2017 (8) TMI 416 - AT - Income Tax

Tribunal upholds tax assessment, deletes interest charges, and defers penalty proceedings

The Tribunal upheld the legality of the assessment order and the taxability of income from both onshore services and offshore supplies. It deleted the ... Income arising from onshore services - Permanent Establishment - global profit accruing from the offshore supplies to PE in India - Composite contract - Attribution of profit - purposes of supply of BTG equipments as well as supervision of erection/installation, commissioning and performance testing at the project site in India - Held that:- Assessee having entered into a Composite contract which is relatable to the operations carried out in India and partly to outside India a proportionate part of income which is so relatable to the operations carried out in India has to be charged to tax. The extension of taxability of profits of PE by including profits directly or indirectly attributable, is akin to the provisions of Article 7(1)(b ) and 7(1)(c) of the UN MC which provides that in addition to the ‘profits attributable to the permanent establishment’ the taxability of PE profits will also extend to ‘(b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment’. The connotations of ‘profits indirectly attributable to permanent establishment’ will extend to these two categories. These categories clearly incorporate a force of attraction rule. The basic philosophy underlying the force of attraction rule is that when an enterprise sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country whether the transactions are routed and performed through the PE or not. The provisions of Article 7(1) of India China DTAA, include same results as sought to be achieved by article 7(1)(c) of UN MC. As to the scope of this provision, one may find guidance from the UN MC Commentary in this regard. The connotations of ‘profits indirectly attributable to permanent establishment’ do indeed extend to incorporation of the force of attraction rule being embedded in article 7(1). In addition to taxability of income in respect of services rendered by the PE in India, any income in respect of the services rendered to an Indian project, which is similar to the services rendered by the permanent establishment, is also to be taxed in India in the hands of the assessee, irrespective of the fact whether, such services are rendered through the permanent establishment, or directly by the general enterprise. There cannot be any professional services rendered in India which are not, at least indirectly, attributable to carrying out professional work in India. This indirect attribution, in view of the specific provisions of India-China tax treaty, is enough to bring the income from such services within ambit of taxability in India. The basic philosophy underlying the force of attraction rule is that when an enterprise sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country whether the transactions are routed and performed through the PE or not. In effect, profits relating to services rendered by assessee, whether rendered in India or outside India, in respect of Indian projects are taxable in India, and are attributable to the supervisory PE of assessee in India, as they are effectively connected with each other. Ld.Counsel has not submitted any justification to adopt the segmental profits. He has also not demonstrated any illegality in the computation adopted by Ld.AO. It is observed that Ld.AO has followed the global profitability based upon the ruling of Rolls Roys (2010 (3) TMI 1157 - ITAT DELHI) and attributed 25% of global profit accruing from the offshore supplies to PE in India - Decided against assessee. Levy of Interest u/s 234B - Held that:- The undisputed fact in the present case remained that the tax on entire income received by assessee was required to be deducted, at appropriate rates by the respective payers under section 195. Had the payer made the deduction of tax at the appropriate rate, the net tax payable by the assessee would have been Nil. Thus, there was no liability to pay advance tax by the assessee. High Court of Delhi in the case of Jacabs Civil Incorporated/ Mitsubishi Corporation reported in [2010 (8) TMI 37 - DELHI HIGH COURT] on identical issue deleted the interest charged u/s 234 B - Decided in favour of assessee. Issues Involved:1. Legality of the assessment order.2. Taxability of income from onshore services.3. Taxability of income from offshore supplies.4. Levy of interest under sections 234B and 234C.5. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Legality of the Assessment Order:The assessee contended that the assessment order passed under section 143(3) read with section 144C of the Income Tax Act was bad in law and void ab initio. The Tribunal noted the detailed process followed by the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) and found that the assessment order was passed following due legal process. Therefore, the Tribunal upheld the legality of the assessment order.2. Taxability of Income from Onshore Services:The AO taxed the income from onshore services under the head “business profits” based on the existence of a Permanent Establishment (PE). The AO also determined profits from onshore services at an arbitrary net profit rate of 25%. The Tribunal upheld the AO’s decision to tax the onshore services under “business profits” but did not address the specific rate of profit determination.3. Taxability of Income from Offshore Supplies:The AO brought to tax revenues arising from offshore supplies in India, treating the offshore supply contracts as works contracts. The Tribunal analyzed the contracts and found them to be composite in nature, involving both offshore supply and onshore services. The Tribunal noted that the contracts were not for the mere supply of goods but included substantial onshore activities such as erection, commissioning, and performance testing. The Tribunal held that the income from offshore supplies was attributable to the PE in India and, therefore, taxable in India. The Tribunal also upheld the AO's attribution of 25% of the profits from offshore supplies to the PE in India based on the global profitability statement.4. Levy of Interest under Sections 234B and 234C:The AO levied interest under sections 234B and 234C of the Act. The Tribunal, referring to the decision of the Hon'ble Delhi High Court in the case of Jacabs Civil Incorporated/Mitsubishi Corporation, held that since the tax on the entire income was required to be deducted at source by the payer, the assessee was not liable to pay advance tax. Consequently, the Tribunal deleted the interest charged under sections 234B and 234C.5. Initiation of Penalty Proceedings under Section 271(1)(c):The AO initiated penalty proceedings under section 271(1)(c) for alleged concealment and furnishing inaccurate particulars of income. The Tribunal noted that the penalty proceedings were premature at this stage and, therefore, did not adjudicate on this issue.Conclusion:The Tribunal upheld the legality of the assessment order and the taxability of income from both onshore services and offshore supplies. The Tribunal deleted the interest levied under sections 234B and 234C and did not address the initiation of penalty proceedings, considering them premature. The appeals filed by the assessee were partly allowed.