2016 (2) TMI 921 - AT - Income Tax

Tribunal Ruling: Tax Assessment Validity, Royalty vs. Contract Income, Interest Exemption

The Tribunal upheld the validity of the assessment reopening for AY 2004-05 as no initial opinion was formed under section 143(1). Receipts from second ... Validity of reassessment notice issued under section 148 based on change of opinion - interpretation and scope of the special provision for non-residents in section 44BB with regard to second leg contracts - distinction between 'used, or to be used' and 'in connection with' in the scope of section 44BB - characterisation of hire receipts as 'royalty' under section 9(1)(vi) vis a vis taxation under section 44BB - chargeability of interest under section 234B where the non resident's income is subject to tax deduction at sourceValidity of reassessment notice issued under section 148 based on change of opinion - Reopening of assessment for AY 2004-05 by issuing notice under section 148 was valid. - HELD THAT: - The Tribunal adjudicated the legal challenge to the reassessment notice issued on 28.03.2011. It noted the original return had been processed under section 143(1) (intimation/processing only) and there was therefore no prior application of mind by the Assessing Officer such as would preclude reassessment on the ground of change of opinion. The Tribunal considered authorities distinguishing orders passed under section 143(1) from those under section 143(3), and relied on higher court precedent establishing that acceptance under section 143(1) does not bar issuance of a section 148 notice; consequently the reassessment was not vitiated as a mere 'change of opinion'. The Tribunal also observed that the assessee had not objected to the reasons recorded and that the reopening ground raised legal contentions which could be raised at any stage; no additional factual enquiry was required. [Paras 9, 10, 11, 12, 13]Cross objection against reopening dismissed; reassessment under section 148 held valid for AY 2004-05.Interpretation and scope of the special provision for non-residents in section 44BB with regard to second leg contracts - distinction between 'used, or to be used' and 'in connection with' in the scope of section 44BB - characterisation of hire receipts as 'royalty' under section 9(1)(vi) vis a vis taxation under section 44BB - Receipts from supplying vessels on hire as a second leg contractor are eligible for taxation under section 44BB and are not to be characterised as 'royalty' under section 9(1)(vi). - HELD THAT: - The Tribunal examined whether section 44BB's concessional scheme extends to non residents who supply plant and machinery on hire to first leg contractors (so called second leg suppliers) whose services/facilities are used in prospecting for or extraction/production of mineral oils. Noting that the statutory language of section 44BB does not require a direct contract with the party engaged in prospecting or extraction, the Tribunal followed a coordinate bench decision in SBS Marine Ltd., which was upheld by the Uttarakhand High Court, and applied the reasoning that section 44BB's scope includes second leg suppliers where the hired plant (here, vessels) is used in offshore drilling operations. The Tribunal rejected the revenue's contention that such receipts must be treated as equipment 'royalty' under section 9(1)(vi) and declined to read the 2010 Finance Act amendments as retrospective to deny benefit for the years in issue. Consequently, the Tribunal held that the assessee's hire receipts qualify for the presumptive taxation under section 44BB. [Paras 22, 23, 24, 25, 26]Appeals concerning characterisation of second leg hire receipts allowed for AYs 2004-05, 2007-08 and 2008-09: receipts taxable under section 44BB and not as royalty under section 9(1)(vi).Chargeability of interest under section 234B where the non resident's income is subject to tax deduction at source - Interest under section 234B is not chargeable in the facts of these cases where the non resident's income was subject to tax deduction at source. - HELD THAT: - The Tribunal considered conflicting High Court authorities. It accepted the position adopted in several High Court decisions that where a non resident's entire income is subject to tax deducted at source under section 195, the non resident may not be liable to pay advance tax and therefore levy of interest under section 234B is not warranted. The Tribunal noted that SLP(s) against some favourable High Court decisions have been dismissed, and having regard to the caselaw relied upon and the facts that the assessee was non resident with income chargeable by TDS, held that interest under section 234B should not be levied in these proceedings. [Paras 28, 29, 31, 32, 33]Grounds challenging levy of interest under section 234B allowed; interest not chargeable for the relevant assessment years.Final Conclusion: The Tribunal upheld the reassessment issued under section 148 for AY 2004-05, held that hire receipts of the assessee as second leg supplier of vessels qualify for the concessional presumptive taxation under section 44BB (and are not royalty under section 9(1)(vi)) for the years in dispute, and concluded that interest under section 234B is not chargeable in the facts of these non resident cases; accordingly the departmental appeals were dismissed and the assessee's appeals for AYs 2007-08 and 2008-09 were allowed as recorded. Issues Involved:1. Reopening of assessment u/s 147.2. Taxability of receipts under section 44BB.3. Chargeability of interest u/s 234B.Issue-wise Detailed Analysis:1. Reopening of Assessment u/s 147:The assessee challenged the reopening of the assessment for AY 2004-05 on the grounds that there was no new material to justify the reassessment. The assessee argued that the reassessment was bad in law due to the absence of any new tangible material. The Tribunal noted that the original return was processed u/s 143(1) and not u/s 143(3), implying no opinion was formed initially. The Tribunal referenced the Supreme Court's decision in Zuari Estate Development and Investment Company Limited, holding that there cannot be a change of opinion if no opinion was formed initially. Consequently, the Tribunal upheld the reopening of the assessment as valid.2. Taxability of Receipts under Section 44BB:The core issue was whether the receipts from rental of vessels from non-PSC companies (second leg contracts) should be taxed under section 44BB or as royalty under section 9(1)(vi). The Tribunal relied on the decision in SBS Marine Limited, upheld by the Uttarakhand High Court, which allowed the benefit of section 44BB to second leg contracts. The Tribunal emphasized that section 44BB does not mandate a direct contract with the entity engaged in mineral oil extraction. Hence, the Tribunal concluded that the assessee's receipts from second leg contracts are eligible for tax treatment under section 44BB and not as royalty under section 9(1)(vi).3. Chargeability of Interest u/s 234B:The revenue contended that interest u/s 234B should be charged, while the assessee argued against it, citing precedents from the High Courts of Uttarakhand and Delhi. The Tribunal noted conflicting decisions on this issue but leaned on the principle that if the entire income is subject to TDS under section 195, the assessee is not liable for advance tax and hence not liable for interest u/s 234B. The Tribunal referenced the Supreme Court's dismissal of the SLP in DIT vs. Clifford Chance LLP, supporting the assessee's position. Consequently, the Tribunal held that interest u/s 234B is not chargeable.Conclusion:- Reopening of Assessment: Valid as there was no initial opinion formed under section 143(1).- Taxability under Section 44BB: Receipts from second leg contracts are taxable under section 44BB and not as royalty under section 9(1)(vi).- Interest u/s 234B: Not chargeable as the entire income is subject to TDS under section 195.Judgment Summary:- Appeals by Revenue (ITA No 592/Del/2013, 746/Del/2013, 1810/Del/2013): Dismissed.- Appeals by Assessee (ITA No 263/Del/2013, 5289/Del/2010, 5775/Del/2011): Allowed for AY 2007-08 and 2008-09; Dismissed for AY 2004-05 on reopening issue.