2012 (10) TMI 257 - AT - Income Tax

Tribunal rules on taxable profits and interest liability under Sections 234B and 234C

The Tribunal partly allowed the appeal, ruling that the contract was divisible, and only profits attributable to installation and commissioning activities ... India UAE DTAA - as appellant had entered into a turnkey project the net taxable income is estimated by him @ 25% of such gross turnover - assessee contested that A.O. exceeded in his jurisdiction in holding that the appellant has a P.E. in India - Held that:- Turnkey contracts means where a contractor has to complete the contract as a whole i.e. from the stage of procurement of material, erection, construction, fabrication and supply thereof. However, where the terms of the contract provide that either party can withdraw or abandon the contract, the company or the contractor has not to make entire payments under the terms of the contract or refund the amounts received, which will accrue only on the completion of the contract, cannot be regarded as a turnkey contract. Hence, agreeing with the contention that even if the contract is a turnkey contract, it does not lead to taxability of the entire contract revenues in India but only as much of the profits as is attributable to the PE India can be taxed in India. The assessee fabricated the platform in Abu Dhabi and after fabrication the said platform was brought to India with the help of its barges and then the possession is handed over to ONGC. In this regard, it is worth noting that before sailing the platform after fabrication, the same is certified by ONGC through it's approved surveyor. Furthermore, as per the insurance policy though to be taken by the assessee, but ONGC is the joint beneficiary. Further, insurance policy also exhibits that, in case there is a loss suffered in the course of transportation the payee of the insured amount would be ONGC. Thus, under the contract there are different phases of execution of contract. The first phase was completed when it was fabricated, erected and brought to India through its barges, to be physically supplied. Thus, agreeing with the contention of the assessee that income attributed to PE in India could not extend to the activities carried outside India and had to be therefore confined to incomes from activities carried out from the PE.- All the activities prior to installation and commissioning are carried out in UAE and thus having regard to Article 7 of the DTAA, no income can be attributed to the PE in India - Thus it is to be opined that assessee did not have a PE in respect of erection and fabricating the platform in Abu Dhabi. The assessee had a PE in respect of installation and commissioning - partly in favour of assessee Assessee has contended that taxability of the assessee should be the same as in preceding years - Held that:- The contention of the Renenue that any formula or any agreement whatsoever arrived at between the assessee and department which is against the provision of law is not enforceable under the law. The Revenue is not bound to follow and perpetuate the mistake which has been committed in the past. In this regard, the case of Distributor (Baroda) Pvt. Ltd. (1985 (7) TMI 1 - SUPREME COURT) may be referred where Hon'ble Apex Court has held that there is no heroism in perpetuating a mistake - against assessee. Section 44BB applies in two situations when non-resident is engaged in the business of providing services or facilities in connection with OR supplying plant and machinery on hire used or to be used, in the prospecting for, of extraction or production of, mineral oils. Thus as the assessee is not in the business of providing services, neither any plant or machinery has been supplied on hire basis. The assessee is under the contract engaged in successful installation of off-shore platform. This activity cannot be characterized as facility provided by the assessee. Thus, business activity of the assessee does not fall within the meaning of section 44BB. Interest u/s 234B, 234C & 234D levied - Held that:- Section 234B is attracted where in any financial year an assessee is liable to pay advance tax under sec. 208 and has failed to pay such tax or where the advance tax paid by the assessee under sec. 210 is less than 90% of the assessed tax. Similarly, section 234C is attracted wherein in any financial year, an assessee is liable to pay advance tax under section 208 and he failed to pay such tax or the advance tax paid by the assessee and its current income on or before the specified dates is less than the specified percentage of the tax due on returned income. In this regard, assessee's contention is that its entire income is subject to tax at source under section 195 & the payer has also taken certificate from the AO under section. 195(2) and thus, there was no liability to pay the advance tax under section 208 and in the absence of any liability, Sec. 234B and 234C could not be applied. Issues Involved:1. Existence of Permanent Establishment (PE) in India.2. Nature and divisibility of the contract.3. Attribution of income to the PE.4. Applicability of Section 44BB.5. Levy of interest under Sections 234B, 234C, and 234D.Issue-Wise Detailed Analysis:1. Existence of Permanent Establishment (PE) in India:The Assessing Officer (AO) determined that the assessee had a PE in India, based on the existence of a project office since 1990 and the involvement of M/s Arcadia Shipping Ltd. as a dependent agent. The AO cited the project office's role in pre-bid surveys, negotiations, and execution of the contract, which went beyond ancillary and auxiliary activities. The AO also noted that the project office lasted more than nine months, fulfilling the duration test for a construction/installation PE under Article 5(2)(h) of the India-UAE DTAA.The assessee argued that the project office was merely a communication channel and that M/s Arcadia Shipping Ltd. was an independent consultant. The assessee claimed that the installation activity in India lasted only four and a half months, thus not meeting the duration test for an installation PE.The Tribunal upheld the AO's findings, noting that the project office was involved in core business activities and that M/s Arcadia Shipping Ltd. acted as a dependent agent. The Tribunal also agreed with the AO that the duration of the PE should be counted from the establishment of the project office, which exceeded nine months.2. Nature and Divisibility of the Contract:The AO considered the contract with ONGC as a composite, turnkey contract, not divisible into separate parts for offshore and onshore activities. The AO emphasized that the contract included various stages like survey, design, fabrication, procurement, and installation, all integral to the overall project. The AO also noted that milestone payments were provisional and did not indicate separate contracts for different activities.The assessee contended that the contract was divisible, with separate considerations for design, fabrication, and installation activities. The assessee argued that the fabrication of the platform in Abu Dhabi was a distinct phase, with the platform being constructively delivered to ONGC before its physical transportation to India.The Tribunal found merit in the assessee's argument, noting that the contract provided for separate payments for different activities and that ONGC had the discretion to terminate the contract at various stages. The Tribunal concluded that the contract was divisible and that only the income attributable to the PE in India should be taxed.3. Attribution of Income to the PE:The AO attributed the entire income from the contract to the PE in India, estimating the profit at 25% of the gross receipts. The AO rejected the assessee's method of attributing 1% of outside India revenues and 10% of inside India revenues after deducting expenses.The assessee argued that only the income attributable to the installation and commissioning activities in India should be taxed, citing Article 7 of the India-UAE DTAA and relevant case laws, including Hyundai Heavy Industries Co. Ltd. and Ishikawajma-Harima Heavy Industries Ltd.The Tribunal agreed with the assessee, holding that only the profits attributable to the installation and commissioning activities in India should be taxed. The Tribunal referred to the principles of apportionment and the specific provisions of the DTAA, concluding that the profits from fabrication and procurement activities outside India were not taxable in India.4. Applicability of Section 44BB:The AO rejected the applicability of Section 44BB, which provides for presumptive taxation of non-residents engaged in providing services or facilities in connection with the prospecting for or extraction of mineral oils. The AO argued that the assessee was engaged in the installation of offshore platforms, which did not fall within the scope of Section 44BB.The assessee contended that Section 44BB applied to its inside India activities, as it was providing services in connection with the extraction of mineral oils.The Tribunal upheld the AO's view, stating that the assessee's activities did not fall within the scope of Section 44BB, as it was not providing services or facilities in connection with the extraction of mineral oils, nor was it supplying plant and machinery on hire.5. Levy of Interest under Sections 234B, 234C, and 234D:The AO levied interest under Sections 234B, 234C, and 234D for failure to pay advance tax. The assessee argued that its income was subject to tax deduction at source under Section 195, and hence, it was not liable to pay advance tax.The Tribunal agreed with the assessee, citing case laws that supported the view that non-residents whose income is subject to tax deduction at source are not liable to pay advance tax and, consequently, are not subject to interest under Sections 234B and 234C. The interest under Section 234D was held to be consequential.Conclusion:The Tribunal partly allowed the assessee's appeal, holding that the contract was divisible, and only the profits attributable to the installation and commissioning activities in India were taxable. The Tribunal also ruled that the assessee was not liable to pay interest under Sections 234B and 234C.