Treaty non-discrimination and make-available tests barred gross-basis taxation, transfer pricing adjustment, and FTS treatment in this matter.

A non-resident UK company's liaison office was not exposed to transfer pricing adjustment because the Tribunal followed its earlier view that treaty non-discrimination required net-basis taxation. Receipts under the Godavari operation and maintenance arrangement were treated as work-contract receipts, not fees for technical services, because no technical knowledge or know-how was made available to the Indian counterparty; gross-basis taxation was therefore rejected. For other Godavari and EPC project incomes, including foreign bank interest and allied receipts, the Tribunal applied its earlier directions that interest earned on bank accounts outside India was not taxable in India and related receipts were generally to be assessed on a net basis, with some ancillary issues remanded.

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Issues: (i) whether transfer pricing provisions could be applied to the assessee's liaison office and the resultant adjustment sustained; (ii) whether receipts from the Godavari operation and maintenance arrangement were fees for technical services and taxable on a gross basis; (iii) whether the other incomes arising from the Godavari and EPC projects, including foreign bank interest and allied receipts, were taxable on a gross basis or were required to be taxed on a net basis, and whether interest earned outside India was taxable in India.

Issue (i): whether transfer pricing provisions could be applied to the assessee's liaison office and the resultant adjustment sustained

Analysis: The liaison office issue was held to be covered by the Tribunal's earlier decision in the assessee's own case. The earlier decision had concluded that the assessee, a non-resident UK company, was entitled to be taxed on a net basis and that gross-basis taxation under the domestic provisions would be discriminatory in view of the treaty's non-discrimination article. On that footing, the liaison office could not be subjected to the impugned transfer pricing adjustment as framed by the Revenue.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): whether receipts from the Godavari operation and maintenance arrangement were fees for technical services and taxable on a gross basis

Analysis: The arrangement was treated as a work contract for operation and maintenance of the power plant, not as a contract for rendering technical services. The earlier order in the assessee's own case had found that no technical knowledge, skill, know-how or process was made available to the Indian counterparty within the meaning of the treaty and that, in any event, the non-discrimination clause prevented the assessee from being taxed less favourably than a domestic enterprise similarly placed. The receipts therefore did not fall within the treaty or domestic-law definition of fees for technical services for gross-basis taxation.

Conclusion: The issue was decided in favour of the assessee.

Issue (iii): whether the other incomes arising from the Godavari and EPC projects, including foreign bank interest and allied receipts, were taxable on a gross basis or were required to be taxed on a net basis, and whether interest earned outside India was taxable in India

Analysis: The Tribunal followed its earlier decisions holding that interest earned on bank accounts maintained outside India was not taxable in India, while other project-related receipts were to be examined on a net basis in accordance with the earlier directions. Profit on sale of fixed assets was to be tested on the basis of whether the relevant block of assets had ceased to exist, and foreign exchange fluctuation was to follow the character of the underlying receipt. The issue relating to interest on income-tax refund and the additional grounds concerning brought-forward losses, depreciation and interest under section 234B were not finally decided on merits and were remitted for fresh adjudication.

Conclusion: The issue was substantially decided in favour of the assessee, with certain ancillary matters remanded to the Assessing Officer.

Final Conclusion: The appeal resulted in partial relief to the assessee. The principal additions under transfer pricing and treaty-based gross taxation were deleted, while limited matters were restored for fresh consideration.

Ratio Decidendi: A non-resident UK enterprise cannot be subjected to gross-basis taxation where the treaty requires net-basis assessment, the make-available condition for technical services is not satisfied, and the treaty's non-discrimination clause bars less favourable treatment than a similarly placed domestic enterprise.

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