2016 (4) TMI 413 - AT - Income Tax

Foreign Company Prevails in Tax Dispute: No Permanent Establishment in India, USD Payments Not Taxable

The Tribunal ruled in favor of the Assessee, a foreign company from the UK, in a tax dispute with the Revenue. It held that the Assessee did not have a ... Permanent establishment (PE) - fixed place of business and disposal test - Fees for technical services (FTS) - 'make available' doctrine under treaty - Article 13(6) (DTAA) - switch from FTS taxation to Business Profits (Article 7) when effectively connected with PE - Article 13(2) (DTAA) - source-state taxation of FTS subject to treaty rate limitations - Grossing up of receipts where payer bears tax under an agreement - Section 115A - taxation of FTS on gross basis where conditions satisfied - Section 44DA - computation of business profits where income is effectively connected with PE - Permissibility of raising substantive claims during assessment proceedings without a revised returnPermanent establishment (PE) - fixed place of business and disposal test - Existence of a Permanent Establishment of the assessee in India during the relevant year - HELD THAT: - On the facts the Tribunal found that the assessee's physical presence in India was limited and restricted to performance of the single GRSE contract and that the office space made available by GRSE (about 50 sq. m.) was provided for the limited purpose of executing that contract. The tribunal applied the 'fixed place of business' requirement and the disposal/right-to-use test and accepted authorities and commentary showing that mere provision of premises by the client for project work does not ipso facto place those premises at the disposal of the foreign enterprise. The assessee's limited visits, restricted use subject to the client's rules, and the concentration of man-hours in the UK led to the conclusion that the business was not carried on in India through that place. Consequently there was no PE in India for the assessee for the years under consideration. [Paras 69, 71]No permanent establishment in India for the assessee for the relevant assessment yearsFees for technical services (FTS) - 'make available' doctrine under treaty - Article 13(2) (DTAA) - source-state taxation of FTS subject to treaty rate limitations - Article 13(6) (DTAA) - switch to Article 7 where FTS are effectively connected with a PE - Taxability of receipts (including USD receipts) - whether taxable as FTS under the India-UK DTAA and, if so, under which article - HELD THAT: - The Tribunal held that the services were technical/consultancy in nature and would fall within the definition of FTS. Because there was no PE, Article 13(6) did not apply to attract Article 7; accordingly Article 13(2) governed source state taxation subject to treaty limits. The Tribunal further found that clause 3.10 of the contract (which vests plans, drawings and reports in GRSE) satisfied the 'make available' element of Article 13(4)(c), and therefore the source State (India) had the right to tax the fees as FTS but within the treaty-prescribed limits. [Paras 52, 53, 55, 72, 73]Receipts (including USD receipts) are FTS arising in India for treaty purposes and taxable by India under Article 13(2), but only subject to treaty limits and subject to domestic implementing provisionsSection 115A - taxation of FTS on gross basis where conditions satisfied - Section 44DA - computation of business profits where income is effectively connected with PE - Grossing up of receipts where payer bears tax under an agreement - Applicable domestic tax treatment - entitlement to tax under section 115A and treatment of grossing up where payer bears the tax - HELD THAT: - Having held there was no PE, the Tribunal examined Sec.115A and held that the assessee satisfied the preconditions for taxation under Sec.115A (receipt from a Government or an Indian concern pursuant to an agreement made in the specified period). Section 44DA applies only where income is effectively connected with a PE; absent a PE, Sec.44DA did not apply. The Tribunal therefore held the assessee was entitled to be taxed under Sec.115A at the applicable gross rate (20% as per the order) and directed that amounts borne by GRSE as tax must be grossed up into the assessee's gross receipts for computation. [Paras 72, 73]Assessee taxable under section 115A on gross receipts (with contractual tax borne by GRSE to be grossed up); section 44DA inapplicable without a PEPermissibility of raising substantive claims during assessment proceedings without a revised return - Whether the assessee could contest the PE/ taxability positions in assessment proceedings without filing a revised return - HELD THAT: - The Tribunal held that the AO's refusal to entertain the assessee's change of stance-made during assessment proceedings but not by way of a revised return-was not tenable. It reviewed conflicting decisions and concluded that the assessee could press substantive claims in the assessment proceedings even if those claims were not accompanied by a revised return; therefore the earlier admission in the originally filed return did not preclude the assessee from contesting PE and taxability on merits. [Paras 70, 71]Assessee entitled to raise and have its substantive claims considered during assessment proceedings notwithstanding absence of a revised returnInterest on shortfall - advance tax computation and payer's obligation to deduct tax at source - Levy of interest under sections 234B and 234C for failure to pay advance tax - HELD THAT: - The Tribunal applied Sec.209(1)(d) and relevant caselaw to hold that where the tax liability arises to be satisfied by deduction at source and the payer (who is obliged to deduct) fails to deduct, the non-resident assessee is not liable to interest under Sec.234B/234C for failure to pay advance tax. The Tribunal followed precedents holding that the assessee could reasonably reckon on TDS in computing advance tax liability, and thus cancelled interest levied under those sections. [Paras 76]No interest under sections 234B and 234C is leviable on the assessee for the years in questionPrior period expenditure and assessment timing - Disallowance of certain consultancy charges as prior period expenses - HELD THAT: - The Tribunal accepted that the AO disallowed certain consultancy charges on the ground they related to an earlier period and noted the AO did not dispute their genuineness. The Tribunal observed that allowance in the appropriate year (AY 2008 09) could be considered by the AO and therefore did not finally adjudicate quantum for the year under appeal. [Paras 7, 77]Disallowance of the identified consultancy charges for AY 2007 08 upheld for that year but AO may consider allowance in AY 2008 09Consequential treatment of disallowances under Sections 40(a)(i) and 40(a)(ia) - Effect of earlier disallowances under Sections 40(a)(i) / 40(a)(ia) given the Sec.115A outcome - HELD THAT: - Because the Tribunal held that income is to be taxed under Sec.115A on gross basis (owing to absence of PE), it held that the AO's earlier disallowances under Sections 40(a)(i) and 40(a)(ia) and similar additions need not be considered in the assessment for the years under appeal, as they would not impact the computation under Sec.115A. [Paras 74]Disallowances under Sections 40(a)(i) and 40(a)(ia) need not be examined for the appealed assessments in view of taxation under Sec.115AFinal Conclusion: The Tribunal partly allowed the appeals for AY 2007 08 and AY 2005 06: it held that the assessee did not have a PE in India; fees received (including USD component) are FTS arising in India but, in absence of a PE, are taxable under section 115A on a gross basis (with amounts borne by GRSE to be grossed up); section 44DA is inapplicable; disallowances under Sections 40(a)(i)/(ia) and related additions need not be examined for these assessments; the assessee could raise substantive claims during assessment proceedings without filing a revised return; AO may consider appropriate allowance of the identified prior period expenses in the correct assessment year; and interest under sections 234B/234C was not leviable. Issues Involved:1. Existence of Permanent Establishment (PE) in India.2. Taxability of payments received in USD.3. Disallowance under section 40(a)(i) of the Act for payments made to Appledore without TDS.4. Disallowance under section 40(a)(ia) of the Act for payments made to Indian sub-consultants.5. Grossing up of USD component of receipts.6. Disallowance of prior period expenses.7. Levy of interest under sections 234B and 234C of the Act.Detailed Analysis:1. Existence of Permanent Establishment (PE) in India:The Assessee, a foreign company from the UK, provided consultancy services to GRSE for shipyard modernization. The Revenue argued that the Assessee had a PE in India based on the office space provided by GRSE and the presence of the Assessee’s personnel in India. However, the Assessee contended that the office space was used solely for the project and not for any other business activities, and thus did not meet the 'disposal test' for a PE. The Tribunal agreed with the Assessee, concluding that there was no PE in India as the office space was not at the Assessee’s disposal for its own business and the Assessee’s presence in India was limited to the project with GRSE.2. Taxability of Payments Received in USD:The Assessee argued that the payments received in USD for services rendered from the UK were not taxable in India as they were not attributable to a PE in India. The Tribunal held that since there was no PE in India, the payments received in USD were not taxable in India under Article 13(2) of the DTAA. The Tribunal also noted that the Assessee was entitled to the benefit of section 115A of the Act, which taxes income by way of fees for technical services at 20% on a gross basis.3. Disallowance under Section 40(a)(i) of the Act for Payments Made to Appledore Without TDS:The Assessee made payments to Appledore, a UK-based sub-consultant, without deducting tax at source. The Revenue disallowed these payments under section 40(a)(i) of the Act. The Assessee argued that the payments were not taxable in India as the services were rendered outside India. The Tribunal, however, upheld the Revenue’s disallowance, citing the amendment to section 9 of the Act by the Finance Act, 2010, which deemed such payments to accrue or arise in India regardless of where the services were rendered.4. Disallowance under Section 40(a)(ia) of the Act for Payments Made to Indian Sub-Consultants:The Revenue disallowed payments made to Indian sub-consultants for delay in depositing TDS under section 194J of the Act. The Tribunal upheld this disallowance, noting that the Assessee had failed to deduct tax at source on these payments.5. Grossing Up of USD Component of Receipts:The Revenue grossed up the USD component of the Assessee’s receipts, arguing that the tax on these receipts was borne by GRSE. The Tribunal agreed with this approach, citing section 195A of the Act, which requires grossing up of income when the tax is borne by the payer.6. Disallowance of Prior Period Expenses:The Revenue disallowed certain expenses as prior period expenses. The Assessee argued that these expenses were genuine and should be allowed in the relevant period. The Tribunal directed the AO to allow these expenses in the appropriate assessment year, either in the year the work was done or the year the invoices were raised.7. Levy of Interest Under Sections 234B and 234C of the Act:The Assessee contended that it was not liable for interest under sections 234B and 234C as the entire tax was deductible at source by the payer. The Tribunal agreed, noting that the payer’s failure to deduct tax at source did not absolve the Assessee from its tax liability, but it did eliminate the requirement for the Assessee to pay advance tax.Conclusion:The Tribunal partly allowed the Assessee’s appeals, concluding that there was no PE in India, and thus the payments received in USD were not taxable in India. However, the disallowances under sections 40(a)(i) and 40(a)(ia) were upheld, and the grossing up of the USD component of receipts was also upheld. The Tribunal directed the AO to allow prior period expenses in the appropriate assessment year and ruled that no interest under sections 234B and 234C was payable by the Assessee.