2010 (9) TMI 741 - AT - Income Tax

Assessee's Appeal Dismissed: No Permanent Establishment in India

The assessee did not have a Permanent Establishment (PE) in India under Article 5(2)(j) of the DTAA between India and the USA. Therefore, the appeals of ... DTAA between India and USA - No PEs - whether, the revenue can now invoke the provisions contained in paragraphs (1) and (2) of article 5 of the DTAA when it had earlier based its case on article 5(2)(j) only - ld. DR submits that all the facts are there and, in fact, no application has been moved for admission of any additional evidence. In view thereof, the argument of the ld. counsel that fresh facts will have to be found seems to be merely in the nature of an apprehension - it appears that the assessee-appellant and the revenue-defendant stand more or less in the same position insofar as taking up a new ground or a new plea is concerned, which does not require finding of fresh facts. Accordingly, it is held that the revenue is entitled to raise this plea before us whether, the assessee had PE under any provision other than Article 5(2)(j) - It is submitted that the agreement had been concluded from this office and all business activities in pursuance of the agreement and the other agreement have been managed and controlled from this office - There is no evidence to show that any business was carried on except that the address has been mentioned in the agreement - That by itself does not lead to inference of PE under these provisions whether, the period of repairs and mobilization has to be taken into account under article 5(2)(j) to decide that the assessee had a PE - It is submitted that an installation or a structure can become a PE only if it is (so) actually used for exploration or exploitation of natural resources for a period of more than 120 days - Rig was used for exploitation of mineral oil when it was positioned at the appointed place for exploitation of mineral oil. It is the admitted position that if the time is reckoned from its positioning at the appropriate place, the period is less than 120 days - it is held that the assessee did not have the PE in terms of article 5(2)(j) also Since the assessee does not have a PE in India, no business income can be computed under article 7 of the DTAA. Accordingly, it is held that the ld. CIT(A) was right in holding that interest income is taxable under article 11 of the DTAA @ 15 per cent of the gross interest - Appeal is dismissed Issues Involved:1. Permanent Establishment (PE) in India under Article 5(2)(j) of the DTAA between India and the USA.2. Computation of total income under Section 44BB of the Income-tax Act.3. Taxability of revenues on account of demobilization of the rig.4. Taxability of interest income under Article 11 of the DTAA.Issue-Wise Detailed Analysis:1. Permanent Establishment (PE) in India under Article 5(2)(j) of the DTAA between India and the USA:The primary issue was whether the assessee had a 'permanent establishment in India' under Article 5(2)(j) of the DTAA. The lower authorities concluded that the rig, which arrived in India on 21-11-2002 and was ready for use, constituted a PE. The assessee argued that preparatory work should not be included in determining the PE and that the rig was not used for business purposes until it was operational. The Tribunal noted that the term 'used' was not defined in the DTAA and should be interpreted as 'ready to use' under the Income-tax Act. However, the Tribunal concluded that the rig was not used for exploration or exploitation of natural resources for more than 120 days, as required by Article 5(2)(j), and thus, the assessee did not have a PE in India.2. Computation of total income under Section 44BB of the Income-tax Act:Grounds 3 to 6 of the assessee's appeal concerned the computation of total income under Section 44BB, which provides for presumptive taxation of business income at 10% of the aggregate amount paid or payable. The Tribunal held that this provision would apply only if the assessee had a PE in India. Since it was determined that the assessee did not have a PE, there was no need to compute business income under Section 44BB.3. Taxability of revenues on account of demobilization of the rig:The revenue's appeal for the assessment year 2003-04 included a ground that the revenues from demobilization of the rig should be taxable. The Tribunal, consistent with its finding that the assessee did not have a PE, held that there was no question of computing presumptive income under Section 44BB, and thus, the revenue from demobilization was not taxable in India.4. Taxability of interest income under Article 11 of the DTAA:The revenue also contested the taxability of interest income, arguing it should be taxed as business income. The Tribunal upheld the CIT(A)'s decision that, since the assessee did not have a PE in India, the interest income should be taxed under Article 11 of the DTAA at 15% of the gross interest.Additional Grounds Raised by Revenue:The revenue raised additional grounds in the appeals for the assessment years 2003-04 and 2004-05, arguing that the assessee had a PE under Article 5(1), 5(2)(a), or 5(2)(c) of the DTAA. The Tribunal admitted these grounds but found no evidence that the business was wholly or partly carried on from the Mumbai office mentioned in the agreement. Thus, it concluded that the assessee did not have a PE under these provisions either.Conclusion:1. The appeal of the assessee in ITA No. 389 (Delhi)/2005 was allowed, concluding that the assessee did not have a PE in India.2. The appeals of the revenue in ITA No. 4752 (Delhi)/2005 and ITA No. 4753 (Delhi)/2005 were dismissed, affirming that the assessee did not have a PE and that the interest income was taxable under Article 11 of the DTAA.