2024 (12) TMI 765 - AT - Income Tax

Foreign company providing offshore services without permanent establishment not taxable under section 44BB despite vessel use

ITAT Delhi held that foreign company providing offshore services vessel without PE in India was not taxable under section 44BB. AO incorrectly applied ... Applicability of section 44BB - amount held to be received for provision of offshore services vessel - AO observed that as the vessel was provided by the assessee company for the purpose of providing services/facilities for extraction or production of mineral oil in India, therefore, such services fall within the provisions of section 44BB and that this section does not embargo any addition on the assessee to have earned for PE in India - AO has taken into consideration a letter issued from the assessee for withholding tax certificate u/s 197 of the Act wherein the assessee had claimed applicability of section 44BB. HELD THAT:- As no issue about taxability of receipt by a foreign resident, not having PE in India, from hire of vessel on time charter basis was examined in any form. So the reliance on the ONGC Case [2015 (7) TMI 91 - SUPREME COURT] by the ld. Tax authorities was not justified. This issue has been examined in the case Smit Singapore Pte Ltd. [2020 (11) TMI 415 - ITAT MUMBAI] wherein the issue was examined to some extent in the context of payment of royalty and it was held in para 18 that the hire charges were not royalty within the meaning of Article 12(3)(b) of India-Singapore Tax Treaty This aspect has been taken note of by the coordinate bench of Delhi in the case Baker Hughes Energy Technologies UK Ltd. [2023 (6) TMI 351 - ITAT DELHI] and, dealing with the case of the assessee in that case that income of the assessee which is a tax resident of UK is not taxable in India since neither it had a permanent establishment in India nor the provisions of section 44B. As the payments received by the assessee are business receipts and the assessee does not have a PE in India. Therefore, the assessee is entitled to be benefitted of the DTAA provisions. Now, merely because of the fact that the assessee had applied for lower deduction certificate u/s 197 of the Act, that in itself cannot be a basis for imposing a tax liability as no admission against the interest of person is conclusive as far as it can be explained. To be more precise, determination of income and tax liability of a person cannot be decided based on concession given by any party at any stage of proceedings. If the assessee, in order to be cautious has sought this certificate u/s 197 of the Act, that cannot act as an estoppel. Thus, on that basis alone any adverse inference by the ld. tax authorities below was not justified. Issues Involved:1. Taxability of income under Section 44BB of the Income Tax Act versus the India-Singapore DTAA.2. Classification of income as royalty under Section 9(1)(vi) and Article 12 of the DTAA.3. Existence of a Permanent Establishment (PE) in India.4. Reliance on Section 197 withholding tax certificate.5. Credit of Tax Deducted at Source (TDS).6. Levy of interest under Sections 234B and 234D.7. Initiation of penalty proceedings under Section 270A.Issue-wise Detailed Analysis:1. Taxability of Income under Section 44BB versus DTAA:The primary issue was whether the income earned by the assessee from the provision of an offshore services vessel should be taxed under Section 44BB of the Income Tax Act or under the provisions of the India-Singapore Double Taxation Avoidance Agreement (DTAA). The assessee argued that since there was no Permanent Establishment (PE) in India, the income should not be taxable under the Indian Income Tax Act but should benefit from the DTAA provisions. The Tribunal noted that the vessel was in India for only 52 days, and there was no PE, thus the income should not be taxed under Section 44BB but should benefit from the DTAA.2. Classification of Income as Royalty:The Assessing Officer (AO) had classified the income as royalty under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA. The Tribunal found this classification incorrect, as the income derived from the time charter of the vessel did not constitute royalty. The Tribunal relied on precedents, such as the case of Smit Singapore Pte Ltd. vs. DCIT, to conclude that hire charges for the vessel do not fall under the definition of royalty.3. Existence of a Permanent Establishment (PE):A significant point of contention was whether the assessee had a PE in India. The Tribunal observed that the tax authorities did not conclusively establish the existence of a PE. The assessee had no office or branch in India, and the vessel's stay was limited to 52 days, which does not constitute a PE under the India-Singapore DTAA. The Tribunal concluded that without a PE, the business profits could not be taxed in India.4. Reliance on Section 197 Withholding Tax Certificate:The AO and DRP relied on a Section 197 withholding tax certificate to conclude that the income was taxable under Section 44BB. The Tribunal held that the certificate, being provisional, cannot be the sole basis for determining tax liability. The Tribunal emphasized that tax liability should not be based on admissions or concessions made by the assessee, especially when such admissions are explained or retracted.5. Credit of Tax Deducted at Source (TDS):The assessee contended that the AO erred in not granting full credit for TDS amounting to INR 1,33,23,843. The Tribunal did not specifically address this issue in detail, but the implication is that the AO's assessment was flawed, warranting a review of the TDS credit.6. Levy of Interest under Sections 234B and 234D:The assessee challenged the levy of interest under Sections 234B and 234D. The Tribunal's decision to allow the appeal suggests that the interest levied may have been incorrect due to the misclassification of income and the absence of a PE.7. Initiation of Penalty Proceedings under Section 270A:The initiation of penalty proceedings was contested on the grounds that there was no underreporting or misreporting of income. The Tribunal's decision to allow the appeal indicates that the penalty proceedings were unwarranted given the circumstances and the lack of a PE.In conclusion, the Tribunal allowed the assessee's appeal, emphasizing the applicability of the DTAA in the absence of a PE, and rejected the classification of income as royalty or under Section 44BB. The Tribunal also criticized the reliance on the Section 197 certificate and addressed procedural issues related to TDS credit and penalty proceedings.