2011 (8) TMI 552 - AT - Income Tax

Existence of Permanent Establishment (PE) - activity relating to outside India operation - Double Taxation Avoidance Agreement (DTAA) between India and Korea. - held that - As pointed out earlier the way the contract has to proceed, Mumbai project office of the assessee has to play a vital role in the execution of entire contract and if assessee wants to contend otherwise, the onus is on assessee and not on the revenue. No material has been brought on record by the assessee to show that its Mumbai office does not have any role to play in the execution of contract, therefore, the argument of the assessee cannot be accepted that the Mumbai project office has carried out only preparatory or auxiliary activities so as to bring the PE of the assessee under exclusionary Article 5.4. - Argument of assessee rejected - PE of the assessee existed in India in accordance with Article 5.1 and 5.2 - decided in favour of revenue. Attribution of outside Income to the PE of the assessee - held that - The AO in the present case has attributed 25% of its outside India activity as income related to PE of the assessee to India. But we find no material on record to support such attribution particularly in absence of any reasoning or basis given for that. Necessary material in this respect has to be brought on record to arrive at a proper conclusion that what percentage will be appropriate to be attributed to the PE of the assessee in India during the year under consideration. - Matter remanded back to AO.

Issues Involved:
1. Violation of principles of natural justice.
2. Tax liability on income from activities performed in and outside India.
3. Existence of Permanent Establishment (PE) in India.
4. Divisibility of the contract with ONGC.
5. Attribution of income to the alleged PE in India.
6. Assessment of overall loss and its impact on tax liability.
7. Estimation of profits from offshore activities.
8. Credit for tax deducted at source.
9. Charging of interest under section 234B.
10. Charging of interest under section 234D.

Detailed Analysis:

1. Violation of Principles of Natural Justice:
The appellant argued that the order was passed without affording adequate opportunity for cross-examination of the ONGC officer whose opinion was used against the appellant. The tribunal noted that the Assessing Officer (AO) had not provided the appellant with an opportunity to cross-examine the ONGC officer, which was a violation of the principles of natural justice.

2. Tax Liability on Income from Activities Performed in and Outside India:
The AO completed the assessment at an income of Rs. 28,12,60,801 against a loss of Rs. 23,50,939 returned by the appellant, holding that the appellant was liable to tax in India for activities performed both inside and outside India. The appellant contended that no part of the revenue from outside India operations should be taxable in India.

3. Existence of Permanent Establishment (PE) in India:
The tribunal examined whether the appellant had a fixed place PE in India under Article 5 of the Double Tax Avoidance Agreement (DTAA) between India and Korea. The AO argued that the project office in India constituted a PE. The appellant contended that the activities carried out by the project office were merely preparatory and auxiliary, and thus did not establish a fixed place PE. The tribunal concluded that the project office did constitute a PE as it was involved in coordination and execution of the project.

4. Divisibility of the Contract with ONGC:
The AO held that the contract with ONGC was not divisible in terms of activities performed in and outside India. The appellant argued that the contract was divisible, with separate considerations for activities performed inside and outside India. The tribunal found that the contract was a composite one and not divisible, as the milestone payments were provisional and related to the entire contract.

5. Attribution of Income to the Alleged PE in India:
The AO attributed 25% of the revenue from outside India operations to the PE in India. The tribunal found no material on record to support this attribution and directed the AO to determine the appropriate percentage of attribution after bringing proper material on record.

6. Assessment of Overall Loss and Its Impact on Tax Liability:
The appellant argued that even if a PE was assumed to exist in India, there was no income liable to tax in India as the appellant incurred an overall loss on the project. The tribunal did not specifically address this issue, focusing instead on the existence of the PE and the attribution of income.

7. Estimation of Profits from Offshore Activities:
The AO estimated profits from offshore activities at 25% of revenues. The tribunal found this estimation to be unsupported by material evidence and directed the AO to reassess the profits with proper substantiation.

8. Credit for Tax Deducted at Source:
The appellant claimed that the AO had given lower credit for tax deducted at source. The tribunal did not specifically address this issue in the judgment.

9. Charging of Interest Under Section 234B:
The appellant argued that interest under section 234B should not be charged as the entire income was subject to tax withholding. The tribunal agreed, citing decisions from higher courts, and directed the AO to reconsider the interest charge under section 234B.

10. Charging of Interest Under Section 234D:
The appellant contended that interest under section 234D was consequential. The tribunal directed the AO to compute the interest accordingly after determining the income of the appellant.

Conclusion:
The tribunal partly allowed the appeal for statistical purposes, directing the AO to reexamine the attribution of income to the PE and reconsider the charging of interest under section 234B. The tribunal upheld the existence of a PE in India and the composite nature of the contract with ONGC.

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