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2012 (6) TMI 290 - AT - Income TaxPercentage of completion method of accounting Held that - The assessee revised its basis of accounting from the invoicing schedule method to the percentage of completion method for computing revenues arising from the project management and onshore supply contract with effect from assessment year 1998-99 - the facts of this ground for the current year are mutatis mutandis similar to those of immediately preceding year wherein such ground has been decided by the Tribunal in assessee s favour thus following the precedent uphold the impugned order on this issue in favour of assessee. Profit in respect of offshore supplies CIT held it not to be taxed in India Held that - It is a case of an offshore supply of equipment on CIF basis outside India for which payment was also made outside India and hence no income accrued or arose in India in favour of assessee. Revenues from Project Management Contract CIT(A) considered it to be taxed on net income basis - AO contested that the assessee was not engaged in any construction activity but only in providing services and hence the revenues from PMCs were liable to be considered u/s 9(1)(vii) being fees for technical services Held that - From the nature of services rendered by the assessee to MRPL HPL and CFCL it can be seen that the same are not at all related with the direct construction/ erection of units the assessee s services are in the nature of managing or supervising the construction/erection of units and not directly entering into such activity - parties are residents of India and the amounts have been paid by them to the assessee a non-resident which is in the nature of fees for technical services and such services have been utilized by them in business carried on in India or for earning any income from any source in India thus the amount received by the assessee falls u/s 9(1)(vii) and hence will be deemed to accrue or arise in India - since revenues are found to be covered u/s 9(1)(vii) the natural consequence would be the attraction of section 44D - admittedly the assessee a non-resident is tax resident of Japan position under DTAA need to be examined - as such the expenses so claimed by the assessee have remained unverified in terms of Article 7 read with paras 7 and 8 of Protocol the impugned order is set aside and the matter is restored to the file of AO. Challenge charging of interest u/s 234B Held that - As decided in case of DIT (International Taxation) v. NGC Network Asia LLC 2009 (1) TMI 174 (HC) that when the duty is cast on the payer to deduct tax at source on failure of the payer to do so no interest can be charged from the payee assessee u/s 234B in favour of assessee.
Issues Involved:
1. Application of the percentage of completion method of accounting. 2. Taxability of profit from offshore supplies in India. 3. Taxation of revenues from Project Management Contracts (PMC) on a net income basis versus gross income basis under section 44D. 4. Charging of interest under sections 234B and 234C. Detailed Analysis: 1. Application of the Percentage of Completion Method of Accounting The first issue concerns the direction of the CIT(A) to apply the percentage of completion method of accounting. The assessee had revised its accounting method from the invoicing schedule method to the percentage of completion method starting from the assessment year 1998-99. The CIT(A) for the previous year had ruled against the assessee, but in the impugned order, the CIT(A) accepted the assessee's contention. The Tribunal had previously decided in favor of the assessee for the preceding year, and the Departmental Representative conceded this position. Consequently, the Tribunal upheld the CIT(A)'s order, and this ground was not allowed. 2. Taxability of Profit from Offshore Supplies in India The second issue pertains to the taxability of profit from offshore supplies. The Tribunal had previously ruled that offshore supply of equipment on a CIF basis outside India, with payment made outside India, does not accrue income in India. The facts for the current year were similar to those of the preceding years, and the Tribunal upheld the CIT(A)'s order on this issue, following the precedent. This ground was not allowed. 3. Taxation of Revenues from Project Management Contracts (PMC) on a Net Income Basis versus Gross Income Basis under Section 44D The third issue involves the taxation of revenues from Project Management Contracts (PMC). The assessee, a Japanese engineering company, was engaged in project management services, onshore and offshore supply contracts, and offshore drawings and design services. The revenues from PMC were offered on a percentage of completion method and taxed on a net income basis (revenues less expenses). The Assessing Officer (AO) contended that the PMC activities did not amount to construction activities but were technical services taxable under section 9(1)(vii) and computed on a gross income basis under section 44D. The CIT(A) held that the PMC activities were closely linked to construction and should be taxed on a net income basis, relying on Circular No. 202 dated 5th July 1976. The Tribunal analyzed whether the revenues from PMC were fees for technical services under section 9(1)(vii). Explanation 2 to section 9(1)(vii) excludes consideration for construction, assembly, mining, or like projects from fees for technical services. The Tribunal found that the assessee provided managerial, technical, and supervisory services, not direct construction or assembly. Therefore, the revenues from PMC were considered fees for technical services, taxable under section 44D on a gross income basis. Under the Double Taxation Avoidance Agreement (DTAA) with Japan, the Tribunal examined whether the provisions of the DTAA or the Act were more beneficial to the assessee. Article 7 of the DTAA deals with business profits, and Article 12 deals with fees for technical services. The Tribunal concluded that the revenues from PMC should be taxed as business profits under Article 7, allowing deductions for expenses incurred for the permanent establishment as per para 3 of Article 7, read with paras 7 and 8 of the Protocol. The matter was remanded to the AO to determine the deductible expenses as per the DTAA provisions. 4. Charging of Interest under Sections 234B and 234C The final issue concerns the charging of interest under sections 234B and 234C. The Tribunal referred to the jurisdictional High Court's judgment in DIT (International Taxation) v. NGC Network Asia LLC, which held that when the payer is required to deduct tax at source, and fails to do so, no interest can be charged from the payee under section 234B. Following this precedent, the Tribunal held that no interest could be charged under sections 234B and 234C for the non-resident assessee. This ground was not allowed. Conclusion: The appeal was partly allowed for statistical purposes, with the Tribunal upholding the CIT(A)'s orders on the application of the percentage of completion method and the non-taxability of offshore supplies, while remanding the issue of PMC revenue taxation to the AO for determination under the DTAA provisions. The Tribunal also ruled that no interest could be charged under sections 234B and 234C.
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