authorities ought to have adopted the status of
        the appellant as individual instead of Foreign Company. CEC
                                                                           4
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

          is a firm and not a company even in US. It is 100% owned by
          the single individual hence does not fall in the category of a
          Company. "
2.     The grounds of the revenue in ITA No. 1275/Del/2009 for AY 2003-04

and in ITA No. 1172/Del/2009 for AY 2004-05 are similar which read as

under:-


                "1. In the facts and in the circumstances of the case
          the CIT(A) has erred in directing the AO to calculate
          attributable profit at 50% of the figure arrived at after
          applying the profit rate of 8.5% which represents the global
          profit ratio of the appellant ignoring the fact that the PE also
          assumes risks in respect of work done by it and the HO earns
          its own profit in respect of part of expenses not attributable to
          PE and so the taxable profit should be income as determined
          by the AO.
          2. On the facts and in the circumstances of the case the Ld.
          CIT(A) -XXIX, New Delhi has not disclosed any reason or
          basis to reduce the attribution of profit by 50%.
          3. On the facts and in the circumstances of the case, the Ld.
          CIT(A) has erred in substituting his own estimate of income
          without pointing out defects in the basis adopted by the AO for
          estimation of attribution of the profit. Such substitution of the
          estimate is contrary to the principle laid down by Hon'ble apex
          court in cases of CST vs H M Esufali H M Abdulali (1973) 90
          ITR 271 and Kachwala Gems vs JCIT (2007) 288 ITR 10.
          4. The order of the CIT (A) be set-aside and that of AO be
          restored. "
3.     Briefly stated the facts giving rise to these appeals are that the assessee's

case was reopened u/s 147/148 of the Income Tax Act, 1961 for AY 2003-04 by

issuing notice dated 06.03.2007. The assessee replied that the earlier return

may be considered to be return filed in response to notice u/s 148 of the Act.

The AO rejected the objection of the assessee towards reopening of assessment

                                                                                  5
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

u/s 147 and 148 of the Act and made an addition of Rs.15,39,789 towards

Arms' Length Price (ALP) reimbursement of Indian branch. The aggrieved

assessee preferred an appeal before the CIT(A) mainly on two grounds, first,

challenging the reopening of assessment u/s 147 and 148 of the Act and,

secondly, challenging the addition made by the AO on account of cost +8.5%

reimbursement of total expenditure of Indian Branch.


4.     Ld. CIT(A) decided the appeal of the assessee for AY 2003-04 by passing

the impugned order dated 10.12.2008 and held that the AO has rightly assumed

jurisdiction u/s 147 and 148 of the Act on legal grounds and contention of the

assessee towards reopening of assessment was rejected.

5.     From the record of ITA 1597/Del/2009 for AY 2003-04 and ITA

1598/Del/2009 for AY 2004-05 of the assessee, we observe that the AO made

similar kind of addition in both the years by holding that the total expenditure

incurred as per audited expenditure and income account requires to be

computed by adding mark up of 8.5% in AY 2003-04 and the mark up of 10%

for AY 2004-05. Therefore, the assessee has raised similar grounds on this

count in both the appeals. The assessee also challenged conclusion of the AO

that the assessee appellant has a fixed place of business in India as PE in the

form of branch office through which the business of the assessee is partly

carried out, therefore, in terms of para 2(c) of Article 5 of Indo US DTAA, this

represents a fixed place of business through which business of the enterprises is

                                                                               6
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

carried out and, accordingly, this constitutes Permanent Establishment (PE) of

the assessee and the income attributable to the operation carried out by the PE

shall be taxable in terms of Article 7 of the Indo US DTAA.


6.     In both the assessment years under consideration, the CIT(A) upheld the

findings of the AO that the assessee has PE in India in the form of branch

office. The CIT(A) partly allowed ground of the assessee on the issue of

attribution of profit to the branch office, PE of the assessee in India and directed

the AO to calculate attributable profit at 50% of the figure arrived at after

applying the profit rate of 8.5% for AY 2003-04 and 10.6% for AY 2004-05

which represents the global profit ratio of the assessee company in the relevant

financial years.


7.     Now, being aggrieved by the impugned appellate orders of the CIT(A),

the assessee as well as the revenue is before this Tribunal on the grounds as

reproduced hereinabove.


Ground no. 1 to 5 in AY 2003-04 of the assessee

8.     At the outset, we find it appropriate to take up legal grounds of the

assessee against the reopening of assessment u/s 147/148 of the Act. We have

heard arguments of both the sides and carefully perused the relevant material

placed on record. Ld. Counsel of the assessee submitted that the AO has no

valid material to assume jurisdiction u/s 147 of the Act and consequently


                                                                                  7
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

reasons so framed by the AO and action thereunder is null, void and bad in law

as in absence of valid material available on record for formation of reason to

believe that there has been an escapement of income, the reopening of

assessment is bad in law.       Ld. Counsel vehemently contended that there was

no reason to believe before the AO as contemplated u/s 147 of the Act that the

income chargeable to tax had escaped assessment, hence, reassessment framed

by the AO is not valid in law and deserves to be quashed. Ld. Counsel of the

assessee also contended that the impugned reasons alleged to have been

recorded are not based on fact but on suspicion which cannot be the foundation

for formation of reason to believe as contemplated under the provisions of

section 147 of the Income Tax Act, 1961 and hence the reopening is bad in law

and reassessment as framed deserves to be quashed. Ld. Counsel pointed out

that the ld. CIT (Appeals) grossly erred in holding that the Assessing Officer

had validly invoked and had rightly assumed the jurisdiction under section 147

of the Act for issuance of notice u/s 148 of the Act. Ld. Counsel reiterated its

argument before the authorities below and submitted that the reopening of

assessment may be quashed under the facts and circumstances of the case.

9.     Replying to the above, ld. DR submitted that at the time of initiating

proceedings u/s 147 and 148 of the Act, the AO is not expected to reach a final

conclusion regarding the taxability of such income under the Act, only a prima

facie belief regarding escapement of income would be sufficient for invoking


                                                                               8
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

the provisions of section 147 of the Act. A reference can be made to the

decision of Hon'ble Supreme Court in the case of Raymond Woollen Mills

(1999) 236 ITR 34 (SC) and ITO vs Selected Co. Ltd. (1996) 217 IGTR 597

(SC) where it has been held that formation of belief is within the realm of

subjective satisfaction of ITO.     Ld. DR also pointed out that during the

assessment proceedings for AY 2004-05, it was found by the AO that the

assessee was liable to tax in India but a higher mark up depending upon the

activities performed by the assessee branch office in India as the 1.83% mark up

did not represent the Arms's length remuneration, therefore, the case of the

assessee was well within the ambit of deemed escapement as provided in sub-

section clause (a) of Explanation 2 to section 147 of the Act.

10.    On careful consideration of above submissions and on careful perusal of

the relevant operative part of the impugned order, we observe that the CIT(A)

rejected the legal objection and contention of the assessee against the reopening

of    assessment u/s 147/148 of the Act with following observations and

conclusion:-


              "5.2 A careful examination of the submissions made by
        the appellant in this regard, indicated that the arguments
        advanced by the appellant are not valid. It is undisputed fact
        that the appellant has filed return of income showing a markup
        of 1.83% for the said assessment years. However, the AO has
        recorded his finding that during the assessment proceedings
        for the assessment year 2004-05, it was found that the income
        of the Appellant was liable to tax in India but a higher markup
        depending upon the activities performed by the appellant's

                                                                               9
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

        branch office in India, and that 1.83% markup did not
        represent the arm's length remuneration. Therefore, the tax
        liability which was not determined gave rise to the reason to
        belief that the Appellant has such income which has escaped
        assessment and thus is not complying with the provision of 139
        of the Act. Therefore, the case of the Appellant falls within the
        ambit of deemed escapement as provided in sub clause (a) of
        the explanation 2 to section 147 and that is why the AO issued
        notices under section 148 of the Act for invoking the
        provisions of section 147 of the Act. Further, there are judicial
        precedents to the effect that at the time of initiating the
        proceedings the AO is not expected to reach a final conclusion
        regarding the taxability of such income under the Act, only a
        prima facie belief regarding escapement of income would be
        sufficient for invoking the provisions of section 147 of the Act.
        A reference can be made to the following two decisions of
        Supreme Court which make it clear that merely a prima facie
        belief with respect to escapement of income has to be found ­
              (i)    It has been laid down by SC in case of Raymond
        Woollen Mills (1999) 236 ITR 34 that where there is a prima
        facie material, the sufficiency and correctness of the belief
        cannot be questioned at this stage. At this stage, the final
        outcome of proceedings is not relevant. In other words, at the
        initiation stage, what is required is reason to believe, and not
        the established fact or computation of income. Whether the
        material would conclusively prove the escapement is not the
        concern at this stage. It may be seen that AO has referred to
        the findings of the A.Y. 2002-03 in the reasons. This clearly
        indicates the facts and application of laws which has gone into
        forming his reason to belief. It has nowhere been denied that
        the appellant was not carrying out the activities during the
        years under consideration (i.e. the years of which notice u/s
        147 has been issued). Similar views have been expressed in the
        case of ITO vs. Selected Co. Ltd. (1996) 2 J 7 IGTR 597 (SC)
        where it has been held that formation of belief is wherein the
        realm of subjective satisfaction of ITO.
        (ii) Similar view has been expressed in the case of Hindustan
        Aluminum Corporation vs. ITO (2002) 254 ITR 370 (Cal.)
        (iii) It is enough, if the AO has reason to belief that Income
        has escaped assessment. It is not necessary to have all the
        details of computation of escaped assessment at the time of
                                                                            10
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

        issue of notice. It was so held in the case of G. Sukh vs. DCIT
        252 ITR 320.
              Thus, the action of the AO is strictly in conformity with
        the provisions of the law as laid down in the act as well as
        jurisprudence evolved as a result of court decisions. The
        ground of appeal raised by the Appellant on the validity of
        invoking the provisions of section 147 by the AO is,
        accordingly, dismissed for the assessment years 2003-04.
               The above legal position clearly indicates that the AO
        has rightly jurisdiction u/s 147 and accordingly the ground of
        appeal no. 1 to 4 are rejected."
11.    In view of above, from page no. 5 of the impugned order, we observe that

for reopening of assessment u/s 147 and 148 of the Act, the AO recorded

following reasons:-


            "Indian entity provides engineering design and
      consultancy services to the Head Office. For these services
      Indian branch is reimbursed at cost plus 1.83% only. This does
      not appear to be an arm's length remuneration. Indian branch
      is hence not disclosing income which would be receivable if it
      were to be paid the arm's length remuneration for the services
      provided. The case has not been assessed u/s 143(3) and
      estimated income escaping assessment is more than Rs. 1 lac."
12.    In the above facts and circumstances of the case, we observe that the

action of the AO was not prompted by any whim, surmise or conjecture but the

assessment for AY 2003-04 was processed u/s 143(1) of the Act and during the

course of assessment proceedings for 2004-05, the AO noticed that Indian entity

provides engineering design and consultancy services to the Head Office. For

these services, Indian branch is reimbursed at cost plus 1.83% only. This does

not appear to be an arm's length remuneration. Therefore, the AO invoked

jurisdiction u/s 147 and 148 of the Act for reassessment and reopening of
                                                                             11
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

assessment. At this juncture, we respectfully take cognizance of the decision of

Hon'ble Apex Court in the case of Raymond Woollen (supra) wherein it was

held that where there is a prima facie material, the sufficiency and correctness

of the belief cannot be questioned at this primary stage. The final outcome of

the proceedings are also not relevant at this stage. Their lordships further

clarified that at the time of initiation stage what is required is reason to believe

and not the established fact or computation of income which escaped

assessment. In the case of ITO vs Selected Co. Ltd. (supra), their lordships also

held that formation of belief is within the realm of subjective satisfaction of the

AO. Under these circumstances, we are inclined to hold that the action of the

AO was proper and in conformity with the provisions of the Act as well as

ratios evolved as a result of court and Tribunal decisions on this issue.

Accordingly, legal contention and ground of the assessee in ground no. 1 to 5

being devoid of merit deserve to be dismissed and we dismiss the same.


Ground no. 6 to 10 in ITA No. 1597/Del/2009 and ground no. 1 to 5 in ITA
No. 1598/Del/2009
13.    The assessee has also raised additional grounds before the CIT(A) by

alleging that there is no PE in India in terms of DTAA (Double Taxation

Avoidance Agreement), with the US, and no business profit can be said to have

accrued in India and, accordingly, the assessee is not liable to be taxed in India.

The ld. Counsel for the assessee submitted that the ld. CIT (Appeals) has erred

in holding that the assessee branch office in India constitutes its PE. Ld.

                                                                                 12
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

Counsel of the assessee further pointed out that the assessee denies its liability

to be assessed to tax in India as all sums received by it are on account of

reimbursement of expenses only and do not bear the character of income.


14.    Ld. DR replied that on the facts of the case and physical presence of the

assessee in India in the form of immoveable property, offices, development

centers, fixed assets at various places and number of employees, their

qualification and nature of work done by them clearly indicate that the core

business of preparing drawing and design is being done in India. Ld. DR has

submitted following written submissions on the issue:-


      "Based on the facts of the case and physical presence of the
      assessee in India in the form of immovable properties, offices,
      development centers, fixed assets at various places and number
      of employees, their qualification and the nature of work done by
      them which indicate that the core business of preparing drawing
      and designs is being done in India, the claim of the assessee that
      its activities are covered by Article 5(3)(e) of the tax treaty i.e.
      activities are of preparatory and auxiliary in nature has no
      factual basis. The assessee is carrying out the business of
      preparation of drawings and designs and also doing structural
      calculations and this work is being done exclusively by the
      Indian branch and this is the core business of the assessee and by
      no stretch of imagination such a work can be considered as
      claimed by the assessee to be covered by the exclusionary
      clauses. The revenue submits that the reliance on the decision of
      the Hon'ble Supreme Court is out of context as in that case the
      Indian subsidiary was being paid at arm's length. The Indian
      subsidiary was being paid for the back office operations. In the
      present case the main business is being carried out in India and
      it has not been compensated at all other than funding of meeting
      the expenses. Other case laws cited by the assessee in the written
      submission on the issue of auxiliary and preparatory activities
      are distinguishable on facts and the ratio does not apply to the

                                                                               13
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

      facts of the case. In view of the facts of the case, the assessee has
      PE in India under the provisions of paragraph 1 and 2 of Article
      5 of the treaty."
15.    Replying to the above, ld. Counsel of the assessee has drawn our attention

towards written synopsis and submitted additional argument as rejoinder to the

issue. From para 10 at page 3, we observe that the main contention of the

assessee on the issue of PE reads as under:-


      "10. Before the Commissioner of Income Tax (Appeals), the
      assessee raised the grounds that for the purposes of taxation of
      business profits of a foreign entity in India, there must be a PE
      and the existence thereof is a pre-condition for taxation
      purposes. The PE has to be considered in accordance with the
      Double Taxation Avoidance Agreement (DTAA) with US. The
      PE has been defined in Article 5 of the DTAA and it includes a
      branch, but paragraph 3 of Article 5, which is an exclusionary
      provision, states in clause (e) that 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 auxillary character for
      the enterprises shall not be deemed to be the permanent
      establishment as contemplated under Article 5 of the DTAA and
      because the Indian branch is only engaged in the supporting
      services to the US Head Office which are in the nature of
      preparatory and auxillary services; hence no income can be
      assessed in terms of Article 7 of the US DTAA because as per
      Article 7, only such income which is attributable to the PE can
      be assessed in the source country."
16.    To support the above contention, ld. Counsel of the assessee has placed

reliance on the decision of Hon'ble Supreme Court in the case of DIT

(International Taxation) vs Morgan Stanley and Co. Inc. (2007) 292 ITR

416 (SC) and contended mainly threefold propositions and arguments:-




                                                                               14
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

              "(i) In the instant case also, the Indian branches are only
        engaged in back office support services which are in the
        nature of preparatory and auxillary services. The Indian
        branches are not doing any independent business and have no
        authority to conclude any contract in India. They are doing
        only the job of preparation of load data and preliminary
        calculations of firm for possible size of structural elements on
        the instructions and directions of US Head office in relation to
        the contracts obtained and executed only in US.
        (ii) The Indian branch offices are only doing job of
        preparation of load data and preliminary calculations for
        possible size of structural elements in respect of the contracts
        obtained and executed in US. In other words, the activities
        carried on by the Indian branches are in aid or support of the
        main activities carried out in US. Every aspect of the main
        transaction, i.e. the 'contract, was concluded in US and the
        receipts in relation to the services rendered in contract have
        also been earned in US. Accordingly, the Indian branch in
        view of Article 5(3) of the US DTAA cannot be considered as a
        permanent establishment in India and in the absence of the
        permanent establishment in India, no income can be said to
        have accrued in India in terms of Article 7 of the DTAA.
        Therefore, no income in respect of the activities carried out by
        the Indian branches is liable to be taxed in India.
        (iii) The income as offered by the assessee in the income-tax
        return filed was under some misconception of law. However, it
        is a settled proposition of law that even if any income has been
        shown and declared in the income-tax return, the assessee may
        resile from the position because the income has to be assessed
        in accordance with the provisions of law and not on the basis
        of admission of an assessee."
17.    On careful consideration of above submissions on the issue of PE and

careful perusal of the relevant operative part of the impugned order, we observe

that the assessee is agitating the issue with the contention that the PE has been

defined in Article 5 of the DTAA between India and US which includes branch

but para 3 of Article 5 which is exclusionary provision states in clause (e) that


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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

the maintenance of stock of goods, 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 shall not be deemed to be the PE as contemplated under Article 5 of

DTAA because the Indian Branch is only engaged in the supporting service to

the US Head office. It is also contended that the services and activities of the

assessee entity are in the nature of preparatory and auxiliary services, hence, no

income can be assessed in India in terms of Article 7 of Indo US DTAA

because as per Article 7, only such income which is attributable to the PE can

be assessed in the source country.


18.    In this context, ld. DR has drawn our attention towards page no. 304 and

305 of the Paper Book of the assessee and submitted that as per assessee entity

during the year under consideration, there were 95 employees of high

qualification in the field of civil engineering, draftsmanship coupled with high

skill of management working in Indian Branch office of the Indian entity. Ld.

DR also pointed out that the physical presence of the assessee in India at various

places in the form of immoveable property etc., number of employees, their

qualification and the nature of work done by them clearly indicates that the core

business of preparing drawing and design was being done in India. Ld. DR

vehemently contended that the claim of the assessee is not sustainable that its




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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

activities are covered by Article 5(3) (e) of the Tax Treaty and the activities are

auxiliary and preparatory in nature.


19.    On careful consideration of relevant material placed before us and rival

submissions and contentions on the issue of PE, we observe that as per list

submitted by the assessee before the authorities below for the period 2003-04,

there were 95 employees of high qualification working for the associated

enterprises of US. In terms of Article 5(2) (b) of Indo US DTAA, the assessee

entity represents a fixed place of business of the enterprise through which

substantial work was carried out by the assessee which constitutes PE of the

assessee in terms of Article 5(2)(b) and (c) of Indo-DTAA.             On careful

consideration of provisions of DTAA between India and US, specially Article

5(3) r/w Article 7, we clearly gather a consolidated meaning that the income

attributable to the operation carried out by the PE shall be taxable in India. In

this context, we may refer letter of the assessee dated 29.4.2008 wherein the

assessee submitted before the CIT(A) the details of role and distribution of work

profile between US office and the Indian office. This letter clarifies that the

India Branch office role was mainly towards engineering calculation and

drafting as per direction, instruction and guidelines provided by the US team.


20.    We also note that it was also confirmed by the assessee before the CIT(A)

in this letter dated 29.04.2008 that the India Branch office during the relevant

point of time was primarily engaged in back end jobs and working under total

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Asstt.Years: 2003-04, 2004-05

control, superintendence and direction of the Head office in USA. It was

further confirmed that in absence of any jobs to the Indian branch office, its

workers and supervisory staff on the bench doing R&D was not resulting in any

productive work.        In view of above factual matrix about the working and

activity of the Indian branch office, and its role towards US Head office, clearly

show that Indian branch office during the relevant period carried out

engineering, calculations as well as drawing of various architectural designs for

the US office.


21.    Admittedly, the assessee entity branch office was also doing R&D work

for the US Head office and the same was being done exclusively by the Indian

branch which was the core business of the assessee and we decline to accept the

contention of the assessee that such a work was of preparatory or auxiliary

character within the ambit of Article 5(3)(e) of the Indo US treaty. In the case of

Morgan Stanely and Co. Inc. (supra) the Hon'ble Apex Court in the peculiar

facts and circumstances of the case observed that as per agreement between

Morgan Stanely and Co. USA and Indian company the Indian entity was

engaged in supporting the front office and in para 8 of this order, their lordships

held that when Indian entity is performing in India, only back office operations,

then to the extent of the back office functions, the second part of Article 5(1) is not attracted.

The ld. DR pointed out para 15 of this order and submitted that even deputationist employees




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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

constitute PE, then in the present case, 95 employees of high technical and

managerial sill would definitely constitute PE.


22.    On vigilant reading of this decision, we note that the benefit of the ratio

of first part of decision is not available for the assessee as on careful

examination of activities and modus operandi of the assessee, we have already

reached to a conclusion hereinabove in this order that the important work

assigned to Indian branch office was preparation of drawing, designs and doing

structural calculations which require high technical and managerial skill,

therefore, this important facet of the Indian Brach cannot be said to be a

preparatory and auxiliary work of a back office but at the same time, we note

that the US office minimise their cost of services and other expenses by

assigning and appointing highly technical and materially skilled professional to

discharge main function of US Head office in India at low cost. The Hon'ble

Apex Court in the case of Morgan Stanley (supra) in para 15 held that even

employees which are highly experienced in their specialised fields lends their

expertise to Indian entity in that that sense there is a service PE under Article

5(2)(1) of Indo-US DTAA. The operative para 15 (at page 428) reads thus:-


             " 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 stated in Article

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Asstt.Years: 2003-04, 2004-05

      5(1) or under Article 5(2) the term P.E. shall not include
      maintenance of a fixed place of business solely for
      advertisement, scientific research or for activities which are
      preparatory or auxiliary 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 falls under Article
      5(3) (e) of the DTAA. Therefore, in our view in the present case
      MSAS would not constitute a fixed place P.E. under Article 5(1)
      of the DTAA as regards its back office operations.

            However, the question which arises for determination in
      the present case is the nature of activities performed by
      stewards and deputationists deployed by MSCo to work in India
      as employees of MSAS. Under Article 5(2)(l) furnishing of
      services through the fixed place in India can constitute a P.E.
      The AAR in the impugned ruling has held that the stewards and
      deputationists are proposed to be sent by the MSCo from U.S.
      According to the AAR there is a flow of service from the MSCo
      to the MSAS when the former deputes its own employees to
      work in India in MSAS. Therefore, according to the AAR the
      service Agreement between MSCo and MSAS dated 14.4.2005
      would fall under Article 5(2)(l) and consequently the transfer
      pricing regulation would apply for evaluating the charges
      payable by MSCo to MSAS in India for such service contract.
      This ruling has been challenged by the applicant."

23.    Thus, we respectfully hold that the case laws cited and relied by the

assessee are clearly distinguishable from the facts and circumstances of the

present case. In view of our conclusion that the assessee is a PE in India as per

provisions of Article 5(2)(b) and (c) of Indo-US DTAA, the contentions of the

assessee are dismissed and hence ground no. 6 and 10 in AY 2003-04 and 1 to 5

in AY 2004-05 are dismissed.




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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

Ground No. 11 & 12 in ITA No.1597/Del/2009, Ground No. 6 & 7 in ITA
1598/Del/2009, Ground no. 1,2 & 4 of the Revenue in ITA No.1275/Del/2009
for AY 2003-04 and ITA No.1172/Del/2009
24.    Apropos these similar grounds in the both the years, ld. Counsel for the

assessee submitted that without prejudice to the earlier grounds of the assessee,

it is further contended that the AO ought not to have taken into consideration

the figure of profits from the US return for the calendar year 2003 but should

have taken the figures for the calendar year 2002 for 2003-04 and figures for the

calendar year 2003 for AY 2004-05 for the determination of attributable profits

and subjected it to a further downward adjustment for functions performed,

assets employed, working capital available and risk assumed and consequently

the adoption of global profit rate of 8.5% and 10.6% for respective assessment

years is very high. Ld. Counsel further contended that the CIT(A) had erred in

directing the AO to calculate attributable profit at 50% of the figure arrived at

by the AO after applying 8.5% and 10.6% respectively for the assessment year

under consideration representing the global profit ratio of US head office of the

assessee.


25.    Replying to the above, ld. DR supported the impugned order and

submitted that the AO as well as the CIT(A) was right in holding that the

attributable profit to the Indian PE on the basis of risk assumed, assets used and

activities performed by the PE in the given set up of activities allocation

between the HO and PE, the Indian branch in the status of PE does entire


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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

designing and drawing work which includes the risk of design and drawing.

The DR further contended that in the light of the fact that Indian branch also

takes same risk as the important designing and drawing calculations are carried

out by the Indian company, therefore, allocation of the profit determined by the

AO after applying Rule 10 of Income Tax Rules 1962 was rightly held to be

attributable to the operations carried out by the PE in India. The ld. DR

strongly supported the assessment order and submitted that the AO calculated

attributable profit at 100% of the figure arrived at after applying the profit rate

of 8.5% for AY 2003-04 and 10.6% for AY 2004-05 according to the global

profit ratio of the assessee. The ld. DR also submitted that the calendar year

2002 for AY 2003-04 and calendar year 2003 for AY 2004-05 cannot be said to

be a suitable bench mark for adopting global profit rate because financial year

for AY 2003-04 goes up to 31.3.2003 and financial year for AY 2004-05 goes

up to 31.3.2004.


26.    On careful consideration of above contentions, at the outset, from bare

reading of the impugned order, we observe that this issue has been decided

against the assessee by the CIT(A) with following observations in AY 2003-

04:-


             "From the above it can be seen that rule 10 has to be
        applied in accordance with para 2 of the article 7 accounting
        thereby that only the profits which are attributable to the PE
        can be taxed in India. Application of global profit rate to the
        Indian turn over results in the profit of the enterprise relatable

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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

        to Indian operations. However this has to be attributed to the
        PE on the basis of risks assumed, assets used and activities
        performed by the PE. Given the set up activities allocation
        between the head office and the PE, it is seen that even though
        marketing, sale promotion and quality checks are being
        carried out by the Head Office, the Indian branch does the
        entire drawing and design work which also includes assuming
        the risks of drawing and design. It is thus true that the Indian
        branch also takes some risk as the important drawing,
        designing and calculations are carried out by the Indian
        company. Looking to the totality of situation it is seen that
        50% of the profits determined by the AO after applying rule 10
        are attributable to the operations carried out by the PE in
        India. Accordingly the AO is directed to calculate attributable
        profit at 50% of the figure arrived at after applying the profit
        rate of 8.5% which represents the global profit ratio of the
        appellant. This covers the grounds of appeal no. and 10 of the
        appellant.
             Ground of appeal no. 7 relates to adoption of status of
        foreign company as against correct status of appellant as
        being an individual. The appellant has filed a copy of the
        return filed before US Tax Authority for calendar year 2002
        wherein the effective date for election as that the Corporation
        has been shown to be from 1.1.1989. The appellant has
        accordingly placed reliance on the provisions of Income-tax
        Act as contained in clause 17 of section 2 which means that
        any body corporate incorporated by or under the laws of a
        country outside India will be considered to be a company for
        the purpose of Income-tax Act but at the same time the
        appellant has also placed reliance of provisions of the
        Companies Act as contained in clause 7 to section 2 wherein it
        is mentioned that the body corporate does not include a
        corporation sole. However, it is to be kept in mind while
        applying or determining the status of the appellant the
        provision of Income-tax Act have to be applied. As per
        provisions of Income- tax Act any body corporate
        incorporated by or under the laws of any country outside India
        has to be treated as a company. Moreover, in terms of
        paragraph 2 of article 3 any term not defined in the statute has
        to be determined in accordance with the provisions of laws of
        that State concerning the taxes to which the Convention
        applies. Applying this principle from this clarification given in

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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

        the treaty, it is clear that an election to be treated as sole
        corporate will not affect the application of the provisions of
        Indian Income-tax Act and, therefore, the appellant has to be
        treated as a company for the purpose of status. The AO has
        accordingly correctly applied and determined the status of the
        appellant as a foreign company, therefore, ground of appeal
        no. 7 is dismissed."
27.    On careful consideration of above submissions, we note that from earlier

part of this order, we have upheld the findings of the authorities below that the

assessee has PE in India as per provisions of Article 5 (2)(b)(c) of Indo US

DTAA. Coming to the issue of attribution of profits to PE in India, from page

no. 191 to 209 of the Paper Book, which contains transfer pricing analysis

report, the assessee itself has adopted the mark up to the cost at 1.83% and at

the same time, the AO found that the net profit earned by the Head Office of the

assessee in US tax return was 8.5% which was based on sales. The revenue

authorities have observed that the assessee has not submitted record of

uncontrolled transactions and the record of analysis, how the uncontrolled

transactions are comparable to the case of the assessee as per requirement of

Rule 10B(2) of the Income Tax Rules, 1962. In this situation, the AO was right

in adopting the profit of 8.5% for AY 2003-04 and 10.6% for AY 2004-05 to

calculate attributable profit. However, the ld. Counsel of the assessee has raised

this objection that the AO adopted the wrong calendar year for adoption of

global profit rate but we are unable to accept this contention as financial year

for respective assessment years is spread over upto 31st March and in the light

of this fact that the percentage of global profit was higher in calendar year 2003,

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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

the adjustment would be neutral and academic, therefore, this contention of the

ld. Counsel of the assessee is not found to be acceptable.


28.    Turning to the ground of the revenue in cross appeals, ld. DR submitted

that the CIT(A) has erred in directing the AO to calculate attributable profit at

50% of the figures arrived after applying profit rate of 8.5% for AY 2003-04

and 10.6% for AY 2004-05 which actually reduce the global profit ratio of the

assessee by ignoring the fact that the PE also assumes risk in respect of work

done by it and the Head office at USA earns its own profit in respect of part of

expenses not attributable to PE so that the taxable profit should be the income of

the PE in India as rightly determined by the AO. Ld. DR vehemently contended

that the CIT(A) has not disclosed any reason or basis to reduce the attribution of

profit by 50% and in substituting his own estimate of income without pointing

out any figure in the basis adopted by the AO for attribution of the profit to the

PE in India. Ld. DR further contended that such kind of estimation by the

CIT(A) is contrary to the principles laid down by the Hon'ble Supreme Court of

India in the cases of CST vs H M Esufali H M Abdulali (supra) and Kachwala

Gems vs JCIT (supra). Ld. DR finally prayed that the impugned order may be

set aside by restoring that of the AO on this issue.





29.    Ld. Counsel for the assessee replied that the CIT(A) was wrong in

assuming that the entire work of the US Head office has been assigned to Indian

Branch and then allocated 50% of the total profits to Indian Branches. Ld.

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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

Counsel further contended that while splitting up profit between US office and

Indian Branch, the revenue authorities had to consider vertical balance sheet for

the calendar year 2002-03 for the respective assessment year against which the

CIT(A) has to take into account this very fact that the actual income returned

was before the US revenue department. Ld. Counsel pointed out that for the

AY 2003-04, the CIT(A) had taken into consideration the vertical balance sheet

whereas for AY 2004-05, the CIT(A) had taken into account the income tax

return filed by the assessee in India. Ld. Counsel also submitted that as per

section 92 of the Act, the ALP in relation to an international transaction shall be

determined by one of the most appropriate method prescribed therein having

regard to the nature of transaction or function performed. Ld. Counsel further

contended that Rule 10B has further explained the procedure for determination

of ALP under various methods prescribed u/s 92C of the Act. Ld. Counsel

further submitted that the CIT(A) applied the profit split method as explained in

Part B of Sub-rule (1) of Rule 10B of the Income Tax Rules 1962. Ld. Counsel

has drawn our attention that first of all, the combined net profit of the AE

arising from the international transaction in which they are engaged will be

determined and then the relative contribution made by each of the AE towards

the earning of such combined net profit should be evaluated on the basis of

function performed, assets employed and risk assumed by each enterprise

and then combined net profit           is    split   amongst     the enterprise in



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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

proportion to their relative contribution as evaluated under sub clause (ii) of

Rule 10B.


30.    Ld. Counsel has also drawn our attention towards page 20 to 22 of the

Paper Book and submitted that the relative contribution to the whole transaction

which was carried out by the US Head office and branch office in India has

been furnished before the CIT(A) on his direction during the first appellate

proceedings. It was further contended on behalf of the assessee that from

perusal of the contribution of work in a particular contract, it is clear that right

from the stage of discussion and obtaining the contract and till its finalisation,

all risks including capital risk, professional risk, investment risk, bad debts,

legal suits, matters relating to patent, trade mark and intellect property rights,

insurance and damages are entirely borne by the US Head office and the branch

office in India have done only engineering calculations as per instruction and

directions of the US Head office without bearing any risk.


31.    Replying to the above, ld. DR submitted a rejoinder supporting the

ground of the revenue in cross appeals and submitted that as per income

standard of CEC US Head office for the period ended on 31.12.2003 available

on Paper Book page 300, the earning before tax were USD 246589 on the

revenue of USD 2324705 and total expenses incurred were of USD 1877959

consisting of direct cost of USD 809945 and operating cost of USD 1068014

which also includes Indian expenses. Ld. DR further submitted that as per TP

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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

study of 22 foreign companies operating in US, the profit margin before tax was

2.34% and US Head office of assessee earned profit of about 8.5% and 10.6%

respectively for the assessment year under consideration, therefore, the profit

percentage of 2.34 on the revenue of USD 23247705 comes to USD 54398,

therefore, the US Head office earned super profit of USD 192191 due to Indian

operations for which the US Head office incurred very low cost and expenses.


32.    Ld. DR also pointed out that the AO simply attributed the profits earned

by the assessee based on cost incurred in India and USA and the AO has applied

mark up on cost and has approved the cost plus method as a most appropriate

method, attribution of profit to Indian PE based on expenses incurred in India

amounts to use of profit split method taking the cost incurred in two tax

jurisdiction as a key split in the profit. The ld. DR also contended that the

CIT(A) ignored liberal approach of the AO wherein the AO has considered the

actual figures of cost incurred and did not take into account the cost of these

services if rendered in US and on this account, the AO had not made any

adjustment due to locational savings and the AO has attributed profits to the

Indian entity on a very lower side, therefore, the CIT(A) has no justification for

further reducing the profits of Indian PE by 50%. The ld. DR further submitted

that once profits are attributed to Indian operations based on Rule 10 of Income

Tax Rules 1962 as done by the AO, then there is no scope of attributing a part of this profit to

US Head office.     The ld. DR also pointed out that the CIT(A) has failed to appreciate



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Asstt.Years: 2003-04, 2004-05

that the profits earned by the assessee have already been allocated to the Head

office and Indian PE based on mark up to cost incurred by them and there

cannot be further attribution as all the development activities have taken place

in India and only the marketing and quality control activities have taken place in

USA.


33.    On careful consideration of above rival submissions, from the relevant

part of the impugned order, we observe that the AO has not brought out any fact

or material into existence that the risk of marketing and quality control activity

have taken place and all developmental activities have taken place in India. In

this situation, it cannot be said that risk is involved exclusively either on the

Head office or on the PE branch office in India. Obviously, from stage of

discussion and obtaining the contract till its final marketing to the respective

client have been undertaken by the US Head office but at the same time this fact

cannot be ignored that the PE branch office in India contributed towards all

development activities at the cheaper cost of service and human resources in

comparison to USA, therefore, we are of the view that for earning higher profit

in comparison to USA, comparable companies as adopted in transfer pricing

study, the US Head office earned higher profit due to low cost of services and

human input by Indian PE. At the same time, although we note that the risk

factor was also borne by the Indian PE branch, we also note this fact that certain

risk in regard to capital investment, bad debts and other legal obligations were


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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

borne by the US Head office, therefore, the AO rightly adopted the global profit

of the US Head office for benchmarking the percentage of profit and the AO

attributed 100% profit to the Indian PE. At this juncture, from the impugned

order, we also observe that the CIT(A) has taken into account this very fact that

the Indian branch takes some risk as the important drawing and designing

calculations are carried out by the Indian company and impliedly other risks as

stated above were taken by the US Head office and, therefore, in the totality of

these facts and circumstances, the CIT(A) was justified in holding that 50% of

the profits determined by the AO after applying rule 10 were to be attributable

to the operations carried out by the PE in India.


34.    On the basis of foregoing discussion, we are in agreement with the action

of the CIT(A) that he directed the AO to calculate attributable profit @50% of

the figure arrived after applying profit rate of 8.5% for AY 2003-04 and 10.6%

for AY 2004-05. Finally, we reach to a conclusion that the contentions of the

assessee for wrong adoption of global profit of the US Head office are not

sustainable. At the same time, we also observe that the CIT(A) was reasonable

and justified in directing the AO to calculate the attributable profit at 50% of the

figure arrived by the AO after applying global profit rate of US Head office for

the respective assessment years under consideration in these appeals.

Accordingly, ground no. 11 & 12 for AY 2003-04 and ground no. 6 & 7 for AY




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ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

2004-05 of the assessee as well as ground no. 1 to 4 of the revenue in both the

appeals for AY 2003-04 and 2004-05 are dismissed.


Ground no. 13 of the assessee for AY 2003-04 and gorund no. 8 of the
assessee for AY 2004-05
35.    Ld. Counsel for the assessee submitted that the revenue authorities ought

to have adopted the status of the assessee as individual independent foreign

company because the CEC is a firm and not a company even in the US as it is

100% owned by a single individual and, hence, does not fall in the category of a

company. Ld. Counsel for the assessee further contended that the authorities

below ought to have adopted the status of the appellant as individual instead of

foreign company because the assessee is a firm and not a company even in US

as it is 100% owned by a single individual, hence, does not fall in the category

of a company.


36.    Ld. DR replied and pointed out that that as per details of employees with

designation and salary available on page 304 and 305, Mr. A.K. Jalla is the Vice

President of Indian PE and in the ground itself, the assessee is accepting that the

CEC is a firm and not a company even in US, then in terms of Indo US Treaty

Part 2 of Article 3, wherein any term has not been defined in the treaty, then the

provisions of the laws of that contracting state will be applied. The DR further

pointed out para 6 of the impugned order and submitted that the assessee was

rightly treated as a company for the purpose of status as per the provisions of

the Act and in consonance with the provisions of the Indian US Treaty.
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Asstt.Years: 2003-04, 2004-05

37.    On careful consideration of above submissions, we find it appropriate to

reproduce the relevant operative part of the impugned order in para 6 which

reads as under:-


        "6. Ground of appeal no. 1 relates to adoption of status of
      foreign company as against correct status of appellant as being
      an individual. The appellant has filed a copy of the return filed
      before US Tax Authority for calendar year 2002 wherein the
      effective date for election as that the Corporation has been
      shown to be from 1.1.1989. The appellant has accordingly placed
      reliance on the provisions of Income-tax Act as contained in
      clause 17 of section 2 which means that any body corporate
      incorporated by or under the laws of a country outside India will
      be considered to be a company for the purpose of Income-tax Act
      but at the same time the appellant has also placed reliance of
      provisions of the Companies Act as contained in clause 7 to
      section 2 wherein it is mentioned that the body corporate does
      not include a corporation sole. However, it is to be kept in mind
      while applying or determining the status of the appellant the
      provision of Income-tax Act have to be applied. As per provisions
      of Income- Tax Act any body corporate incorporated by or under
      the laws of any country outside India has to be treated as a
      company. Moreover, in terms of paragraph 2 of article 3 any
      term not defined in the statute has to be determined in
      accordance with the provisions of laws of that State concerning
      the taxes to which the Convention applies. Applying this
      principle from this clarification given in the treaty, it is clear that
      an election to be treated as sole corporate will not affect the
      application of the provisions of Indian Income-tax Act and,
      therefore, the appellant has to be treated as a company for the
      purpose of status. The AO has accordingly correctly applied and
      determined the status of the appellant as a foreign company,
      therefore, ground of appeal no. 1 is dismissed. "
38.    In view of above conclusion of the CIT(A), we observe that in the ground

itself, the assessee has mentioned that US Head office is a firm and not a

company even in the US tax status, therefore, the assessee should be given the


                                                                                32
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

status of individual instead of foreign company. We further observe that the

CIT(A) has rightly concluded that while applying or determining the status of

the appellant, the provisions of Income-tax Act have to be applied. As per

provisions of Income- Tax Act, anybody corporate incorporated by or under the

laws of any country outside India has to be treated as a company. Therefore, we

hold that the assessee was rightly treated as a foreign company for the purpose

of tax status and the AO correctly applied and determined the status of the

assessee as a foreign company for the purpose of tax payer status of the

assessee. Accordingly, ground no. 13 of the assessee for AY 2003-04 and

ground no. 8 of the assessee for AY 2004-05 being devoid of merits are

dismissed.

39.     In the result, the appeal of the assessee in ITA No. 1597/Del/2009 for AY

2003-04 and ITA 1598/Del/2009 for AY 2004-05 as well as appeals of the

Revenue in ITA No. 1275/D/2009 and 1172/Del/2009 are hereby dismissed.


        Order pronounced in the open court on 31.10.2014.

      Sd/-                                           Sd/-

(G.D. AGRAWAL)                               (CHANDRAMOHAN GARG)
VICE PRESIDENT                                    JUDICIAL MEMBER
DT. 31st OCTOBER, 2014
`GS'




                                                                               33
ITA No.1597,1598,1275,1172/D/2009
Asstt.Years: 2003-04, 2004-05

Copy forwarded to:-

   1.   Appellant
   2.   Respondent
   3.   C.I.T.(A)
   4.   C.I.T.
   5.   DR
                                    By Order



                                    Asstt.Registrar




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