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From the Courts »
 Reliance Communications Ltd vs. DDIT (ITAT Mumbai)
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 Deputy Director Of Income Tax Vs. Virage Logic International

Income Tax Officer,(International Taxation)-3(1), N M Road, Ballard Estate, Mumbai-400038 Vs. Linklaters & Paines (Now Linklaters), Co., Plot No.12, Dr.Annie Besant Road, Mumbai-400018
August, 12th 2014
                  ,                  ""          
    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
                                         2                   I.T.A. No.1711/Mum/2004
                                                             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.
                                        3                   I.T.A. No.1711/Mum/2004
                                                            I.T.A. No.1354/Mum/2004


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
                                         4                   I.T.A. No.1711/Mum/2004
                                                             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
                                        6                   I.T.A. No.1711/Mum/2004
                                                            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.
                                        7                  I.T.A. No.1711/Mum/2004
                                                           I.T.A. No.1354/Mum/2004




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.
                                         8                   I.T.A. No.1711/Mum/2004
                                                             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
                                          9                 I.T.A. No.1711/Mum/2004
                                                            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
                                         10                   I.T.A. No.1711/Mum/2004
                                                              I.T.A. No.1354/Mum/2004


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.
                                        11                   I.T.A. No.1711/Mum/2004
                                                             I.T.A. No.1354/Mum/2004




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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