2007 (5) TMI 288 - AT - Income Tax

Tribunal affirms jurisdiction, lifts corporate veil, upholds PE in India, directs interest rework under Section 234B

Ansaldo Energia Spa. Versus Assistant Director Of Income-tax (International Taxation).

The Tribunal partly allowed the appeal, affirming the CIT(A)'s jurisdiction and lifting the corporate veil to treat the contracts as a composite one. It ... Powers Of CIT(A) Issues Involved:1. Jurisdiction for enhancement under Section 251 of the IT Act, 1961.2. Conformity with principles of natural justice.3. Whether ASPL was a facade for tax purposes and if its corporate veil should be lifted.4. Existence of Permanent Establishment (PE) in India for offshore supply activities.5. Business connection with Neyveli Lignite Corporation (NLC) and Ansaldo Energia SpA.6. Charging of interest under Section 234B of the Act.7. Taxability of income from design and engineering services under Contract I as 'Fees for technical services'.Detailed Analysis:1. Jurisdiction for Enhancement under Section 251 of the IT Act, 1961:The assessee contended that the CIT(A) lacked jurisdiction to enhance the assessment as the items considered were not part of the original assessment order. The CIT(A) has plenary powers co-terminous with those of the AO and can consider any matter arising from the proceedings. The Tribunal upheld the CIT(A)'s jurisdiction, citing precedents like CIT v. Kanpur Coal Syndicate and CIT v. Nirbheram Daluram, affirming that once an assessment is reopened, the entire proceedings are open before the AO and CIT(A).2. Conformity with Principles of Natural Justice:The assessee argued that no opportunity for cross-examination was provided. However, the Tribunal found that no specific request for cross-examination was made, and the information from NLC was shared with the assessee. The Tribunal concluded that there was no denial of natural justice as the material gathered was supplied to the assessee, who had the opportunity to respond.3. Facade for Tax Purposes and Lifting Corporate Veil:The Tribunal examined whether ASPL was a facade created for tax purposes. The contracts were split at the suggestion of the assessee, but the overall responsibility remained with the assessee. The Tribunal found that ASPL lacked the necessary qualifications and financial capacity to execute the contracts independently. The Tribunal concluded that the contracts were essentially a single composite contract and lifted the corporate veil, consolidating the contracts for tax purposes.4. Existence of Permanent Establishment (PE) in India:The Tribunal determined that the assessee had a PE in India as it was involved in various activities such as unloading, transportation, and supervision for a period exceeding six months. The presence of a project manager and site office in India further established the existence of a PE, making the business profits attributable to Indian operations taxable.5. Business Connection with NLC and Ansaldo Energia SpA:The Tribunal found that there was a business connection between the assessee and NLC/ASPL. The assessee was involved in the management and control of ASPL, provided technical advice, and guaranteed the performance of the contracts. This continuous relationship and interaction contributed directly to the earning of profits, establishing a business connection under Section 9(1) of the Act.6. Charging of Interest under Section 234B of the Act:The assessee argued that interest under Section 234B should not be charged as the income was subject to tax deduction at source. The Tribunal directed the AO to rework the interest, considering the lower tax deductible at source as per the assessee's request and the provisions of Section 209.7. Taxability of Income from Design and Engineering Services:The additional ground raised by the assessee was that the income from design and engineering services under Contract I should not be taxed as 'Fees for technical services.' The Tribunal treated the whole contract as a composite one with single bidder responsibility, dismissing the bifurcation of this part of the receipt.Conclusion:The Tribunal partly allowed the appeal, affirming the CIT(A)'s jurisdiction and lifting the corporate veil to treat the contracts as a composite one. It also upheld the existence of a PE and business connection in India, directing the AO to rework the interest under Section 234B. The principles of natural justice were found to be observed, and the additional ground regarding 'Fees for technical services' was dismissed.