2006 (3) TMI 199 - ITAT BOMBAY-E

Double Taxation Relief - DTAA between India and Netherlands - received arbitration award - payment taxable under Article 7 - No Permanent Establishment - Levy of interest u/s 234D - HELD THAT:- We find that the language of Article 7(1) of DTAA between India and Netherlands is unambiguous and clearly lays down that if an enterprise carries on business in the other State through a Permanent Establishment situated therein, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that Permanent Establishment. Here in this Article there is no mention of any condition of there being a PE in that other State to be in existence in the year of receipt of income by the enterprise. In these facts since the assessee was having a PE in India and also the income of Rs. 30.78 crores received from NMPT being attributable to the PE in India and there being no condition that PE should be in existence in India in the year of receipt of the amount by the enterprise, we hold that the arbitration award of Rs. 30.78 crores received by the assessee-company from NMPT project has rightly been taxed by the Assessing Officer as income of the assessee-company for the assessment year 2001- 02.

In view of our finding that the assessee was having PE in India and the income of Rs. 30.78 crores was attributable to PE in India and accordingly taxable in the hands of the assessee for the relevant assessment year 2001-02, we consider that the issue of applicability of provision of section 176(3A) of the Act is not relevant. Accordingly, the issue is decided in favour of the revenue and the Grounds of appeal Nos. 1 and 2 of the assessee are dismissed.

Taxing the arbitration award - The language of section 176(3A) lays down that the amount received will be taxed as income in the like manner as if such sum were received before such discontinuation of business. Accordingly, it cannot be said that as per the wording of section 176(3A) of the Act such income can be taxed in the hands of the assessee on a gross basis. We direct the Assessing Officer to tax the receipt of arbitration award of Rs. 30.78 crores, not on gross basis and to allow the allowable deductions thereon, if had not been allowed already in the earlier assessment years. We order accordingly.

Deduction of arbitration proceedings related expenses incurred against the arbitration award - We find no justification for not allowing the genuine expenses incurred by the assessee in relation to the arbitration award amount received by it. While deciding the Grounds of appeal Nos. 1 and 2 in this appeal, we have held that the assessee was having a PE and the amount of Rs. 30.78 crores received by the assessee is attributable to the PE in India and accordingly the allowable expenses in relation to this amount of Rs. 30.78 crores have to be allowed as allowable deduction to the assessee. Accordingly the Assessing Officer is directed to examine and allow the genuine and allowable expenses incurred by the assessee in relation to the arbitration award amount received by the assessee. We direct accordingly.

Levy of interest u/s 234D - The provision of section 234D was not in the statute book during the relevant period and was inserted by the Finance Act, 2003 with effect from 1-6-2003. In this case the processing u/s 143(1)(a) was made on 25-2-2003 wherein the order was passed granting refund to the assessee and on which date the provision of section 234D had not come on the statute. In these facts of the case we are of the view that the decision of the Delhi Tribunal in Glaxo Smithkline Asia (P.) Ltd.'s case [2005 (8) TMI 301 - ITAT DELHI-C] is applicable and accordingly the interest u/s 234D of the Act is not chargeable to the assessee and the ground of appeal No.6 of the assessee is allowed.

In the result, the appeal is partly allowed.