D.K. Agarwal, Judicial Member. - These two appeals referred by the revenue are directed against the separate orders dated 31-1-2005 and 11-7-2006 passed by ld. CIT(A) for the assessment years 2001-02 and 2003-04 respectively, Since facts are identical and issues involved are common, both these appeals are disposed of by this common order for the sake of convenience.

2. Briefly stated the facts extracted from ITA No. 3703/M/2005 for assessment year 2001-02 are that the assessee is a Branch Office in India of Staubli A.G., Switzerland. It acts as a commission and meketing agent in respect of textile machineries manufactured by the Staubli Group entities, to customers in India. The Staubli Group entities directly sell/invoice and ship the machineries to the Indian customers. The assessee does not enter into a sales contract with the customers. The assessee also assists the customers in installation of the machineries at the client’s site. The machineries supplied by the Staubli Group entities are sold by them under a warranty-twelve months from the date of manufacture. The assessee renders after sales and maintenance services under the warranty period to the customers in India for which it receives service fees at agreed rates over and above its commission on sales of machineries. Besides this, the assessee also renders services to local customers after the warranty period and bills them locally for the services rendered. For the assessment year in question the assessee filed its return of income declaring total income at Rs. 17,32,730. However, after making certain additions/disallowances the Assessing Officer passed the assessment order under section 143(3) of the Income-tax Act, 1961 (the Act) dated 19-3-2004, determining the taxable income at Rs. 42,78,830. On appeal, the ld. CIT(A) deleted the addition and disallowance of depreciation made by the Assessing Officer in toto and accordingly allowed the appeal.

3. Being aggrieved by the order of the ld. CIT(A) the revenue is in appeal before us.

4. Ground No. 1 reads as under :

"1. On the facts and in the circumstances of the case and in law, the law the ld. CIT(A) erred in directing to delete the addition of Rs. 25,68,701 made by the Assessing Officer by estimating the commission income at the rate of 10 per cent, without appreciating the fact that :

(i)The assessee is assuming risks in respect of the sales of products made by the Head Office/Staubli Group Entities.

(ii)The profits arising on account of such risks assumed by the Indian Branch is the income of the branch and not of the Head Office/Staubli Group Entities.

(iii)The Arm’s length payment of commission to the Indian branch by the Head Office/Staubli Group Entities(Principals) does not extinguish the assessment of the principals in India."

5. The brief facts of the above issue are that during the course of assessment it was inter alia observed by the Assessing Officer that the assessee has only shown income by way of commission from Staubli AG (HO) and service revenues from manufacturing group of companies. It also earns commission on sale of spare parts to the customers in India. In response to various queries raised by the Assessing Officer with regard to the justification of commission shown by the assessee, the assessee submitted detailed replies which were summarised by the Assessing Officer in para-3 of the assessment order as under :

"-As per Article 5(2), the assessee being an Indian branch of Staubli A.G., it constitutes a permanent extablishment (PE) of Staubli A.G. in India.

-The PE would be liable to be taxed n India in respect of income directly or indirectly attributable to it. This right to tax does not extend to profits that Staubli A.G. may derive otherwise than through the PE.

-All activities other than marketing activity such as manufacturing, sales, managerial control, etc. carried outside India. Considering the activities carried in India and the risk borne by the branch office in India, the branch has