2018 (6) TMI 401 - AT - Income Tax

PE in India: Consultancy Services Taxable on Net Basis, Interest Deletion Upheld

DIT, Circle-1 (1), International Taxation And ADIT Circle-1 (2), International Taxation, New Delhi Versus DHV BV

The Tribunal upheld the CIT(A)'s findings that the consultancy services were effectively connected to the PE in India, supporting taxation on a net basis ... PE in India - contracts in dispute as “effectively connected' to the PE - Income accrued in India - Held that:- The details of the personnel and their duration activity shows that the contracts are required to be rendered for substantially long period of time which supports the case of the assessee that the scope of work was required to be rendered in India and the time spent in India by the assessee/subcontractor proves that a Permanent Establishment (PE) was constituted in India. Therefore, the CIT(A) rightly held that income earned by the assessee under such contracts is effectively connected to a PE in India and is liable to tax at 40% on net income basis as per the RBI guidlines Interest levied u/s 234B - liable to pay advance tax under the provisions of section 208 - Held that:- Interest u/s 234B is not leviable as all payments to the non-resident appellant are subject to tax deduction at source u/s 195. The AO is directed to delete the interest levied u/s 234B. Decision in the case of DIT v. GE Packaged Power Inc. (2015 (1) TMI 1168 - DELHI HIGH COURT), is squarely applicable in the present case wherein held that no interest under section 234B of the Act can be levied on the assessee-payee on the ground of non-payment of advance tax because the obligation was upon the payer to deduct the tax at source before making remittances to them. Revenue appeal dismissed. Issues Involved:1. Whether the consultancy services were rendered through the PE and ‘effectively connected’ to it.2. Whether the CIT(A) erred in deleting the addition without appreciating the detailed reasons given by the AO.3. Whether interest under section 234B was chargeable in the assessee’s case.Issue-Wise Detailed Analysis:1. Whether the consultancy services were rendered through the PE and ‘effectively connected’ to it:The Revenue contended that the consultancy services provided by the assessee were not effectively connected to the Permanent Establishment (PE) in India. The Assessing Officer (AO) held that the nature of services rendered by the assessee is Fee for Technical Services (FTS) for all projects. For projects executed through the branch office with agreements entered into after 01-04-2003, the AO concluded that FTS were not effectively connected with the PE, thereby applying section 115A for taxation on a gross basis at 10%.The assessee argued that the consultancy services were indeed effectively connected to the PE. The assessee, a tax resident of Netherlands, established a branch office in India, constituting a PE under Article 5(2)(b) of the India-Netherlands DTAA. The income from the contracts was 'effectively connected' to the PE since the projects were carried out in India by the branch office, which was involved in negotiation, signing, and execution of the contracts. The assessee provided substantial evidence, including affidavits, Power of Attorney, consultancy contracts, invoices, financial statements, and bank statements, to demonstrate that the contract revenues were received and managed by the branch office in India.The CIT(A) found that the AO selectively concluded that contracts after 01-04-2003 were not effectively connected with the PE, while those before were. The CIT(A) held that all contracts were effectively connected to the PE, as the branch office negotiated, signed, and executed the contracts, and the actual operational part was done by the Indian subsidiary. The CIT(A) directed that income from these contracts be taxed on a net basis as per section 44DA.2. Whether the CIT(A) erred in deleting the addition without appreciating the detailed reasons given by the AO:The Revenue argued that the CIT(A) erred in deleting the addition made by the AO without appreciating the detailed reasons provided in the assessment order. The AO had claimed that the assessee failed to furnish project-wise details of employees and their presence in India, thus not establishing the effective connection of income to the PE.The CIT(A), however, found that the AO's action was not based on a proper appreciation of facts. The CIT(A) noted that all relevant documents were produced before the AO, but the AO overlooked them. The CIT(A) concluded that the contracts were effectively connected to the PE in India, as all activities were carried out by the branch office and the Indian subsidiary, with no significant involvement from the head office.3. Whether interest under section 234B was chargeable in the assessee’s case:The Revenue contended that the CIT(A) erred in holding that interest under section 234B was not chargeable by relying on the decision of the Delhi High Court in DIT vs. Jacobs Civil Incorporated, without appreciating that the levy of interest under section 234B is mandatory as held in CIT vs. Anjum M. H. Ghaswala.The assessee argued that the revenues were subject to tax deduction at source under section 195, and hence, no advance tax was payable, making the levy of interest under section 234B inapplicable. The assessee cited several judicial precedents, including the Delhi High Court's decision in DIT v. GE Packaged Power Inc., which held that no interest under section 234B can be levied on the non-resident payee if the payer is obligated to deduct tax at source.The CIT(A) agreed with the assessee, holding that interest under section 234B is not leviable as all payments to the non-resident were subject to tax deduction at source under section 195. The CIT(A) directed the deletion of interest levied under section 234B.Conclusion:The Tribunal upheld the CIT(A)'s findings on all issues. It concluded that the consultancy services were effectively connected to the PE in India, and the income should be taxed on a net basis under section 44DA. The Tribunal also upheld the CIT(A)'s decision to delete the interest levied under section 234B, following the judicial precedents that no interest is chargeable when the payments are subject to tax deduction at source. Thus, all appeals filed by the Revenue were dismissed.