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IN THE INCOME TAX APPELLATE TRIBUNAL "L" BENCH, MUMBAI
BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM)
.. , ,
./I.T.A. No.1711/Mum/2004
( / Assessment Year : 1997-98)
Income Tax Officer, / Linklaters & Paines (Now
(International Taxation)-3(1), Vs. Linklaters),
Ground Floor, Scindia House, C/o C C Chokshi and Co., Plot
N M Road, Ballard Estate, No.12, Dr.Annie Besant Road, Opp.
Mumbai-400038 Shivsagar Estate, Worli, Mumbai-
400018
( /Appellant) .. ( / Respondent)
./I.T.A. No.1354/Mum/2004
( / Assessment Year : 1997-98)
Linklaters (Formerly Linklaters / Dy. Commissioner of Income Tax
& Paines), Vs. Circle 2(6), 1st floor, Ayakar
C/o C C Chokshi and Co., Bhavan M K Road, Mumbai-400020.
Plot No.12, Dr.Annie Besant
Road, Opp. Shivsagar Estate,
Worli, Mumbai-400018
( /Appellant) .. ( / Respondent)
. / . /PAN/GIR No. : GIR No.39-044-CX-1480
/ Revenue by : Shri Ajay Kumar Srivastava
/Assessee by: S/Shri S E Dastur, Sr. Counsel and
Niraj Sheth
/ Date of Hearing
: 23.6.2014
/Date of Pronouncement : 8.8.2014
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I.T.A. No.1354/Mum/2004
/ O R D E R
Per B.R.BASKARAN, Accountant Member:
These cross appeals are directed against the order dated 29-12-2003
passed by Ld CIT(A)-XXXIII, Mumbai and they relate to the assessment year
1997-98.
2. The assessee herein is a partnership firm formed in United Kingdom and is
engaged in the profession of practice of law. Its head office is located in U.K
and is having branches around the world. During the year under consideration,
the assessee herein provided professional services to certain persons, whose
operations extended to India. Since these persons had deducted tax at source
from the payments made to the assessee herein, it filed its return of income
declaring NIL income and thus claimed refund of tax of Rs.43,21,218/-. The
assessee claimed before the AO that it does not have a permanent establishment
in India as defined in Article 5 of the Double Taxation Avoidance Agreement
entered between India and United Kingdom and accordingly claimed that no part
of its income is chargeable to tax in India. Without prejudice to the above
contention, the assessee also prepared a Profit and Loss account showing
revenues which could be reasonably attributed to the work performed in India.
However, while doing so, the assessee had computed the revenues by adopting
fee rates estimated on the basis of amount that could have been paid to
corresponding professionals working in India for availing similar kind of services.
Thus, alternatively, the assessee seems to have contended that the profit
declared in the above said profit and loss account is chargeable to tax in India.
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3. The assessing officer noticed that the total stay of its partners and staffs
exceeded 90 days in India during the financial year 1.4.1996 to 31.3.1997.
Hence, the AO held that the assessee is having Permanent Establishment in
India. In the immediately preceding year, the AO had rejected the alternative
contention of the assessee, i.e., the claim to assess the profit computed in the
profit and loss account relating to Indian operations. Hence, in this year also,
the AO rejected the said claim. Accordingly, the AO proceeded to assess the
entire amount received from Indian clients, which is detailed as under in the
assessment order:-
Professional fee in UK Pounds 2,844,868.31
Reimbursement of expenses:-
In UK pounds 939,220.53
In Jap. Yen 11,756,233.00
In Singapore $ 52,608.47
The AO assessed the entire amount of professional receipts as well as the
reimbursement of expenses cited above as the income of the assessee. Further,
the AO also noticed from the TDS certificates furnished by the assessee that it
has received a sum of Rs.2,21,199/- from M/s Serum Institute of India and the
same was not included in the total receipts. Hence, the AO included the above
said amount of Rs.2,21,199/- also in the total income of the assessee. The AO
allowed a deduction 5% of the total receipts cited above under sec. 44C of the
Act. Accordingly, the AO determined the total income of the assessee at
Rs.21,54,31,390/-.
4. The assessee challenged the assessment order by filing appeal before Ld
CIT(A) and the first appellate authority allowed the appeal partly. While
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I.T.A. No.1354/Mum/2004
deciding the issues contested before him, the Ld CIT(A) followed the decision
rendered by his predecessor in the assessee's own case in the earlier years.
Aggrieved by the order passed by Ld CIT(A), both the parties have filed appeals
before us on the issues decided against each of them by the first appellate
authority.
5. We shall first take up the appeal filed by the assessee. Grounds
numbered as 1, 10 & 11 are general in nature and hence they require no
adjudication. At the time of hearing, the Ld Counsel appearing for the assessee
did not press the grounds numbered as 5 & 6. Accordingly these two grounds
are dismissed as Not Pressed.
6. In ground No.2, the assessee is contesting the decision of Ld CIT(A) in
holding that the assessee has got "Permanent Establishment" in India. Both the
parties admitted that this issue is decided against the assessee and in favour of
revenue by the co-ordinate benches of Tribunal in the orders passed by them for
assessment years 1995-96 and 1996-97. In the order passed by the co-ordinate
bench of Tribunal in the assessee's hands for assessment year 1995-96, which is
reported in (2010) 40 SOT 51)(Mum) as Linklaters LLP Vs. ITO, the above said
issue is discussed in paragraphs 80 to 107 of the order. The final conclusion is
given in paragraphs 106 to 107 of the order and these two paragraphs are
extracted below (pgs.35 and 36):-
"106. We are in considered agreement with this analysis in the UN Model
Convention Commentary. We are thus of the considered view that, in a
situation like the one that we are in seisin of, i.e., in which specific
provisions for professional services or independent personal services or
included services exist under article 15, when services are rendered by the
enterprise, article 5(2)(k) will come into play, and when services are
rendered by an individual, article 15 will find application. Therefore, while
5 I.T.A. No.1711/Mum/2004
I.T.A. No.1354/Mum/2004
we agree with the learned counsel that article 15 will not be applicable on
the facts of the present case, this finding does not really come to the
rescue of the assessee since, as we have already held, the assessee did
have a PE in India under article 5(2)(k) of the India-UK tax treaty, and,
accordingly, profits attributable to the PE are taxable under article 7 of the
India-UK tax treaty.
107. In view of the above discussions, we are unable to uphold the plea
so strenuously argued by the learned counsel for the assessee, and we
hold that the authorities below have rightly invoked the provisions of
article 5(2)(k). We approve the same, and decline to interfere in the
matter".
We notice that the above said finding is followed by the Tribunal in the
assessee's own case in assessment year 2006-07. Hence, consistent with the
view taken by the co-ordinate benches in the earlier years, we also uphold the
order of Ld CIT(A) in confirming the order of the AO in holding that the assessee
did have Permanent Establishment in India.
7. The grounds numbered as 3 & 4 relate to the computation of income, i.e.,
according to the assessee the tax authorities are not justified in ignoring the
alternative contention of the assessee that the income should be assessed as per
the Profit and Loss account relating to Indian operations, which was discussed
supra. Both the parties admitted that this issue is decided against the assessee
and in favour of revenue by the Tribunal in the assessment years 1995-96 and
1996-97. In assessment year 1995-96, the Tribunal has discussed this issue in
paragraphs 108 to 130. In paragraph 130 of the order, the Tribunal has held
that the plea put forth by the assessee proceeds on fallacy that arm's length
price adjustment can be made in respect of the transactions with the clients of
the assessee. Accordingly the Tribunal held that the revenues earned by the
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I.T.A. No.1354/Mum/2004
assessee are to be taken at actual figures and no adjustment is permissible in
respect of the same. Accordingly, the Tribunal upheld the action of the tax
authorities in adopting the revenues at actual figures. In assessment year 1996-
97, the co-ordinate bench has followed the decision rendered by the Tribunal for
assessment year 1995-96. Accordingly, these two grounds are liable to rejected
by following the ratio of decision rendered by the Tribunal in assessment year
1995-96. Accordingly we uphold the order of Ld CIT(A) on this issue.
8. The grounds numbered as 7 & 8 relate to the validity of assessment of
receipts relating to "reimbursement of expenses" as income of the assessee.
The AO rejected the claim of the assessee that it had received reimbursement of
expenses on actual basis and hence there is no element of income embedded
therein. Accordingly, the assessing officer assessed entire amount of
reimbursement of expenses as the income of the assessee. The Ld CIT(A), by
following the decisions cited above, upheld the action of the AO.
(a) Elkem Technology Vs. DCIT (250 ITR 164)(AP)
(b) Cochin Refineries Ltd (222 ITR 354)(Kerala)
However, the Ld CIT(A), in principle, accepted the claim of the assessee that the
said receipts relate to the expenses actually incurred and hence the said of
expenses are eligible for deduction. However, the Ld CIT(A) noticed that the
assessee was not able to produce all supporting in respect of the expenditure
incurred and accordingly opined that some disallowance is called for. In the
preceding years, the Ld CIT(A) had disallowed 15% of the claim. Accordingly,
the Ld CIT(A) disallowed 25% of the expenses (termed as disbursement claim)
proportionate to the fee relating to services rendered in India as compared to the
total fees.
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9. Both the parties admitted that this issue is decided in favour of the
assessee and against the revenue by the Tribunal in AY 1995-96 [(2010) 40 SOT
51 (Mum)]. The discussions relating to this issue finds place in paragraphs 131-
133 of the order passed by the Tribunal has held as under (para 133, pg.40):-
"133. Having heard the rival submissions and having perused the material
on record, we are inclined to uphold the grievance of the assessee. The
reimbursements received by the assessee are in respect of specific and
actual expenses incurred by the assessee and do not involve any mark up,
there is reasonable control mechanism in place to ensure that these
claims are not inflated, and the assessee has furnished sufficient evidence
to demonstrate the incurring of expenses. There is thus no good reason to
make any addition to income in respect of these reimbursements of
expenses. The action of the CIT(A), as learned counsel rightly contends,
on pure surmises and conjectures. In view of the above discussions, we
direct the Assessing Officer to delete the disallowance of expenses as
sustained by the CIT(A) and hold that no part of reimbursements of
expenses received by the assessee, on the facts of this case, be treated as
income of the assessee. The assessee gets the relief accordingly."
We notice that the above said view has been followed by the Tribunal in AY
1996-97 also. We notice that the Tribunal has given a specific finding in the
assessment year 1995-96 that these reimbursements are made on actual basis
and they do not involve any mark up, since the assessee has shown that there is
reasonable control mechanism in place to ensure that these claims are not
inflated. The Tribunal has also noticed that the assessee has furnished sufficient
evidence to demonstrate the incurring of expenses. The Ld A.R, before us,
submitted that there is no change in the facts and circumstances surrounding
this issue in the instant year vis-à-vis AY 1995-96. The Ld D.R. also did not
furnish any document to prove the contrary.
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I.T.A. No.1354/Mum/2004
10. Even if the entire amounts representing reimbursement of expenses is
considered as the income of the assessee as per the decision rendered in the
cases relied on by Ld CIT(A), viz., Elkem Technology Vs. DCIT (250 ITR 164)(AP)
and Cochin Refineries Ltd (222 ITR 354)(Kerala), there should not be any
controversy that these expenses have to be allowed as deduction, since they
have been incurred for the purpose of profession. Hence, in effect, the net
income will be NIL. In assessment years 1995-96 & 1996-97, the tribunal has
held the reimbursement of expenses is not assessable as income. Thus, in
effect, the assessee would not be liable to be assessed in respect of
reimbursement of expenses under both the methods. In view of the foregoing
discussions, we set aside the order of Ld CIT(A) on this issue and direct the
assessing officer to delete the amounts relating to reimbursement of expenses
from the total income of the assessee.
11. The Ground number 9 relates to the difference in the amounts relating to
reimbursement of expenses assessed by the assessing officer. The Ld A.R
submitted that consideration of this issue would arise only if the issue relating to
the assessment of reimbursement of expenses is decided against the assessee.
In the earlier paragraphs, we have decided the issue relating to the assessment
of reimbursement of expenses in favour of the assessee. Hence, there arises no
necessity to adjudicate this issue.
12. We shall now take up the appeal filed by the revenue. The grounds
numbered as 1 & 4 relate to the assessment of Professional receipts. The Ld
CIT(A) had held that, only that portion of the income relating to the services
performed in India is assessable. Both the parties admitted that the Tribunal
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I.T.A. No.1354/Mum/2004
has considered identical issue in AY 1995-96 and has held that the entire profits
directly or indirectly attributable to the Permanent Establishment is assessable
and accordingly upheld the order of the assessing officer. Consistent with the
view taken by the Tribunal in AY 1995-96, we reverse the order of Ld CIT(A) on
this issue and restore that of the assessing officer.
13. Ground No.2 relates to the charging of interest u/s 234B of the Act. The
interest charged by the AO u/s 234B of the Act was deleted by the Ld CIT(A) by
holding that the assessee is not liable to pay advance tax, since the Tax is
deductible at source on the entire amount received by the assessee. The Ld D.R
placed reliance on the decision rendered by Hon'ble Delhi High Court in the case
of Director of Income tax Vs. Alcatel LUCENT USA Inc. (2014)(264 CTR (Del)
240), wherein the Hon'ble Delhi High Court has expressed the view that the
assessee, having denied its liability to pay income tax right from the beginning,
should not take the plea that the Indian payers should have deducted tax at
source from the remittances made to it. Accordingly the Hon'ble Delhi High
Court has held that, where the revenue has been deprived of use of monies and
thereby put to loss for no fault on its part and where loss arose as a result of
vacillating stands taken by the assessee, it is not expected of assessee to shift
responsibility to Indian Payers. Accordingly, the Hon'ble Delhi High Court has
upheld levy of interest u/s 234B of the Act.
14. On the contrary, the Ld A.R placed strong reliance on the decision
rendered by the Hon'ble Bombay High Court in the case of DIT Vs. Ngc Network
Asia LLC (313 ITR 187)(Bom), wherein the Hon'ble jurisdictional High Court has
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held that when a duty is cast on the payer to pay tax at source, on failure, no
interest can be imposed on the payee.
15. We have heard the rival contentions on this issue. Though the reasoning
given by the Hon'ble Delhi High Court (referred supra) is appealing, yet we are
unable to follow the said decision in view of the binding decision rendered by the
Jurisdictional High Court in the case of Ngc Network Asia LLC (referred above).
Accordingly, we uphold the order of Ld CIT(A) on this issue.
16. In Ground No.3, the revenue is aggrieved by the decision of Ld CIT(A) in
sustaining the assessment of reimbursement of expenses (disbursements) only
to the extent of 25%. This issue was addressed by us in paragraphs 8 to 10
while adjudicating the grounds urged by the assessee. Since we have held that
no part of reimbursement of expenses is assessable to tax, we are constrained to
reject this ground urged by the revenue.
17. In Ground No.5, the revenue is urging that the Ld CIT(A) should have
denied the benefit of Indo-UK DTAA to the assessee, as the assessee is a
partnership firm in UK where it is not taxed. The facts relating to this issue is set
out in brief. As per the Indo-UK treaty, the benefits of treaty would apply to
persons who are residents of one or both of the Contracting States. Under the
tax provisions of UK, a partnership firm is a fiscally transparent entity and it is
not taxable on its own right, but tax is computed by taking the tax payable by
the partners. In this back drop, it is being contended by the revenue that the
assessee, not being a taxable entity, cannot be considered as a "resident of
contracting state" and hence it is not entitled for DTAA benefits.
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18. We notice that this issue was also addressed by the Tribunal in
assessment year 1995-96 and the relevant discussions find place in paragraphs
21 to 79 of the order. The co-ordinate bench of Tribunal, in paragraph 79 of its
order, has held that the assessee is eligible for the benefits of India-UK tax
treaty, as long as entire profits of the partnership firm are taxed in UK- whether
in the hands of the partnership firm though the taxable income is determined in
relation to the personal characteristics of the partners or in the hands of partners
directly. By following the decision rendered by the Tribunal for AY 1995-96, we
reject this ground urged by the revenue.
19. In the result, the appeal filed by the assessee is partly allowed and the
appeal of the revenue is dismissed.
The above order was pronounced in the open court on 8th August, 2014.
8th August, 2014
Sd sd
( /AMIT SHUKLA) (.. / B.R. BASKARAN)
/ JUDICIAL MEMBER / ACCOUNTANT MEMBER
Mumbai: 8th August, 2014.
. ../ SRL , Sr. PS
12 I.T.A. No.1711/Mum/2004
I.T.A. No.1354/Mum/2004
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
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