2007 (3) TMI 302 - AT - Income Tax

Tribunal Partly Allows Appeal: Deletes Addition for Understated Proceeds, Upholds Other Tax Rulings, Dismisses Revenue Appeal.

Snc-lavalin/acres Inc. Versus Assistant Commissioner Of Income-Tax.

The Tribunal partly allowed the assessee's appeal by deleting the addition due to the understatement of contractual proceeds, recognizing the consistent ... Applicability Of s. 5(2) r/w s. 9(1)(i) - DTAA between India and Canada - Method of accounting - denial of claim of appellant for attribution and apportionment of profit between Permanent Establishment (PE) in India and the Canadian Office (HO) - 'fees for technical services' as defined in Expln. 2 in s. 9(1)(vii) of the Act, the income be computed as per the provisions of s. 44D of the Act and the tax may be charged as per s. 115A of the Act - HELD THAT:- Sec. 5(2) provides that subject to the provisions of this Act, the total income of a person who is a non-resident shall include all income from whatever source derived which (a) is received or deemed to be received in India; (b) accrues or arises or is deemed to accrue or arise to him in India. Sec. 9(1) provides that following income shall be deemed to accrue or arise in India. Clause (i) of s. 9(1) provides that all income accruing or arising directly or indirectly through or from any business connection in India. Thus, applying s. 5(2) r/w s. 9(1)(i) it can be held that the income accruing by way of execution of the Chamera project in India accrues in India and accordingly liable to tax in India. There was composite contract for rendering services in connection with setting up of Hydroelectric project. Even if it is considered that part of work in relation of such services was carried out out side India, the services are the same as rendered by the PE in India. It is also fact that the invoices were raised through the PE in India which are accounted for in the books of project office set up in India. The work executed has been effected through the PE in India. Thus, even if admitting that merely 30 per cent of the part A work as contained in document No. 2 to the agreement dt.18th July, 1999 is attributable to Head Office in Canada, since it is of the same or similar kind as effected through the PE in India, profit attributable to such transaction is also chargeable to tax in India. The contention of learned counsel for assessee would have been valid had the art. 7 of the DTAA would have been on the basis of OECD Model Convention. However, the fact remains that the same is not so and in view of cl. (b) of sub-art. (1) of art. 7 of DTAA, whole of the profit in respect of Chamera project is to be taxed in India. Thus, though in view of s. 5(2) r/w s. 9(1)(i) of the Act, and also r/w art. 7(1) of the DTAA, broadly the principles of attributions are acceptable yet in view of cl. (b) of sub-art. (1) of art. 7 of DTAA between India and Canada, no part of the profit from the execution of Chamera project can be excluded while computing the profit of the appellant non-resident in India. Accordingly, ground No. 2 raised in this regard is to be dismissed. Income by way of fees for technical services - It is clear that the services of the assessee are technical services as defined in Expln. 2 to s. 9(1)(vii) of the Act. The assessee also does not dispute that the services are technical services. As per s. 44D while computing the income by way of fees for technical services, no deduction in respect of any expenditure or allowance is to be allowed. As per s. 115A(1)(b), where the total income of a foreign company includes any income by way of fees for technical services received from an Indian concern, the amount of income-tax on the income by way of fees for technical services shall be 20 per cent where such fees for technical services are received in pursuance of an agreement made after 31st May, 1997. Since admittedly the assessee received fees for technical services as defined in Expln. 2 to s. 9(1)(vii), the same can be taxed as per the provisions of s. 44D r/w s. 115A of the Act. Since the assessee has chosen to be governed by the provisions of the IT Act, the AO shall compute the income as per s. 44D r/w s. 115A of the Act. Thus, the alternate plea raised on behalf of the assessee is accepted and the AO is directed to compute the tax liability in consonance with the above finding. Addition made as alleged under statement of contractual proceeds - This is evident from the invoice raised by the assessee. As per the terms of contract, the invoice can be raised provided the work completed has reached billable stage. Accordingly, in respect of work done upto31st March, 2001, invoice NO.6 which contains a sum of over Rs. 3.94 crores, a sum of Rs. 3.09 crores has been accounted for. The credit by NHPC or deduction of tax by NHPC cannot be concluded as accrual of income in favour of assessee. Since the assessee raised the bill on 11th June, 2001 though pertaining to January till April, 2001, but since the payments were received prior to close of the accounts and audit thereof, instead of showing the work-in-progress the assessee has accounted for entire income in relation to work done between January and March, 2001 though claimed in the bill raised on 11th June, 2001. It is also to be noted that bill dt.11th June, 2001 also contains the period 1st April, 2001 till 30th April, 2001. Thus, the income for this period cannot be said to have been accrued before the close of the financial year on 31st March, 2001. It is settled law that tax is payable on accrual of income and not on the basis of entries made by the payer or deduction of tax on such credit to the account, rather the provision is otherwise. As per s. 199, credit for tax deducted at source is allowable in the year in which the income comprised in such certificate is assessable. Thus, the reverse is not the law. The AO has merely presumed that since the amount has been credited by NHPC and since the work pertaining to J.P Industries Ltd. has been completed, the work of assessee is also completed. In our opinion, this presumption is not based on facts established in this regard. The assessee raised the running bill from month to month on the basis of work to be executed by it and not on the basis of work completed by J.P. Industries. Since the value of work done is also part of the invoices raised in subsequent year and which is accounted as income in the subsequent year, we find that the assessee is following proper method of accounting for such contract receipts based on percentage completion method. We accordingly do not find any justification to treat the income accruing in subsequent year as income of the year under appeal. We accordingly delete the addition as alleged under statement of contract proceeds. In the result, the appeal of assessee is partly allowed. Issues Involved:1. Violation of principles of natural justice.2. Attribution and apportionment of profit between Permanent Establishment (PE) in India and the Canadian Office (HO).3. Addition due to understatement of contractual proceeds.4. Disallowance of various expenses.5. Charging of interest under Sections 234B and 234C of the IT Act.6. Relief allowed by CIT(A) in respect of salary of expatriate employees.Issue-wise Detailed Analysis:1. Violation of Principles of Natural Justice:- Decision: The ground was dismissed for want of prosecution as it was not pressed during the hearing.2. Attribution and Apportionment of Profit:- Background: The assessee, a Canadian company, filed a return of income declaring the entire income from Chamera project as attributable to the PE in India. Later, the assessee claimed that only a portion of the profit should be attributed to the PE.- AO's Decision: The AO rejected the claim, stating that all business activities were carried out through the PE, and the entire income was taxable in India.- CIT(A)'s Decision: The CIT(A) upheld the AO's decision, noting that the contract receipts and expenses were accounted for in the books of the PE in India.- Tribunal's Decision: The Tribunal held that the DTAA between India and Canada, based on the UN Model Convention, allows for the taxation of profits attributable to sales and business activities of the same or similar kind as those effected through the PE. Therefore, the entire profit from the Chamera project was taxable in India. The Tribunal rejected the claim for apportionment of profit to the HO.3. Addition Due to Understatement of Contractual Proceeds:- Background: The AO noted a discrepancy between the contract receipts declared by the assessee and the amount mentioned in the TDS certificate.- AO's Decision: The AO added the difference to the income, stating that the work had been completed, and the amount was legally due.- CIT(A)'s Decision: The CIT(A) upheld the addition, agreeing with the AO's reasoning.- Tribunal's Decision: The Tribunal deleted the addition, noting that the assessee followed a consistent method of accounting and that the income for the work done was accounted for in the subsequent year when the invoices were raised.4. Disallowance of Various Expenses:- Background: The AO disallowed several expenses, treating them as head office expenses and also due to non-deduction of tax at source.- Expenses Disallowed:- Cost of personnel: Rs. 2,63,02,407- Opening work-in-progress: Rs. 1,84,30,838- Computer repair and maintenance: Rs. 10,86,321- Travelling expenses: Rs. 56,66,033- Engineering software: Rs. 2,03,761- Tribunal's Decision: Since the income was to be computed as per Section 44D r/w Section 115A of the IT Act, no deduction in respect of any expenditure was permissible. Therefore, the grounds became infructuous and were dismissed.5. Charging of Interest Under Sections 234B and 234C:- Background: The assessee did not deny its liability to pay advance tax.- Tribunal's Decision: Interest under Sections 234B and 234C was held to be consequential and mandatory, to be charged as per the provisions of law.6. Relief Allowed by CIT(A) in Respect of Salary of Expatriate Employees:- Background: The Revenue appealed against the relief allowed by CIT(A) regarding the salary of expatriate employees stationed in India.- Tribunal's Decision: The issue became non-applicable in view of the decision to compute tax liability under Section 44D r/w Section 115A of the IT Act. Therefore, the ground was dismissed.Conclusion:- The appeal of the assessee was partly allowed, providing relief on the addition due to understatement of contractual proceeds.- The appeal of the Revenue was dismissed as the issues raised became infructuous.