2008 (10) TMI 258 - AT - Income Tax

Tribunal Upholds Non-Taxable Status for Assessee's Profits in India Under DTAA; Dismisses Revenue's Appeal.

Assistant Commissioner of Income Tax Versus Enron Global Exploration and Production Ltd.

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision. It concluded that the assessee and EOGIL, although distinct entities, were ... Generation of revenue from Indian Operation - Reimbursement of expenses on cost to cost basis - DTAA between India and USA - Non-resident - Whether the assessee has earned any profit out of services rendered by it to EOGIL as per PSC - activities in connection with oil and gas exploration drilling - DR contended that assessee company is having a PE in India as per cls. (j), (k) and (l) of art. 5(2) of DTAA between India and USA. HELD THAT:- As per clauses of art. 5(2) of DTAA between India and USA, it cannot be said that assessee is having a PE in India. Nothing brought on record to show that the assessee was having an installation or structure which was used for exploration or exploitation of natural resources and hence. cl. (j) cannot be applied in the present case. As per art. 7, we find that the business profits of an enterprise of a Contracting State shall be taxable only in that State, unless, the enterprise carries on business in the other Contracting State i.e., India in the present case through a PE situated therein. We have noted that there is no PE of the assessee in India, business profits of the assessee, even if any, is taxable only in USA and not in India. Hence, even if it is held that the assessee company was having PE in India, there is no taxable profit of the assessee in India because the assessee has incurred expenses of equal amount for rendering the services. With regard to 1 per cent of the expenses charged by the assessee company as production overhead charges, it may have some element of profit but the same cannot be brought to tax because income does not accrue or arise in India. As per s. 90(2), where there is a DTAA between India and any other country, in relation to the assessee to whom such agreement applies, the provisions of IT Act of India shall apply to the extent that they are more beneficial to that assessee. In the present case, the provisions of DTAA between India and USA are more beneficial to the assessee and hence, provisions of s. 44BB cannot be thrusted upon the assessee. We are of the considered opinion that no interference is called for in the order of ld CIT(A) because we have noted that there is no profit element in the receipts of the assessee company from EOGIL because payments were made by EOGIL as per PSC which have been approved by both Houses of Parliament and as per this PSC, the payment made by a party to the PSC to any of its affiliated concern is to be without profit. This is an admitted position that the assessee company is an affiliated concern of EOGIL and payment made by EOGIL to the assessee company are in line with PSC and hence, it has to be accepted that such payments were made by the EOGIL to the assessee without any profit and hence, it has to be accepted that no profit has been earned by the assessee company on this account. The claim of the Revenue is that the assessee had not maintained books of account and could not produce evidence for its claim that the services provided by it were on a cost to cost basis and without any profit. This claim of the Revenue is meaningless once it is shown by the assessee that the payments received by the assessee company are in line with PSC as per which no payment can be made by a party to PSC to its affiliate concern after including any profit element therein. Under this factual position, we uphold the order of ld CIT(A) on this issue and this ground of the Revenue is rejected. Appeal of the Revenue is dismissed. Issues Involved:1. Whether the assessee company and EOGIL are distinct entities and if the services provided by the assessee were on a cost-to-cost basis without any profit.2. Whether the assessee company had a Permanent Establishment (PE) in India.3. Applicability of Section 44BB of the Income Tax Act, 1961 to the assessee's income.4. Relevance of Double Taxation Avoidance Agreement (DTAA) between India and USA.Detailed Analysis:1. Distinct Entities and Cost-to-Cost Services:The Revenue argued that the assessee (EGEPI) and EOGIL are two distinct entities and that the assessee had not maintained books of accounts to substantiate its claim that the services provided were on a cost-to-cost basis without any profit. The assessee contended that it rendered services to EOGIL on a cost-to-cost basis, and payments through debit notes were merely reimbursements as per the Production Sharing Contract (PSC). The Assessing Officer (AO) rejected this claim, citing that no company would provide services without a profit motive and that the assessee charged 1% as parent company overheads. The CIT(A) deleted the addition made by AO, noting that the assessee produced proof that there was no profit element as per the PSC, which was approved by both Houses of Parliament.2. Permanent Establishment (PE) in India:The Revenue claimed that the assessee had a PE in India as per clauses (j), (k), and (l) of Article 5(2) of the DTAA between India and the USA. The assessee countered that these clauses were not applicable as the installations or structures used for exploration were not owned by the assessee, and services were not rendered in India for more than 90 days within any 12-month period. The Tribunal found that there was no evidence to show that the assessee had a PE in India, thus supporting the CIT(A)'s finding.3. Applicability of Section 44BB:The AO held that the income of the assessee was taxable under Section 44BB, which assesses income at 10% of the aggregate amounts received. The CIT(A) deleted this addition, and the Tribunal upheld this decision, noting that Section 44BB is a machinery provision and does not supersede Section 4. The Tribunal also noted that if there is no income, no tax can be imposed as per Section 44BB.4. Relevance of DTAA:The assessee argued that as per the DTAA between India and the USA, business profits are taxable only in the state where the enterprise is resident unless it has a PE in the other contracting state. Since the assessee did not have a PE in India, its business profits were not taxable in India. The Tribunal agreed, noting that even if the assessee had a PE in India, only profits attributable to the PE could be taxed, and in this case, there were no profits as the services were rendered on a cost-to-cost basis.Conclusion:The Tribunal dismissed the appeal of the Revenue, upholding the CIT(A)'s order. It concluded that the assessee and EOGIL, despite being distinct entities, had a close connection allowing services to be rendered without profit. The Tribunal also found that the assessee did not have a PE in India, and thus, its business profits were not taxable in India under the DTAA. The applicability of Section 44BB was also negated as there was no profit element in the assessee's receipts from EOGIL.