1998 (12) TMI 609 - AAR - Income Tax

Whether the rationale behind the provisions of section 44BBB would be applicable in the case of the appellant and a sum equal to ten per cent. of the contract amount as and when paid shall be deemed to be the profits and gains chargeable under the head Profits and gains of business or profession ?

Summary

Issues involved:
1. Determination of permanent establishment in India
2. Computation of profits attributable to the permanent establishment under Double Taxation Avoidance Agreement
3. Allowance of depreciation on assets not used in India
4. Treatment of repairs and maintenance expenses related to contract execution
5. Deductibility of standing charges for assets taken on hire/lease
6. Allowance of writing off obsolete assets as deduction
7. Credit for tax deducted at source upon completion of contract
8. Applicability of section 44BBB for determining taxable profits

Analysis:

1. The applicant, a foreign company engaged in dredging and marine contracting, sought clarification on whether it has a permanent establishment in India. The applicant had opened a temporary project office in India to execute a specific contract awarded by Chennai Port Trust. The company's control and management were situated outside India, and it had no branches in India.

2. The applicant inquired about the method for computing profits attributable to the permanent establishment under the Double Taxation Avoidance Agreement between India and Belgium. The contract involved dredging work at Ennore Coal Port Project, and the applicant sought clarity on the completed contract method for profit calculation.

3. There was a query regarding the allowance of depreciation on assets like dredgers, boats, equipment, computers, and machinery deployed for contract execution, even though these assets were not previously used in India and no depreciation was claimed under the Income-tax Act, 1961.

4. The ruling addressed the treatment of repairs and maintenance expenses incurred before and after the contract execution, specifically related to the contract but incurred outside the contract period. The question was whether such expenses should be allowed as deductions or capitalized on the equipment cost.

5. The ruling considered the deductibility of standing charges for assets hired or leased for the Indian contract, even if the assets remained idle but ready for use during the contract execution period.

6. The applicant sought clarification on whether writing off obsolete assets could be allowed as a deduction for tax purposes.

7. The ruling discussed the applicant's eligibility for credit for tax deducted at source upon contract completion, without treating the earlier deductions as taxable income received.

8. The judgment primarily focused on the applicability of section 44BBB for determining taxable profits. The contract in question was part of a turnkey power project approved by the Central Government, and it was deemed that section 44BBB applied, resulting in a fixed percentage of the contract amount being considered as profits chargeable to tax.

Overall, the ruling provided detailed insights into various tax-related queries raised by the applicant, ultimately concluding that section 44BBB was applicable in determining taxable profits, thereby resolving the primary issue raised in the application.