2011 (8) TMI 552 - AT - Income Tax

Tribunal directs reassessment of income attribution to PE, upholds existence of PE in India

The tribunal partly allowed the appeal, directing the Assessing Officer to reassess the attribution of income to the Permanent Establishment (PE) and ... Fixed place permanent establishment under Article 5(1) - installation/assembly permanent establishment under Article 5(3) - preparatory and auxiliary activities exclusion under Article 5(4) - divisibility of turnkey contract and attribution of profits - attribution of business profits to a permanent establishment under Article 7 - relevance of board resolution and RBI approval to existence of PE - tax withholding obligation of payer and advance tax liability where tax deductible under section 195Fixed place permanent establishment under Article 5(1) - relevance of board resolution and RBI approval to existence of PE - preparatory and auxiliary activities exclusion under Article 5(4) - Whether the Mumbai project office constituted a permanent establishment of the assessee in India during the year under consideration - HELD THAT: - The Tribunal found on the material on record - including the Board resolution authorising opening of a Mumbai project office, the RBI registration permitting a project office without restrictive conditions and contractual provisions requiring the contractor to establish organization and co ordinate with ONGC - that the Mumbai project office was a fixed place of business through which the assessee carried on its business wholly or partly. Article 5.1/5.2 thus applied and Article 5.3 cannot be read to exclude Article 5.1; Article 5.3 only extends the concept of PE for construction/installation projects. The exclusion in Article 5.4 applies only where the fixed place is used solely for preparatory or auxiliary activities and the onus to establish such limited character lies on the assessee. The assessee did not place cogent material to prove that the Mumbai office's role was merely preparatory or auxiliary; contractual terms and documentary admissions showed continuing coordination and functions material to execution of the contract. On these findings the Tribunal rejected the assessee's contention that no PE existed in India for the year under consideration. [Paras 73, 74, 75, 76, 77]Mumbai project office constituted a permanent establishment of the assessee in India for the relevant year; the exclusion under Article 5(4) was not established and is rejected.Divisibility of turnkey contract and attribution of profits - attribution of business profits to a permanent establishment under Article 7 - Whether and to what extent profits from the assessee's offshore activities are attributable to the Indian permanent establishment - HELD THAT: - The Tribunal held that the contract was a composite turnkey contract and that, having found a PE in India, a portion of offshore revenues could be taxable to the extent profits are attributable to that PE under Article 7. However, the Tribunal found that the Assessing Officer's mechanical attribution of 25% of offshore revenue lacked factual foundation and reasoning on the record; there was insufficient material to sustain that specific percentage. Determination of the appropriate quantum of profit attributable to the PE therefore required further fact finding and quantification by the Assessing Officer with opportunity to the assessee. [Paras 78]Attribution to PE is a live issue but the specific 25% attribution is unsupported; the matter is remanded to the Assessing Officer for fresh determination after ascertaining necessary facts and giving the assessee an opportunity of hearing.Tax withholding obligation of payer and advance tax liability where tax deductible under section 195 - Whether interest under the advance tax provision was chargeable on the assessee (non resident) where tax was deductible by the payer - HELD THAT: - On the facts the Tribunal observed that where tax liability on payments to a non resident arises from the payer's obligation to deduct under the law, the non resident is not automatically liable for advance tax and charging interest under section 234B is impermissible in such circumstances. The Tribunal noted relevant precedent and concluded that interest under section 234B should not be charged in the assessee's case. Because the Assessing Officer and DRP had not considered certain authorities relied upon by the assessee, the Tribunal directed the AO to examine those decisions in the record while implementing this conclusion. [Paras 79, 80]Interest under section 234B is not chargeable on the assessee in the present factual matrix; AO to consider cited authorities and comply with the direction.Consequential computation and interest under section 234D - Whether interest under section 234D should be levied - HELD THAT: - The Tribunal treated the claim regarding interest under section 234D as consequential to the determination of taxable income and remitted the matter to the Assessing Officer to compute interest (if any) after determining income in accordance with the Tribunal's directions on attribution and other issues. [Paras 81]Levy of interest under section 234D is consequential; AO to compute interest after recomputation of income as directed.Final Conclusion: Tribunal held that the Mumbai project office was a permanent establishment of the assessee in India for Assessment Year 2007 08 and rejected the contention that it was limited to preparatory/auxiliary functions; the AO's attribution of 25% of offshore revenue to the PE was unsupported and is remitted for fresh determination with an opportunity to the assessee; interest under section 234B was held not chargeable in the factual matrix and the AO is directed to consider cited authorities; interest under section 234D is consequential and remitted for recomputation. Issues Involved:1. Violation of principles of natural justice.2. Tax liability on income from activities performed in and outside India.3. Existence of Permanent Establishment (PE) in India.4. Divisibility of the contract with ONGC.5. Attribution of income to the alleged PE in India.6. Assessment of overall loss and its impact on tax liability.7. Estimation of profits from offshore activities.8. Credit for tax deducted at source.9. Charging of interest under section 234B.10. Charging of interest under section 234D.Detailed Analysis:1. Violation of Principles of Natural Justice:The appellant argued that the order was passed without affording adequate opportunity for cross-examination of the ONGC officer whose opinion was used against the appellant. The tribunal noted that the Assessing Officer (AO) had not provided the appellant with an opportunity to cross-examine the ONGC officer, which was a violation of the principles of natural justice.2. Tax Liability on Income from Activities Performed in and Outside India:The AO completed the assessment at an income of Rs. 28,12,60,801 against a loss of Rs. 23,50,939 returned by the appellant, holding that the appellant was liable to tax in India for activities performed both inside and outside India. The appellant contended that no part of the revenue from outside India operations should be taxable in India.3. Existence of Permanent Establishment (PE) in India:The tribunal examined whether the appellant had a fixed place PE in India under Article 5 of the Double Tax Avoidance Agreement (DTAA) between India and Korea. The AO argued that the project office in India constituted a PE. The appellant contended that the activities carried out by the project office were merely preparatory and auxiliary, and thus did not establish a fixed place PE. The tribunal concluded that the project office did constitute a PE as it was involved in coordination and execution of the project.4. Divisibility of the Contract with ONGC:The AO held that the contract with ONGC was not divisible in terms of activities performed in and outside India. The appellant argued that the contract was divisible, with separate considerations for activities performed inside and outside India. The tribunal found that the contract was a composite one and not divisible, as the milestone payments were provisional and related to the entire contract.5. Attribution of Income to the Alleged PE in India:The AO attributed 25% of the revenue from outside India operations to the PE in India. The tribunal found no material on record to support this attribution and directed the AO to determine the appropriate percentage of attribution after bringing proper material on record.6. Assessment of Overall Loss and Its Impact on Tax Liability:The appellant argued that even if a PE was assumed to exist in India, there was no income liable to tax in India as the appellant incurred an overall loss on the project. The tribunal did not specifically address this issue, focusing instead on the existence of the PE and the attribution of income.7. Estimation of Profits from Offshore Activities:The AO estimated profits from offshore activities at 25% of revenues. The tribunal found this estimation to be unsupported by material evidence and directed the AO to reassess the profits with proper substantiation.8. Credit for Tax Deducted at Source:The appellant claimed that the AO had given lower credit for tax deducted at source. The tribunal did not specifically address this issue in the judgment.9. Charging of Interest Under Section 234B:The appellant argued that interest under section 234B should not be charged as the entire income was subject to tax withholding. The tribunal agreed, citing decisions from higher courts, and directed the AO to reconsider the interest charge under section 234B.10. Charging of Interest Under Section 234D:The appellant contended that interest under section 234D was consequential. The tribunal directed the AO to compute the interest accordingly after determining the income of the appellant.Conclusion:The tribunal partly allowed the appeal for statistical purposes, directing the AO to reexamine the attribution of income to the PE and reconsider the charging of interest under section 234B. The tribunal upheld the existence of a PE in India and the composite nature of the contract with ONGC.