Treaty classification of O&M receipts, foreign-source interest, loss set-off and advance-tax interest for foreign companies

Receipts from O&M and project activities under a power-plant works contract were treated as business income on a net basis, not fees for technical services, because the treaty's make-available requirement was not met. Interest on foreign bank accounts, along with related credits such as write-backs, foreign exchange fluctuation and similar items, was treated as not taxable in India to the extent arising outside India under the treaty source rule. Carry forward and set-off of business losses and unabsorbed depreciation remained available under the Act. Interest under section 234B was not chargeable where the foreign company's income was subject to withholding tax under section 195.

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Issues: (i) whether receipts from the O&M and project activities were fees for technical services taxable on gross basis or business income taxable on net basis under the treaty, (ii) whether interest earned on foreign bank accounts and allied items such as written back liabilities, foreign exchange fluctuation and profit on sale of assets were taxable in India, (iii) whether carry forward and set-off of business losses and unabsorbed depreciation could be denied, and (iv) whether interest under section 234B was chargeable in the case of a foreign company.

Issue (i): whether receipts from the O&M and project activities were fees for technical services taxable on gross basis or business income taxable on net basis under the treaty.

Analysis: The receipts from the O&M arrangement were found to arise from a works contract for operation and maintenance of the power plant, not from rendering technical services. The activity did not satisfy the treaty concept of fees for technical services, including the make available requirement. The treaty also barred treatment that was more burdensome than that applicable to a comparable domestic enterprise. The income was therefore required to be computed as business profits on a net basis after allowing admissible expenditure under the domestic Act.

Conclusion: The receipts were not fees for technical services and were taxable, if at all, on net basis as business income in favour of the assessee.

Issue (ii): whether interest earned on foreign bank accounts and allied items such as written back liabilities, foreign exchange fluctuation and profit on sale of assets were taxable in India.

Analysis: Interest arising on bank accounts maintained outside India was held not to be taxable in India under the treaty source rule. The balance items in the schedules of other income, including amounts written back and similar credits, were not independent fees for technical services and followed the same treatment of net business computation. Foreign exchange fluctuation linked to such foreign-bank interest or deposits was treated as consequential and not separately taxable in India on the facts found. Profit on sale of assets was held taxable only where the relevant block of assets ceased to exist; otherwise no separate taxability arose.

Conclusion: The foreign-bank interest and connected items were held not taxable in India to the extent found to accrue outside India, and the related additions were deleted in favour of the assessee.

Issue (iii): whether carry forward and set-off of business losses and unabsorbed depreciation could be denied.

Analysis: Carry forward of business loss was treated as a statutory right under the Act. The computation of profits under the special treatment adopted by the revenue did not convert business income into income under a different head, and therefore existing business losses and unabsorbed depreciation remained available for set-off against business profits of the year. The denial of such adjustment was held to be inconsistent with the scheme of the Act.

Conclusion: Carry forward and set-off of business losses and unabsorbed depreciation were allowed in favour of the assessee.

Issue (iv): whether interest under section 234B was chargeable in the case of a foreign company whose income was subject to tax deduction at source.

Analysis: The entire income of the foreign company was held liable to deduction at source under section 195. In such a situation the assessee had no obligation to pay advance tax in respect of income that was required to be subjected to withholding at source, and interest for default in advance tax could not be levied. The issue was treated as a legal one and decided consistently with the binding view that section 234B did not apply on these facts.

Conclusion: Interest under section 234B was held not chargeable in favour of the assessee.

Final Conclusion: The Department's appeal failed and the assessee's appeals succeeded, with the assessments set aside to the extent they had treated the relevant receipts as taxable on gross basis or had denied the consequential deductions and statutory benefits.

Ratio Decidendi: A non-resident company carrying on works-contract or business operations in India cannot be taxed on gross receipts as fees for technical services where the treaty conditions are not met, treaty-protected foreign-source interest is not taxable in India, statutory business-loss and depreciation set-off must be allowed, and section 234B cannot be levied where the tax was deductible at source under section 195.

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