TaxTMI 
TaxTMI 
2006 (3) TMI 199
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.... the return of income, in computing the returned loss of Rs. 12.80 crores the income of Rs. 30,78,70,463 received in relation to the New Mangalore Port Trust (NMPT) project was reduced on the basis that the said project was completed earlier in the Financial year 1995-96 and accordingly in the absence of a Permanent. Establishment (PE) in relation to the NMPT project in the relevant assessment year 2001-02 the said amount was not taxable as per the various Clauses of the Indo-Netherlands Tax Treaty. The assessee had in the assessment years 1995-96 and 1996-97 a contract with NMPT dated 5-12-1994 for carrying out maintenance and capital dredging services in connection with the development of additional facilities at the New Mangalore Port. The services were rendered at the site by the assessee by bringing its dredgers (ships) for carrying out its dredging activities. The assessee was deemed to have a PE under article 5(3) of the Treaty namely a construction site or project which continued for more than a period of six months. In the assessment year 1996-97 the project of the assessee at New Mangalore Port was completed and completion certificate granted by NMPT and the PE of the ass....
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....se and cannot apply under the India-Netherlands tax treaty." 5. The Ld. Counsel for the assessee submitted that after the completion of the project at NMPT during the period relevant to the assessment year 1996-97, the PE of the assessee at NMPT ceased to exist. He submitted that the revenue has not disputed this fact that the assessee does not have the PE in relation to the NMPT during the assessment year 2001-02. He submitted that despite the absence of PE in India of the assessee for assessment year 2001-02, the revenue has held the amount of Rs. 30.78 crores chargeable to tax by wrongly invoking the provisions of section 176(3A) of the Act. He submitted that once the project was completed the machinery (ships) were sent back out of India and therefore there was no PE in India with regard to the project at New Mangalore Port. He referred to various clauses and articles of the treaty between India and Netherlands in support of his arguments that the amounts received by the assessee can be taxed in India only if there is a permanent establishment in India. He referred to the provisions of section 176(3A) of the Act and submitted that once Treaty is there between India and Netherl....
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....at when damages are received through a Court order the source of income is the order of the Court as held by Bombay High Court in Princess Maheshwari Devi of Pratapgarh v. CIT [1984] 147 ITR 258. He submitted that this position of the OECD has not been accepted by one of its members namely. The United States of America, which in para 45 has added a reservation to the commentary on Article 7. Under the US Model convention the US differs from the other countries in seeking to tax payment which are deferred, to a point of time after the PE has ceased to exist. He submitted that in DTAA between India and USA after signing of the convention a protocol was signed adding a new provision. He submitted that in DTAA with Netherlands not only there is no clause which permits the taxation of profits after a PE has ceased to exist but instead under a protocol an addition is made specifically providing that profits of a PE are only taxable in respect of actual activity carried out by the PE in that State. Therefore once there is no PE in India the question of taxation of profits under Article 7 does not arise. He submitted that irrespective of section 176(3A) of the Act whether the tax treaty pr....
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....are applicable and relied on decision of Hon'ble Born bay High Court in CIT v. Star Andheri Estate [1994] 208 ITR 573. He submitted that the assessee has declared the income of Kakinada Port Trust even after the close of PE for Kakinada Port Trust venture. Hence there is no reason that why the income of Rs. 30.78 crores received during the year by the assessee from NMPT project be not taxed in this year. He relied on decision in Ashoka Woollen Mills v. IAC [1995] 215 ITR 573 (Delhi) and Dhanamall Silk Mills v. CIT [1998] 234 ITR 682 (Bom.). He also referred to the commentary by K. Vogul in support of the argument that even if PE is liquidated during the relevant period, the income received by the assessee is still taxable. He submitted that the PE of the assessee-company was in existence during the assessment years 1995-96 and 1996-97 in India and that the income of Rs. 30.78 crores received in September 2000 is attributable to the PE in India and therefore, the assessee has been rightly taxed on this amount of income by the Assessing Officer. He supported that in this case we are not concerned with the US model of treaty. He referred to the notes to the financial statements for th....
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....tted that there is no other condition that the particular PE should be in the year in which the, amount has been received. In this case when the income was earned PE was very much there and income is attributable to that PE (NMPT) only. The assessee has claimed all expenses incurred for earning this 'income and the same has been allowed as a deduction and therefore, the Assessing Officer has rightly taxed the arbitration award amount during relevant year. He submitted that there are four types of model conventions which were prepared with context to the requirement of those organisations, which are, OECD Model, UN Model, US Model and Andean Model. He submitted that the arguments of the ld. Counsel for the assessee in respect of certain provisions of US Model and Indo-American Treaty is not relevant for the issue under reference to DTAA between India and Netherlands. He submitted that the arguments of the ld. Counsel for the assessee which is based on provision of OECD Model convention is also not relevant. The ld. D.R submitted that if as per assessee's argument that the present PE independent of NMPT ceased to exist since financial year 1995-96 onward, then definitely there is dis....
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....rces provided that the activities continue for more than 183 days. 3. A building site or construction, installation or assembly project constitutes a permanent establishment only where such site or project continues for a period of more than six months." Article 7: Business profits "1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of one of the States carries on business in the other State through a permanent establishment situated therein, there shall in each State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In ....
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....to the head office of the enterprise or any of its other offices, by way of royalties, fees, or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise by way of interest on monies lent to the head office of the enterprise or any of its other offices. 4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by the permanent establishment of goods or merchandise of the enterprise. 5. For the purpose of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 6. Where profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article. 11. A reading of the relevant Article 5 and Article 7 of the DTAA between India and Netherlands shows that there are only two conditions for taxing an amount received by the assessee in India and they are that t....
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....nd force in the argument of the Ld. DR that if the plea of the assessee that to tax its income the PE should be in existence I during the relevant assessment year is accepted then it can lead to anomaly since the assessee would be entitled to deduction of all expenses and income received in the subsequent years shall not be taxable due to non-existence of the PE. The CIT(A) has mentioned in its order that by assessee's own admission in the statement of fact that the assessee has made claim at NMPT aggregating to Rs. 89.25 crores for additional work performed and for this additional work performed the assessee-company has claimed all expenditure and now at the time of offering the income which was received on account of those expenditure the assessee has taken the argument that the same is not taxable in view of provision of Article 7 of Indo-Netherlands Treaty, which is not correct. We find that the language of Article 7(1) of DTAA between India and Netherlands is unambiguous and clearly lays down that if an enterprise carries on business in the other State through a Permanent Establishment situated therein, the profits of the enterprise may be taxed in the other State but only so ....
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.... Act such income can be taxed in the hands of the assessee on a gross basis. We direct the Assessing Officer to tax the receipt of arbitration award of Rs. 30.78 crores, not on gross basis and to allow the allowable deductions thereon, if had not been allowed already in the earlier assessment years. We order accordingly. 15. Ground of appeal No.4 - The ground of appeal No.4 is as under:- "The Ld. CIT(A) has erred in not allowing set off of unabsorbed depreciation and current year's depreciation against the assessed income of assessment year 2001-02." The Ld. Counsel for the assessee submitted that the provision of section 176(3A) specifically provides that the amount taxable under section 176(3A) is to be treated in the like manner as if they had been received prior to discontinuation. The Ld. DR has relied on the order of the CIT(A). He submitted that the assessee is also assessed in the country of residence i.e., in Netherlands where the assessee can claim the loss of Indian project against income of its Head office as per the provisions of Netherlands. He submitted that if these losses have been claimed and set off against the world income in Netherlands on the basis of resid....
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....owable deduction to the assessee. Accordingly the Assessing Officer is directed to examine and allow the genuine and allowable expenses incurred by the assessee in relation to the arbitration award amount received by the assessee. We direct accordingly. 20. Ground No.6 - The ground of appeal No.6 is as under:- "The Ld. CIT(A) erred in upholding the levy of interest of Rs. 34,01,534 under section 234D of the Act." The Ld. Counsel for the assessee submitted that the provision of section 234D was inserted by Finance Act, 2003 with prospective effect from 1-6-2003 and was not given retrospective effect. He submitted that this provision was not on the statute book for the assessment year 2001-02 and that was not there when the order under section 143(1)(a) was made on 25-2-2003. The President's assent was received only on 14-5-2003 and the section came into force with effect from 1-6-2003. He relied on the decision of Delhi Tribunal in Glaxo Smithkline Asia (P.) Ltd. v. Asstt. CIT [2006] 6 SOT 113 (Delhi), wherein it is held that the section cannot be applied to assessment year prior to 2003-04. He relied on a series of decisions in support of his arguments in K.M. Sharma v. ITO [200....
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.... assessment of the past years, which are not subject-matter of appeal." The Ld. Counsel for the assessee submitted that the CIT(A) has no jurisdiction to give direction with regard to earlier years which are not the subject-matter of appeal before him. He relied on decision in P.J. Udani's case and Abdul Wahid Gehlots case. The Ld. Departmental Representative submitted that the CIT(A) is within his powers to give his finding which is necessary for disposal of the case before him. He relied on decision in Rajinder Nath v. CIT [1979] 120 ITR 141 (SC) and Bhagwan Das Sitaram v. CIT [1984] 143 ITR 563 (SC). 24. We have considered the rival submissions. We find that the CIT(A) has not given any direction to reopen any of the earlier years assessments of the assessee and he has only observed that "He (Assessing Officer) may also consider reopening any of the prior years assessments, given that based on the documents submitted in course of the appeal proceedings it appears that there is a significant tax arbitrage by shifting of income from the appellant to NOB". Thus the CIT(A) has only asked the Assessing Officer to consider the issue and cannot be said to be a direction by him and ac....
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....Act and there is no ambiguity in the language of the provision of section 90 of the Act. Further the Explanation to section 90 inserted by the Finance Act, 2001 with retrospective effect from 1-4-1962 making it clear that charge of tax in respect of foreign company at a higher rate than the rate at which domestic company is chargeable shall not be regarded as less favourable charges in respect of such foreign company. He relied on decision of Hon'ble Supreme Court in the case of CIT v. Stepwell Industries Ltd. [1997] 228 ITR 171. On merits the Ld. Departmental Representative submitted that this issue has been decided by the Bombay Tribunal in the case of Decca Survey Overseas Ltd. [IT Appeal No. 5261 (Bom.) of 1992, dated 1-4-2005]. He relied on decision of Hon'ble Supreme Court in the case of Electronics Corpn. of India Ltd. v. CIT [1990] 183 ITR 432. He submitted that Mumbai Tribunal in the case of Toyo Engg. Corpn. [ITA No. 6600/M/02], cited by the assessee, has not considered the amendment made by Finance (No.2) Act, 2004, which has modified the amendment made by Finance Act, 2001 retrospectively. He relied on decision in Credit Llyonnais v. Dy. CIT [2005] 94 ITD 401 (Mum.), CI....
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....tely entire amount is found chargeable to tax, in absence of payment of advance tax as per provision of the Act interest under section 234B is chargeable. He submitted that the assessee will get deduction as per provision of section 209(1)(a) to the extent of amount at the rate of 7 per cent of the TDS payment and not the full amount of tax on assessed income and submit that the decision of Special Bench of the Tribunal in Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi)(SB) is not applicable to the case of the assessee. 29. The Ld. Counsel for the assessee submitted that the issue is covered in favour of the assessee with the decision of the Tribunal in Special Bench case of Motorola Inc. 30. We have considered the rival submissions. All payments made to a non-resident are subject to tax deduction at source under section 195 of the Act and accordingly it cannot be said that the assessee-company was liable to payment of advance tax. The case law cited by the CIT(A) in his order supports the case of the assessee. Merely because the assessee has requested the Assessing Officer for issue of certificate for tax deduction at a lower rate of tax, shall not make the assessee liable fo....