TMI Blog2012 (5) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... inclusion in the total receipts. 4. On the facts and circumstances of the case, once a PE of an entity has been established in a geographical market then all the other offices of the entity can automatically be treated as PE. The ld. CIT(A) has erred in holding that liaison office of the assessee (having a PE in India) was not a PE under Article 5 of DTAA. 5. On the facts and circumstances of the case, the ld. CIT(A) has erred in holding that interest u/s 234 B of the Act is not chargeable in the case. 6. On the facts and circumstances of the case, without prejudice to anything contended above, even if it is presumed that the assessee was taxable on net basis, the ld. CIT(A) should have called for a remand report after giving her the opportunity to scrutinize and determine the allowable expenses. The ld. CIT(A) erred in allowing all the expenses claimed by the assessee without giving an opportunity to the AO. 2. As against Ground Nos. 1 to 5, duly supported by the arguments of the ld. DR, the learned counsel for the assessee has referred to the Tribunal order dated 5.10.2010 in the assessee s own case for the assessment years 1998-99 to 2004-05 (copy placed on record) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is rejected. 8. Coming to Ground No. 2 the findings of the Tribunal are as under:- With respect to the grounds taken by assessee for taxing of Interest income in various years the AO s finding is that interest income is chargeable under Art. 12(2) of the DTAA has been upheld by the CIT(A) and the finding given by him is that these incomes were not related to execution of any projects as relevant projects are stated to have been completed and Art. 12(2) of DTAA gives taxing rights to the source state in respect of income that arises in that state and profits on such interest may be taxed on gross basis at a rate not exceeding 15%. The stand of the assessee is that the interest has mainly arisen in respect of bank balances in U.K. viz., in Nat West Bank and Chase Manhattan Bank. Therefore, applying the source rule as opined by the CIT(A) under Art. 12(2), the interest received by the assessee in U.K. on bank accounts maintained in U.K. cannot be taxed in India. We find force in the submissions of the assessee as on the point of law there is no dispute between the assessee and the Revenue. The assessee has only current account in India and all the interest amount has arisen o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 3,52,12,032/- which had been shown under the head other income in Schedule 5 of Godavari (O M) Project. I have verified the provisions for doubtful debts added back in the computation of income of the earlier relevant assessment years together with the relevant Godavari (O M) Project s Profit Loss Account, and am satisfied that the sum of ₹ 3,52,12,032/- which has been reversal of provision for doubtful debts not allowed in earlier years, cannot be treated as income of the appellant in the year of reversal. The income of the appellant is to be computed on the basis of net profit or loss as per consolidated Balance Sheet, Profit and Loss Account and Tax Audit Report u/s 44 AB, as against the computation of income made by the AO, which had been held to be erroneous by the ITAT vide its consolidated order for assessment years 1998-99 to 2004-05. The appellant had itself in the computation of its income excluded this amount of ₹ 3,52,12,032/- and this is being upheld following the directions of the ITAT. The appellant will not be entitled to a further relief on this account, as it will amount to a double deduction. 15. In view of the above observations of the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts income in India and was being assessed in India as a foreign Company for over 15 years. The stand taken by the Department is that the LO and Project offices of the assessee had different entities and ought to have been subjected to different tax audits and they ought to have filed different tax return in India. The Tribunal, as above, has held that the entity is one and all the Project offices and Los form part of that one single entity and thus, they are not required to file separate returns of income or to get separate tax audits conducted. The Tribunal has held that no income is to be added to the LO s costs incurred as there was no benefit to the Head Office in the U.K. Though in the present year, the TPO advised a mark up of 17.99% as against that of 15% in earlier years, the principal remains the same. 19. Hence Ground No. 4 is rejected. 20. Turning to Ground No. 5, the findings of the Tribunal are as under:- Grounds have also been taken against charging of interest u/s 234B and 234D in the AY 2001-02,02-03,03-04 04-05. As far as charging of interest u/s 234B is concerned, admittedly the entire income of the assessee, i.e. a foreign company is liable for deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a non-resident but also penalties etc. Once it is found that the liability was that of the payer and the payer has defaulted in deducting the tax at source, the Department can take action against the payer under the provisions of section 201 of the Act and compute the amount accordingly. If the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non-resident is not absolved from payment of taxes thereupon. In such a case, the non-resident is liable to pay tax but the question of payment of advance tax would not arise. For this reason, it would not be permissible for the Revenue to charge any interest under section 234B of the Act.. Section 234D is applicable only from the assessment year 2004-05 onwards and not in the earlier assessment years and therefore no interest under that provision could be levied for the period prior to the assessment year 2004- 05. 24. In SNC Lavalin International Inc. (supra), the assessee Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DTAA as per local laws in India (e)Taxing liabilities no longer required written back (f)Taxing provisions written back Misc. income 2. Margins on Liaison Offices: (a)27.08% mark up on liaison offices under transfer pricing provisions by holding that the LO has international transaction with its HO. 3. Godavari EPC Project: (a)Taxing other income on gross basis as foreign Company income in India. (b)Taxing foreign Exchange fluctuation. (c)Taxing interest income on gross basis. (d)Provisions written back and realization of bad and doubtful debts. 4. Rihand Project Office: (a) Taxing other income on gross basis as foreign Company income in India. (b) Taxing foreign exchange fluctujation. (c) Taxing interest income at gross basis. 5. Others: (a) Set off of b/f business losses depreciation. 6.Additional Ground: (a)The ld. AO has erred in charging interest u/s 234 B of the Act. ITA No. 5438/Del-2011 1. O M Project Godavari: (a) Taxing the receipt from O M Project of Godavari on gross basis u/s 44D of the I.T. Act which consisted only of other income which was also treated as FTS by the Ld. AO. (b) Profit on sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and UK. The assessee had also not make available any knowledge, skill etc. to M/s Spectrum within the meaning assigned to it under Article 13(4)(c) of the DTAA to FTS under the treaty. Accordingly, assessee cannot be taxed on gross basis and Section 44AD has no application to the facts of the instant case. Furthermore, Article 13(4)(c) read with Article 26 of DTAA does not permit the revenue authorities to discriminate against the assessee, a UK registered company and accord it less favourable treatment than a domestic company and therefore, section 44AD cannot be invoked in assessee s case. Thus, looking from any angle, the income received by the assessee from M/s Spectrum was not a fee for technical services, we therefore direct the AO to compute assessee s income and profit and gains of business from operation and maintenance of power plant of net profit and loss basis. We direct accordingly. 36. The Tribunal, thus, has held that income must be taxable on a net basis, after allowing deduction in respect of costs incurred, as it is not fees for technical services, but income arising out of works contract on O M maintenance of power plant. 37. The AO, as available at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest has mainly arisen in respect of bank balances in U.K., viz., in Nat West Bank and Chase Manhattan Bank. Therefore, applying the source Rule as opined by the CIT(A) under Art. 12(2), the interest received by the assessee in U.K. on bank accounts maintained in U.K. cannot be taxed in India. We find force in the submissions of the as sessee as on the point of law there is no dispute between the assessee and the Revenue. The assessee has only current account in India and all the interest amount has arisen out of bank accounts in U.K. and, therefore, the same should not have been subjected to tax in India at all. We allow this ground of appeal. The AO is directed to exclude interest earned outside India under Article 12(2) of the DTAA and tax interest earned in India as normal income. AO is at liberty to examine such interest income whether taxable as income from other sources or as business income. We direct accordingly. 41. Therefore, the issue is covered in favour of the assessee by the aforesaid Tribunal order and accordingly, Ground No. 2 is rejected. The Tribunal has, in effect, held that the interest earned in the U.K. Banks is not taxable in India, whereas other i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a as normal income. AO is at liberty to examine such interest income whether taxable as income from other sources or as business income. We direct accordingly. 45. Therefore, in keeping with the Tribunal order(supra), interest earned on foreign bank accounts is not taxable in India and accordingly, Ground No. 1(c) is accepted. 46. Apropos Ground No. 1(d), this issue is also covered in favour of the assessee by the Tribunal order(supra), wherein it has been held as follows:- Ground taken with regard to Profit on sale of assets under Art. 14 of DTAA as per local laws in India arises only in assessment year 2000-01. The assessee has submitted that profit on sale of assets can only be taxed if the gross block of the particular assets of the assessee ceases to exist. Till such time profit or loss on the sale of such assets is irrelevant as according to the assessee, the gross block continues to exist even after crediting the sale to the WDV of the assets, no profit or loss should have been recognized. The AO is directed to verify this position. If the gross block exists of the particular assets even after crediting the sale amount, WDV of that block of assets would get reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. 51. The matter being covered by the Tribunal order as above, the other income should be taxed on net basis. Accordingly, Ground No. 1(e) is accepted. 52. The same applies to Ground No. 1(f), i.e., concerning taxing provisions written back and misc. income. Accordingly, Ground No. 1(f) is accepted. 53. Turning to Ground No. 2(a), the Tribunal has held that no income is to be added to the LO s costs incurred as there is no benefit to the head office in the U.K. The TPO, in the year under consideration, advised a mark up of 27.07% as against that of 15% in the earlier year. However, the principle remains the same. 54. The observations of the Tribunal in this regard are as follows:- In respect to ground taken with regard to Margins on Liaison Offices, both the A.O. and the CIT(A) have held that the assessee should have charged 15% in addition to cost from its Head office and, therefore, have added notional income on the expenses incurred on Liaison offices in India amounting to 15% of the actual cost incurred. It was submitted before us that the Liaison offices are basically to facilitate communication between the various projects undertaken by the assessee in vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of expenditure u/s. 30,31,32,36,37,40,43B etc would have to be taken in to account. In our view this is the purport of Article 7.5 read with Article 26 of the DTAA between India and UK. 56. The issue is, thus, squarely covered in favour of the assessee. Accordingly, Ground No. 3(a) is accepted. 57. Concerning Ground No. 3(b), it has been held by the Tribunal that if foreign exchange is earned on trading basis, only then it is taxable, but it is earned on capital assets, it is not taxable. With regard to the ground taken for taxation of Foreign Exchange Fluctuation in assessment year 2002-03, there is no dispute to the well settled legal proposition that if profit or loss on account of foreign exchange fluctuation arises out of capital assets, then it will be capital receipt and in case it arises out of trading business, then it should be treated as trading income. The AO is directed to verify the same and act accordingly. 58. It is seen that as contended that the fluctuation is on the deposits in the U.K. Bank Accounts. It is exempt, as such. The Tribunal has held that the interest is exempt as per the DTAA between India and U.K. and therefore, the fluctuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s Spectrum vide contract dated 14.3.1995. For undertaking the work contract, the assessee got a price for producing power by operating and maintaining the power plant. It has not rendered any technical services to M/s Spectrum so as to come within the meaning of FTS. The income so received for executing the work contract did not fall within the definition of FTS u/s 9(1)(vii) Explanation 2 of the IT Act nor as defined in Article 13(4) of DTAA between India and UK. The assessee had also not make available any knowledge, skill etc. to M/s Spectrum within the meaning assigned to it under Article 13(4)(c) of the DTAA to FTS under the treaty. Accordingly, assessee cannot be taxed on gross basis and Section 44AD has no application to the facts of the instant case. Furthermore, Article 13(4)(c) read with Article 26 of DTAA does not permit the revenue authorities to discriminate against the assessee, a UK registered company and accord it less favourable treatment than a domestic company and therefore, section 44AD cannot be invoked in assessee s case. Thus, looking from any angle, the income received by the assessee from M/s Spectrum was not a fee for technical services, we therefore di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in India. We find force in the submissions of the assessee as on the point of law there is no dispute between the assessee and the Revenue. The assessee has only current account in India and all the interest amount has arisen out of Bank accounts in U.K. and, therefore, the same should not have been subjected to tax in India at all. We allow this ground of appeal. The AO is directed to exclude interest earned outside India under Article 12(2) of the DTAA and tax interest earned in India as normal income. AO is at liberty to examine such interest income whether taxable as income from other sources or as business income. We direct accordingly. With regard to the ground taken for taxation of Foreign Exchange Fluctuation in assessment year 2002-03, there is no dispute to the well settled legal proposition that if profit or loss on account of foreign exchange fluctuation arises out of capital assets, then it will be capital receipt and in case it arises out of trading business, then it should be treated as trading income. The AO is directed to verify the same and act accordingly 67. In accordance with the findings of the Tribunal, since foreign exchange fluctuation is on the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, the issue was not discussed in the assessment order. DRP also followed suit and did not allow the carry forward of losses u/s 72 of the Act, without discussing the matter. 71. The Tribunal held that set off and carry forward has a statutory right of the assessee and the same cannot be denied. The findings of the Tribunal are as under:- We have considered the rival contentions and given our careful consideration to the materials placed on record and are of the opinion that carry forward business loss is a statutory right allowable to the assessee by section 72 of the Act. This statutory right cannot be withheld from the assessee as this loss has been properly computed and allowed to be carried forward in the previous assessment years which have become final. Copies of the same have been filed before us. The manner of computation of profits and gains of business would not convert profits and gains of business income under anther head of income. It will continue to be profits and gains of business. The A.O in all these years has not also treated this income to be taxable under any other head than profits and gains of business Once profits and gains of business are c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trolling Co. Ltd. 264 ITR 370 (Uttaranchal), DIT (International Taxation) v. NGC Network Asia LLC 313 ITR 187 (Mumbai) all have held that no interest u/s 234B would be chargeable and we direct the AO to delete the interest charged for all the years under consideration u/s 234B of the Income Tax Act. 75. The issue, it is seen, is also covered in favour of the assessee by Jacabs Civil Incorporated (supra) and Mitsubishi Corporation (supra) and SNC Lavalin International Inc. (supra). Therefore, Ground No. 6(a) is accepted. ITA No. 5438(Del)2011: 76. Apropos Ground No. 1(a), the findings of the Tribunal are as under:- In the instant case, the assessee has undertaken a work contract for operation and maintenance of power plant for its owner M/s Spectrum vide contract dated 14.3.1995. For undertaking the work contract, the assessee got a price for producing power by operating and maintaining the power plant. It has not rendered any technical services to M/s Spectrum so as to come within the meaning of FTS. The income so received for executing the work contract did not fall within the definition of FTS u/s 9(1)(vii) Explanation 2 of the IT Act nor as defined in Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as income from other sources or as business income. We direct accordingly. 77. The Tribunal has held that the income must be taxable on a net basis after allowing deduction in respect of costs incurred as it is not fees for technical services but business income arising out of the works contract on O M of the Godavari Power Plant; and that the interest earned in the U.K. Banks is not taxable in India, whereas the other interest earned in India is taxable in India. 78. The assessee has maintained that during the year, there were no receipts in the O M Project from SPGL and in fact, the income, as credited to the Profit Loss Account was in the Schedule of other income and was mainly interest on foreign bank accounts accruing outside India, amounting to ₹ 1,26,48,619/-, liabilities no longer required written back - ₹ 4,32,602/- and profit on sale of assets - ₹ 32,000/-. All these issues being covered in favour of the assessee by the Tribunal order (supra), Ground No. 1(a) is accepted. 79. With regard to Ground No. 1(b), the Tribunal has held that the profit on sale of assets is taxable if the block ceases to exist. It has been so held while dealing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the assessee, a UK registered company and accord it less favourable treatment than a domestic company and therefore, section 44AD cannot be invoked in assessee s case. Thus, looking from any angle, the income received by the assessee from M/s Spectrum was not a fee for technical services, we therefore direct the AO to compute assessee s income and profit and gains of business from operation and maintenance of power plant of net profit and loss basis. We direct accordingly. 82. This issue is also covered in favour of the assessee, Ground No. 1(c) is accepted. 83. With regard to ground No. 2, the Tribunal has held that the interest earned in the U.K. Banks is not taxable and the other interest earned in India is taxable in India as other income. The findings of the Tribunal are as under:- With respect to the grounds taken by assessee for taxing of Interest income in various years the AO s finding is that interest income is chargeable under Art. 12(2) of the DTAA has been upheld by the CIT(A) and the finding given by him is that these incomes were not related to execution of any projects as relevant projects are stated to have been completed and Art. 12(2) of DTAA gives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st has mainly arisen in respect of bank balances in U.K. viz., in Nat West Bank and Chase Manhattan Bank. Therefore, applying the source rule as opined by the CIT(A) under Art. 12(2), the interest received by the assessee in U.K. on bank accounts maintained in U.K. cannot be taxed in India. We find force in the submissions of the assessee as on the point of law there is no dispute between the assessee and the Revenue. The assessee has only current account in India and all the interest amount has arisen out of Bank accounts in U.K. and, therefore, the same should not have been subjected to tax in India at all. We allow this ground of appeal. The AO is directed to exclude interest earned outside India under Article 12(2) of the DTAA and tax interest earned in India as normal income. AO is at liberty to examine such interest income whether taxable as income from other sources or as business income. We direct accordingly. 87. On behalf of the assessee, it has been contended that during the year under consideration, there were no receipts in the Rihand Project and that in fact, the income, as credited to the Profit and Loss Account, was in the Schedule of other income and was only o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, there are a number of businesses in which section 44D has not been invoked and, therefore, even unabsorbed depreciation was needed to be adjusted against profits and gains of business of the years under review. Therefore, in our opinion, the A.O. and CIT(A) were wrong in not allowing the set off of both unabsorbed depreciation and unabsorbed loss to the assessee. 90. In accordance with the findings of the Tribunal, Ground No.4 is accepted. 91. Ground No. 5 is an additional ground, which has been taken by way of a chart filed. Charging of interest u/s 234 B of the Act is a legal issue and so the additional ground is admitted. 92. The Tribunal, in this regard, has held that the entire income of the foreign company was liable for TDS u/s 195 of the Act and that therefore, no interest was chargeable u/s 234 B of the Act. The findings of the Tribunal are as under: Grounds have also been taken against charging of interest u/s 234B and 234D in the AY 2001-02,02-03,03-04 04-05. As far as charging of interest u/s 234B is concerned, admittedly the entire income of the assessee, i.e. a foreign company is liable for deduction of tax at source u/s 195 of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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