2010 (10) TMI 597 - AT - Income Tax

DTAA between India and U.K. - Reopening - Scrutiny - Set off and carry forward of loss - Fees for technical services - Income escaping assessment - whether assessee has disclosed all material facts fully and truly - assessee has been filing consolidated statement of accounts of its activities in India which consists of the gross income from all the projects and gross expenses supposedly pertaining to the gross receipts - Held that the services in question are technical services within the meaning of provisions of the Income-tax Act, 1961 and that the allowability of expenses is governed by provisions of section 44D of the Income-tax Act, 1961 carry forward business loss is a statutory right allowable to the assessee by section 72 of the Act - Once profits and gains of business are computed, it is necessary that carry forward business loss has to be set off against profits and gains of business of the years under review under section 32(2), again the assessee s contention is correct that when you compute profits and gains of business, you compute profits and gains of various businesses of the assessee and then unabsorbed depreciation would become current year s depreciation whenever you compute profits and gains of business or any business other than the business in which section 44D has been invoked Regarding applicability of section 44AB - whether it needed to get separate tax audit report for different projects in India or was one tax audit report enough as the assessee was taxed on all its projects as a foreign company in India - It is first principle of tax that a corporate entity whether Indian or foreign is liable for tax as a single entity by clubbing all income that arises to it from various sources against same head of income or under various heads of income Regarding interest u/s 234B and 234D - As far as charging of interest under section 234B is concerned, admittedly the entire income of the assessee, i.e., a foreign company is liable for deduction of tax at source under section 195 of the Income-tax Act - Insofar as ground of charging interest under section 234D is concerned for assessment year 2002-03, the Delhi SB in the case of ITO v. Ekta Promoters (P.) Ltd. 2008 -TMI - 65270 - ITAT DELHI-E has held that it can only be charged from assessment year 2004-05 Regarding pleading against double taxation of profits from Haldia Bolpur Project, IOCL Project and Budge Budge Project, respectively - Assessing Officer is directed to verify from the profit and loss account filed before him as to whether there was any income declared by the assessee for these three projects in assessment year 2003-04 at all. If there is no income in the year under review, then the amounts taken by him are directed to be deleted Regarding KBPL Expansion Project - Assessing Officer is directed to tax this also on net basis as there is no change in the facts and circumstances of the case or in the contract and on the same contract in the previous three years, the Assessing Officer himself has taken the profit of these projects on net basis only - In result, all the appeals are allowed in part

Summary

Issues Involved:
1. Reopening of assessment proceedings.
2. Taxation of income from the operation and maintenance (O&M) contract.
3. Taxation of interest income.
4. Taxation of profit on the sale of assets.
5. Taxation of income from the Budge Budge project.
6. Taxation of margins on liaison offices.
7. Set-off of brought forward business losses and depreciation.
8. Applicability of provisions of section 44AB.
9. Charging of interest under sections 234B and 234D.
10. Double taxation of profits from various projects.

Detailed Analysis:

1. Reopening of Assessment Proceedings:
The first issue common in assessment years 1998-99 to 2001-02 is that the CIT (Appeals) upheld the reopening of the assessment proceedings. The assessee, a UK-incorporated company, engaged in the erection, commissioning, supervision, operation, and maintenance of power plants in India, had its assessments reopened by a new Assessing Officer (AO) who believed that the income from technical services was taxable on a gross basis without deducting expenses. The AO formed an opinion that the assessee failed to disclose fully and truly all material facts necessary for its assessment. The Tribunal found that the reopening was based on a change of opinion without fresh material, and thus quashed the reassessment orders for assessment years 1998-99, 1999-2000, and 2001-02.

2. Taxation of Income from the O&M Contract:
The income from the O&M contract with Spectrum Power Generation Ltd. was treated by the AO as fees for technical services (FTS) taxable on a gross basis under section 44D and section 115A of the Income-tax Act, 1961. The Tribunal held that the contract was a works contract and not for rendering technical services. The assessee did not make available any technical knowledge, skill, or know-how to Spectrum, and thus the income was to be taxed as business profits on a net basis under Article 7 of the DTAA between India and the UK.

3. Taxation of Interest Income:
The AO taxed the interest income under Article 12(2) of the DTAA at a rate not exceeding 15%. The Tribunal directed that interest earned on bank accounts in the UK should not be taxed in India, while interest earned in India should be taxed as normal income.

4. Taxation of Profit on Sale of Assets:
The Tribunal directed the AO to verify whether the gross block of the particular assets continued to exist after crediting the sale amount. If the gross block exists, the sale amount should reduce the WDV of the assets without recognizing profit or loss. If it exceeds the WDV, it should be taxed under section 50 of the Income-tax Act.

5. Taxation of Income from the Budge Budge Project:
The AO treated the income from the Budge Budge project as FTS and taxed it on a gross basis. The Tribunal held that the income should be taxed on a net basis as business profits, similar to the O&M project.

6. Taxation of Margins on Liaison Offices:
The AO added notional income on the expenses incurred on liaison offices in India. The Tribunal deleted the 15% mark-up added by the AO, holding that liaison offices are cost centers facilitating communication and smooth running of the business, without any benefit to the head office in the UK.

7. Set-off of Brought Forward Business Losses and Depreciation:
The AO did not allow the set-off of brought forward business losses and unabsorbed depreciation. The Tribunal held that carry forward business loss is a statutory right and should be allowed against profits and gains of business. Unabsorbed depreciation should also be allowed as current depreciation under section 32(2) of the Income-tax Act.

8. Applicability of Provisions of Section 44AB:
The Tribunal held that the assessee was correct in filing a single tax audit report for all its businesses in India under section 44AB of the Income-tax Act, as there is no provision requiring separate tax audit reports for each business.

9. Charging of Interest under Sections 234B and 234D:
The Tribunal directed the deletion of interest charged under section 234B, as the entire income of the assessee was liable for deduction of tax at source under section 195. Interest under section 234D was to be deleted for assessment year 2002-03, following the Special Bench decision.

10. Double Taxation of Profits from Various Projects:
The Tribunal directed the AO to verify and ensure that profits from Haldia Bolpur Project, IOCL Project, and Budge Budge Project were not taxed twice in assessment year 2003-04. For the KBPL Expansion Project, the AO was directed to tax the receipts on a net basis, consistent with previous years.

Conclusion:
The Tribunal allowed the appeals in part, quashing the reassessment orders for certain years, and directed the AO to tax the income from various projects on a net basis, allow set-off of brought forward losses and depreciation, and delete interest charged under sections 234B and 234D. The Tribunal also ensured that the income from liaison offices and interest earned in the UK was not taxed in India.