2007 (5) TMI 260 - AT - Income Tax

Supervision Fees Taxed at 20% Under Indo-Japan DTAA; No Interest Liability for Assessee; Section 154 Appeal Dismissed.

Sumitomo Corporation. Versus Deputy Commissioner Of Income-Tax.

The ITAT partially allowed the appeals, ruling that the supervision fees received by the Japanese company from MUL were taxable at 20% under Article 12(2) ... Foreign companies, Additional Ground Issues Involved:1. Taxability of Supervision Fees: Whether the supervision fees received by the assessee from MUL are taxable in India.2. Existence of Permanent Establishment (PE): Whether the assessee had a PE in India and if the contracts in respect of which supervision fees were paid were effectively connected to such PE.3. Rate of Tax on Supervision Fees: Whether the supervision fees should be taxed at 20% as per Article 12(2) or at 30.25% as per Article 12(5) r/w Article 7(1) of the Indo-Japan DTAA.4. Interest under Sections 234B and 234C: Whether the assessee is liable to pay interest under sections 234B and 234C of the Income-tax Act, 1961.Summary:1. Taxability of Supervision Fees:The assessee, a Japanese company, received supervision fees from MUL for supervising the installation of machinery and equipment. The assessee initially offered these fees as taxable income but later argued that these fees should not be taxed separately as they were part of the contract for the supply of equipment. The Tribunal held that the assessee cannot raise this issue for the first time before the Tribunal as it was not raised before the lower authorities. The supervision fees were therefore taxable as 'fees for technical services' (FTS).2. Existence of Permanent Establishment (PE):The Revenue argued that the assessee had a PE in India through its liaison office (LO) and project offices for various projects, including the YE2 car project with MUL. The Tribunal held that the LO did not constitute a PE as it was engaged only in preparatory and auxiliary activities. However, the project office for the YE2 car project constituted a PE. The Tribunal further held that the supervision fees were not effectively connected to the PE as the supervision activities were carried out by personnel from Japan and not through the PE in India.3. Rate of Tax on Supervision Fees:The Tribunal held that since the supervision fees were not effectively connected to the PE in India, they should be taxed at 20% as per Article 12(2) of the Indo-Japan DTAA and not at 30.25% as per Article 12(5) r/w Article 7(1).4. Interest under Sections 234B and 234C:The Tribunal held that the assessee was not liable to pay interest under sections 234B and 234C as the tax on the supervision fees was deductible at source by MUL. The Tribunal relied on the decision of the Special Bench in the case of Motorola Inc., which held that the assessee cannot be held liable for interest if the payer fails to deduct tax at source.Conclusion:The appeals were partly allowed, with the Tribunal holding that the supervision fees were taxable at 20% under Article 12(2) of the Indo-Japan DTAA and that the assessee was not liable to pay interest under sections 234B and 234C. The appeal regarding the order under section 154 was dismissed as infructuous.