2014 (2) TMI 674 - AT - Income Tax

Taxability of offshore design revenues Fees for Technical Services - Revenue earned by the head office Held that - The assessee has categorically stated that the Permanent Establishment has no role in earning the Fees for Technical Services/royalty in question. Having said so that the Permanent Establishment of the assessee has no role in earning of the income from Fees for Technical Services under offshore design contract then the exclusion clause under Article 12(5) of Indo-Japan treaty shall not be attracted and consequently the provisions of Article 12 relating to Fees for Technical Services will be applicable - The authorities have not considered the relevant provisions of DTAA and particularly Article 12 of Indo-Japan treaty in the light of the terms and conditions of the contract in question to arrive at the finding that the income in question is taxable in India even under Indo-Japan DTAA thus, the matter is remitted back to the AO for examining the provisions of Article 12 of Indo-Japan DTAA. Rate of Tax Held that - The decision in Dy. Commissioner of Income Tax Versus M/s Toyo Engineering Corporation 2009 (12) TMI 852 - ITAT MUMBAI Followed - the AO was right in applying tax rate of 48% as per the Act instead of 35% as claimed by the assessee invoking provisions of Article 24 of Indian Japan treaty Decided against Assessee. Denial of exemption u/s 10(6A) of the Act Held that - The decision in Dy. Commissioner of Income Tax Versus M/s Toyo Engineering Corporation 2009 (12) TMI 852 - ITAT MUMBAI Followed - The tax on income derived by the foreign company, if it is payable under the terms of the agreement by the Government or the Indian concern, the tax so paid cannot form part of total income - Section 10(6A) clearly lays down the tax paid or payable, under such circumstances is exempt u/s 10(6A) - Once an amount has been paid as tax to the Central Government on behalf of a foreign company, by the Indian concern in terms of an agreement covered in clause (a) and clause (b) of section 10(6A), such payment cannot be treated as income Decided in favour of Assessee. Levy of Interest u/s 234D of the Act Held that - The decision in Commissioner of Income Tax Versus M/s. Indian Oil Corporation Ltd. 2012 (9) TMI 517 - BOMBAY HIGH COURT followed - As there was no provision of interest on the grant of refund under Section 143(1) it became necessary to provide for the same by having a charging provision - This was done by section 234D in respect of all pending assessments in which refund was given - even if, a refund has already been granted the same would be subject to the provisions of section 234D - The refund which has been granted under section 143(1) of the Act is provisional, to be finally determined when final assessment order is passed under section 143(3) of the Act - Explanation-2 to section 234D of the Act makes it clear that it would be applicable to pending proceedings - Decided in favour of Assessee .

Summary

Issues Involved:
1. Taxability of offshore design revenues.
2. Application of tax rate under the Indo-Japan DTAA.
3. Exemption under Section 10(6A) of the Income Tax Act.
4. Validity of reassessment proceedings under Section 148.
5. Levy of interest under Section 234D.
6. Taxation of revenues from Project Management Contracts (PMC) on net or gross income basis.
7. Liability under Section 234B for advance tax.

Detailed Analysis:

1. Taxability of Offshore Design Revenues:
The primary issue was whether the offshore design revenues earned by the assessee's head office in Japan were liable to tax in India. The assessee, a non-resident company incorporated in Japan, operates through project offices in India. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the revenue under project management and offshore design contracts constituted Fees for Technical Services (FTS) and was taxable in India. The assessee argued that the income was not attributable to its Permanent Establishment (PE) in India and thus not taxable under the Indo-Japan DTAA. The Tribunal remitted the issue to the AO for examination under Article 12 of the Indo-Japan DTAA, noting that the authorities below had not adequately considered the relevant DTAA provisions.

2. Application of Tax Rate under Indo-Japan DTAA:
The assessee contended that the tax rate should be 35% as applicable to domestic companies, instead of 48% applied by the AO. The Tribunal noted that this issue had been previously decided against the assessee in its own case for the assessment year 1998-99, following the decision in Chohung Bank v. DCIT. Thus, the Tribunal upheld the 48% tax rate.

3. Exemption under Section 10(6A) of the Income Tax Act:
The assessee claimed exemption under Section 10(6A) for taxes paid by Mangalore Refinery and Petrochemicals Limited (MRPL) on its behalf. The Tribunal referred to its earlier decision for the assessment year 1996-97, where it was held that once tax is paid by an Indian concern under an agreement approved by the Central Government, such payment cannot be treated as income. Therefore, the Tribunal allowed the exemption under Section 10(6A) in favor of the assessee.

4. Validity of Reassessment Proceedings under Section 148:
The assessee had raised the issue of the validity of reassessment proceedings initiated under Section 148. However, during the hearing, the assessee chose not to press this ground. Consequently, the Tribunal dismissed this ground as not pressed.

5. Levy of Interest under Section 234D:
The Tribunal addressed the issue of interest levy under Section 234D, noting that this was decided against the assessee by the Hon'ble Jurisdictional High Court in CIT v. Indian Oil Corporation. The High Court held that Explanation 2 to Section 234D, introduced by the Finance Act, 2012, was declaratory and retrospective, applying to all assessments completed post-1/06/2003. Therefore, the Tribunal decided this issue against the assessee.

6. Taxation of Revenues from Project Management Contracts (PMC) on Net or Gross Income Basis:
The Tribunal referred to its earlier decision in the assessee's own case for the assessment year 1999-2000, where it was concluded that receipts from PMC are in the nature of FTS under Section 9(1)(vii) and should be computed under Article 7 of the Indo-Japan DTAA. The Tribunal remanded the issue to the AO for computation in terms of the DTAA provisions.

7. Liability under Section 234B for Advance Tax:
The Tribunal noted that the issue of charging interest under Section 234B had been resolved by the Hon'ble Jurisdictional High Court in the case of NGC Network Asia LLC, which held that no interest can be charged from the payee if the payer fails to deduct tax at source. Following this precedent, the Tribunal decided this issue against the Revenue.

Conclusion:
The appeals were partly allowed, with specific issues remanded to the AO for further examination, while others were decided based on precedents and existing legal interpretations. The Tribunal's detailed analysis ensured that the provisions of the Income Tax Act and the Indo-Japan DTAA were appropriately applied.