2016 (3) TMI 1097 - AT - Income Tax

ITAT Mumbai: Income not taxable under sec 44B, PE not established in India

The ITAT Mumbai ruled in favor of the assessee, holding that the income was not chargeable under section 44B of the Income-tax Act as the business ... Chargeability of income u/s.44B - existence of Permanent Establishment (PE) - DTAA - Held that:- We find that assessee had not claimed exemption of Article 8 of the DTAA as it was not in the shipping business.Therefore, the income of the assessee had to assessed as per the provisions of tax treaty which deals with business income.Here,we would like to mention that FAA was not justified in confirming the order of the AO holding that provisions of sec.44B of the Act would be applicable with regard to the disputed amount.Section 44 B deals with the shipping business and the AO had himself admitted that the assessee was not in shipping business.The assessee did not own or charter or took on lease any vessel or ship for the year under consideration, it was only providing container services to its various clients. Therefore, we have no hesitation to hold that provisions of section 44B were not applicable to the facts of the case under consideration. Considering the above discussion,we hold that the income of the assessee was to liable to be taxed as business income and that in absence of PE no income was taxable in India, that the provisions of section 44B were wrongly invoked by the AO. Reversing the order of the FAA, we decide effective ground of appeal in favour of the assessee. Issues Involved:1. Chargeability of income under section 44B of the Income-tax Act and existence of Permanent Establishment (PE).2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Singapore.3. Determination of business connection, PE, and control and management.4. Interpretation of agency agreement and its impact on tax liability.5. Justification of invoking section 44B of the Act for taxing the income.6. Assessment of interest under section 234 of the Act.Issue 1: Chargeability of Income under Section 44B and Existence of Permanent Establishment (PE):The Assessing Officer (AO) determined the income of the assessee at Rs. 2.97 crores under section 44B of the Act, holding that the business of the assessee fell within its provisions. The AO found that the assessee had business connections in India and a PE based on its agency agreement with an Indian company. The AO applied the DTAA provisions and held that the income was taxable in India. The First Appellate Authority (FAA) upheld the AO's order, emphasizing the control and management exercised by the Indian parent company. However, the ITAT Mumbai found that the effective management was not in India, as evidenced by the business activities conducted from Singapore. The ITAT concluded that the provisions of section 44B were wrongly invoked, reversing the FAA's decision.Issue 2: Applicability of DTAA between India and Singapore:The ITAT noted that the assessee did not claim exemption under Article 8 of the DTAA as it was not engaged in the shipping business. Therefore, the income had to be assessed as per the tax treaty's provisions related to business income. The ITAT held that the provisions of section 44B were incorrectly applied by the AO, as the assessee was not involved in shipping activities but provided container services. The ITAT's decision favored the assessee, highlighting the correct interpretation of the DTAA in determining tax liability.Issue 3: Determination of Business Connection, PE, and Control and Management:Both the AO and FAA concluded that the assessee had business connections in India and a PE due to the control and management exercised by the Indian parent company. However, the ITAT scrutinized the evidence and emails provided by the assessee, establishing that the effective management was not in India. The ITAT emphasized that factors like the location of the parent company or directors did not determine the assessee's residential status. The ITAT's analysis showcased that substantial income was earned from operations outside India, supporting the assessee's claim.Issue 4: Interpretation of Agency Agreement and Its Impact on Tax Liability:The AO and FAA based their decisions on the agency agreement between the assessee and an Indian company, attributing tax liability to the income generated in India. However, the ITAT found that the business activities were primarily conducted from Singapore, and the agency agreement did not establish a PE or business connection in India. The ITAT's detailed examination of the agreement led to a favorable outcome for the assessee.Issue 5: Justification of Invoking Section 44B for Taxing Income:The ITAT critically reviewed the application of section 44B by the AO, emphasizing that the assessee was not engaged in shipping activities but provided container services. The ITAT's analysis concluded that the provisions of section 44B were inaccurately invoked, leading to a decision in favor of the assessee. The ITAT's meticulous assessment highlighted the incorrect application of tax provisions by the authorities.Issue 6: Assessment of Interest under Section 234:The ITAT noted that the second effective ground of appeal, regarding the levy of interest under section 234, was consequential and did not require adjudication. Therefore, the ITAT focused on the primary issues related to tax liability and the incorrect application of tax provisions, ultimately allowing the appeal filed by the assessee.This comprehensive analysis of the judgment showcases the intricate legal considerations, interpretations of tax provisions, and the meticulous review conducted by the ITAT Mumbai in arriving at a just decision regarding the tax liability of the assessee.