2012 (6) TMI 483 - AT - Income Tax

DTAA between India and Netherlands - Re-assignmnet of dredging contract being awarded by Gujarat Adani Ltd by assessee (Netherlands company) to its Indian subsidiary - reimbursement by subsidiary of expenses incurred by appellant treated as Fees for Technical services(FTS) by Revenue on ground that subsidiary has no technical expertise or any other wherewithal to carry out the contract - Held that - Cost allocation agreement entered into between the assessee company and its Indian subsidiary has unequivocally declared that the Indian company does not have any sort of technical expertise or resources and ability to carry out the dredging contract assigned to it. It is in the light of the above declaration that the assessee company has undertaken to provide all sorts of services, wherever necessary, to execute the dredging contract. Such services include not only arranging the dredgers from abroad, but also application of technical mind to select and choose appropriate parties to execute the work entrusted to its Indian subsidiary. Also, assessee has not established that it had offered services to the subsidiary company on cost to cost basis at best reasonable and competent prices available at that point of time. Therefore, it is established that assessee had rendered technical services to its subsidiary in India and the payments were in the nature of fee for technical services - Decided in favor of Revenue. Existence of Permanent establishment - Held that - If we pierce the veil of assignment contract and go to the root of the case, we find that there is interlacing of activities and interlocking of funds between the assessee and its Indian subsidiary in executing the dredging contract. Hence, relationship of agency is there and the existence of permanent establishment is also there. Validity of reassessment proceedings - original return processed u/s 143(1) - Held that - When the facts of the case are so complicated and cumbersome and when the return was only processed u/s 143(1), the materials available on record along-with the return filed by the assessee themselves constituted sufficient materials in the hands of the AO to hold a reason that income had escaped assessment. Where the return was processed u/s 143(1), there is no room even for an earlier conviction. Hence, issue of notice and passing of assessment order u/s 147 is to be upheld - Decided in favor of Revenue.

Issues Involved:
1. Jurisdiction of the Assessing Officer to issue notice under section 148.
2. Computation of income and classification of reimbursement as "fees for technical services."
3. Attribution of permanent establishment to the assessee.
4. Levy of interest under sections 234A, 234B, and 234D.

Issue-Wise Detailed Analysis:

1. Jurisdiction of the Assessing Officer to Issue Notice Under Section 148:
The assessee argued that the assessment order was beyond jurisdiction, bad in law, and void ab initio as the proceedings under section 147 were initiated without a "reason to believe" that income had escaped assessment. The Tribunal noted that the return was initially processed under section 143(1) and no assessment was completed under section 143(3). The Tribunal upheld the jurisdiction exercised by the Assessing Officer, citing that the materials available on record constituted sufficient reasons to believe that income had escaped assessment. The Tribunal referenced the Supreme Court's decision in ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., 291 ITR 500, and the Gujarat High Court's decision in Praful Chunilal Patel vs. ACIT, 236 ITR 832, supporting the view that the reopening of the case was justified.

2. Computation of Income and Classification of Reimbursement as "Fees for Technical Services":
The Assessing Officer treated the sum of Rs. 11,53,52,883/- received by the assessee from its Indian subsidiary as fees for technical services rendered in India. The assessee contended that these payments were reimbursements for expenses incurred and did not constitute income. The Tribunal examined the cost allocation agreement and found that the Indian subsidiary lacked technical expertise and relied heavily on the assessee for executing the dredging contract. The Tribunal concluded that the payments were indeed for technical services and upheld the Assessing Officer's decision to tax the amount as fees for technical services. The Tribunal dismissed the assessee's argument that the payments were mere reimbursements without any profit element.

3. Attribution of Permanent Establishment to the Assessee:
The Assessing Officer's finding that the Indian subsidiary constituted a dependent agent permanent establishment of the assessee in India was upheld by the Tribunal. The Tribunal noted that the assessee was effectively carrying out the contract work for and on behalf of its Indian subsidiary, indicating interlacing of activities and interlocking of funds. This relationship justified the existence of a permanent establishment in India.

4. Levy of Interest Under Sections 234A, 234B, and 234D:
The Tribunal addressed the issue of interest levied under sections 234A, 234B, and 234D. Interest under section 234A was deemed consequential. For section 234B, the Tribunal directed the Assessing Officer to reconsider the levy in light of the payer's duty to deduct tax at source, noting that TDS had been made. Interest under section 234D was found to be prospective and not applicable to the assessment year 2003-04. The Tribunal instructed the Assessing Officer to recompute the interest liability afresh, ensuring the assessee was heard before passing the order.

Conclusion:
The Tribunal dismissed the substantial grounds raised by the assessee regarding the jurisdiction, computation of income, and permanent establishment. However, it allowed the grounds related to the levy of interest under sections 234B and 234D, directing a recomputation. The appeal was thus partly allowed for statistical purposes.

← Previous Next →