2010 (7) TMI 1050 - AT - Income Tax

Summary

Issues Involved:
1. Existence of Business Connection and Permanent Establishment (PE) in India.
2. Attribution of Profit to the PE.
3. Taxation Rate on Interest Income.
4. Charging of Interest under Section 234B.

Issue-wise Detailed Analysis:

1. Existence of Business Connection and Permanent Establishment (PE) in India:
The primary issue was whether the assessee had a business connection and a PE in India. The CIT(A) held that the assessee had a business connection in India through BWIPL, which was under common management and control, financially supported by the assessee, and habitually exercised authority to negotiate and conclude advertisement contracts on behalf of the assessee. The Tribunal noted that the facts were identical to the previous assessment year, where it was held that the assessee had a dependent agent PE in India. Since no argument was advanced against these findings, the Tribunal upheld the CIT(A)'s decision that the assessee had a business connection and a PE in India.

2. Attribution of Profit to the PE:
The assessee contended that since BWIPL was remunerated at arm's length (15% commission on advertising revenue), no further income should be attributed to the PE. The Tribunal referred to its previous decision for the assessment year 2000-01, where it was held that the payment at arm's length exhausted the profits of the PE. The Tribunal also considered the Transfer Pricing Officer's (TPO) acceptance of the arm's length price in BWIPL's case and the reliance on the decision of the Hon'ble Bombay High Court in "SET Satellite (Singapore) Pvt. Ltd. v. DDIT". The Tribunal concluded that the income attributed to the PE was nil, allowing the assessee's grounds.

3. Taxation Rate on Interest Income:
The assessee argued that the interest on a loan from BWIPL should be taxed at 15% as per the Double Taxation Avoidance Agreement (DTAA) between India and the UK. The Tribunal examined the loan agreement and found that it was a case of lending money, making the DTAA provision more beneficial. Consequently, the Tribunal held that the assessee was liable to pay tax on the gross amount of interest at 15%, allowing the assessee's grounds.

4. Charging of Interest under Section 234B:
The assessee contended that interest under Section 234B should be levied on the assessed income, not the returned income, as the entire income was subject to tax deduction at source under Section 195. The Tribunal agreed with the assessee's logic, holding that the ground was based on sound reasoning and allowed the assessee's grounds. However, the Tribunal noted that this decision did not absolve the payment from liability of interest arising from failure to deduct tax or deposit the same as per rules.

Additional Points in ITA No. 2459(Del)/2008:
The submissions in this appeal were the same as in ITA No. 2458(Del)/2008 regarding business connection, PE, and the rate of interest. The Tribunal applied the same order to this appeal. However, the Tribunal noted that the transfer pricing study in BWIPL's case indicated adjustments, suggesting that transactions were not at arm's length. The Tribunal restored the matter to the AO for further examination, considering both transfer pricing reports and the prospective withdrawal of Circular No. 23.

Conclusion:
- Appeal in ITA No. 2458(Del)/2008 was partly allowed.
- Appeal in ITA No. 2459(Del)/2008 was treated as partly allowed.

This order was pronounced in the open court on 23 July, 2010.