2009 (1) TMI 302 - AT - Income Tax

Tribunal Adjusts Tax Rate for Technical Services, Remands Case for Fresh Adjudication; Clarifies PE Six-Month Rule.

The Tribunal partly allowed the appeals, modifying the CIT(A)'s orders and remanding the matter to the AO for fresh adjudication. It upheld the CIT(A)'s ... Double Taxation Relief - 'PE' in India arising out of carrying out of supervisory activities - Scope of PE, under cl. (i) of art. 5(2) - DTAA between India and Germany . The stand of the Revenue is that all the sites under different contracts should be taken together while determining the existence of PE while the stand of the assessee is that each contract should be considered separately and independently. Whether different sites on which work is carried on by the assessee can be considered together in determining the scope of PE? - HELD THAT:- In computing the minimum period of 6 months, various sites cannot be considered together particularly when different contracts had no effective interconnection with each other. In the present case, the assessee had entered into various contracts with various parties in respect of various independent projects located at different places. Hence, the lower authorities were not justified in considering the various sites together while computing the minimum period of six months prescribed in art. 5(2)(i) of the DTAA. Whether on the facts of the case, it can be said that the minimum period of six months commences from the date when the project or building site itself commenced? - HELD THAT:- The minimum period would commence from the date of supply of the plant and machinery itself. Even in such case, the period of construction of building cannot be taken into consideration since contract of construction of building is separate and independent contract. Thus, the date of commencement of the threshold limit of six months would depend on the facts of each case considering the terms of contract. It is held that if the supervisory activity is carried out under a separate and independent contract then the minimum period of six months would commence only when such activity itself had commenced and not from the date of the project. Whether the intervening period caused on account of various factors should be excluded while computing the minimum period of six months? - HELD THAT:- It is the settled legal proposition that when the language of the treaty is not clear then one can look into. the commentaries on the subject in dispute - an activity once commenced continues till its completion. Accordingly, the intervening period cannot be excluded. Whether the period under art. 5 should be calculated with reference to each year? - HELD THAT:- The minimum period of six months is to be counted from the date when activity starts till the date when the contract is completed irrespective of the year/years to which such period relates - the learned CIT(A) was not justified in computing the period of six months with reference to each assessment year. The orders of the learned CIT(A) for both the years are modified and the matter is restored to the file of the AO for fresh adjudication in accordance with our findings given above as well as on the basis of material which may be placed before him by the assessee - matter restored. Issues Involved:1. Permanent Establishment (PE) in India under Article 5 of the DTAA between India and Germany.2. Tax rate applicable to fees for technical services.3. Determination of the minimum period of six months for PE.4. Reimbursement of expenses and inspection fees as taxable income.5. Applicability of interest under Section 234B of the IT Act, 1961.Issue-wise Detailed Analysis:1. Permanent Establishment (PE) in India under Article 5 of the DTAA between India and Germany:The main issue was whether the assessee had a PE in India under Article 5 of the DTAA between India and Germany. The assessee, a German company, provided technical know-how, basic engineering services, and supervisory activities for construction or installation projects in India. The Assessing Officer (AO) concluded that the assessee had a PE in India as the supervisory activities exceeded six months, thus making the income taxable at 30% under Section 115A of the IT Act, 1961. The CIT(A) partially upheld this view, stating that the assessee had a PE in respect of three projects but not for others.2. Tax rate applicable to fees for technical services:The assessee argued that fees for technical know-how and basic engineering services should not be taxed at 30% as these services were rendered from Germany and did not involve a PE in India. The CIT(A) accepted this contention, and the Department did not appeal against this finding. For supervisory activities, the CIT(A) held that the assessee had a PE for three projects, making the income taxable at 30%, while for other projects, the income was taxable at 10% under Article 12(2) of the DTAA.3. Determination of the minimum period of six months for PE:The Tribunal examined whether the six-month period for determining a PE should be considered for each contract separately or in aggregate. It was held that each contract should be considered independently, and the period should commence when the supervisory activity itself started, not from the date when the project began. The Tribunal also clarified that the intervening period should not be excluded and that the period should be counted irrespective of the financial years involved.4. Reimbursement of expenses and inspection fees as taxable income:The issue was whether amounts received towards reimbursement of expenses and inspection fees were taxable as 'fees for technical services.' The Tribunal held that inspection fees amounted to technical services and were taxable. However, reimbursement of expenses did not involve an element of income and thus was not taxable, following the principle that when there is a conflict between judicial decisions, the view favorable to the assessee should be adopted.5. Applicability of interest under Section 234B of the IT Act, 1961:The Tribunal decided that interest under Section 234B could not be charged where the tax was deductible at source under Section 195 of the Act. This decision was based on the Special Bench ruling in Motorola Inc. vs. Dy. CIT and the Uttaranchal High Court decision in CIT vs. Halliburton Offshore Services Inc., which held that the assessee was not required to pay advance tax when tax was deductible at source.Conclusion:The Tribunal partly allowed the appeals, modifying the CIT(A)'s orders and remanding the matter to the AO for fresh adjudication based on the Tribunal's findings. The Tribunal upheld the CIT(A)'s decision on the tax rate for technical services where there was no PE and ruled against the Revenue on the issue of interest under Section 234B.