2016 (2) TMI 667 - AT - Income Tax

Amount received from NH-45 project - chargeable to tax u/s 44D or under the normal provision of taxation - Held that - It is not controverted that assessee was carrying on similar activities in the preceding years as well, and the income earned form the said activities have been accepted by the Department as business income of the assessee and assessment made u/s 143(3) of the Act. Principle of consistency has been accepted by the courts in many judicial precedents and some of the landmark decisions in the cases are of Radhasoami Satsang v. CIT (1991 (11) TMI 2 - SUPREME Court ), CIT v. Lagan Kala Upwan (2002 (12) TMI 74 - DELHI High Court), Saurashtra Cement & Chemical Industries v. CIT (1979 (2) TMI 21 - GUJARAT High Court ), Commissioner of Income Tax v. Paul Brothers (1992 (10) TMI 5 - BOMBAY High Court ) and Commissioner of Income Tax v. Modi Industries Limited 2010 (8) TMI 51 - DELHI HIGH COURT . Therefore on this ground too assessee deserves relief. In view of above, we are of the view that according to the provision of section 44D rws 9 (1) (vii) of the act assessee s receipt from NH is not taxable as FTS under that section but under normal provision of income tax act as business income. On this count we confirm the order of CIT (A). - Decided against revenue

Summary

Issues Involved:
1. Whether the income received by the assessee from the NH-45 project is chargeable to tax under Section 44D of the Income Tax Act as "Fees for Technical Services" (FTS) or under the normal provisions of taxation.
2. Applicability of Article 12(6) and Article 7 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

Issue-wise Detailed Analysis:

1. Taxability of Income Under Section 44D as FTS or Normal Provisions:
The primary issue is whether the income received by the assessee from the NH-45 project should be taxed as "Fees for Technical Services" (FTS) under Section 44D of the Income Tax Act or under the normal provisions of taxation. The Assessing Officer (AO) contended that the income should be taxed as FTS under Section 44D, which would mean that no expenditure would be allowed as a deduction, and the income would be taxed at a presumptive rate of 20%. The assessee argued that the income is not FTS as per Explanation 2 of Section 9(1)(vii) of the Act, which excludes consideration for any construction, assembly, mining, or like project.

The Tribunal examined the nature of the services provided by the assessee, which included consultancy services related to construction activities such as the implementation of the project, review and approval of materials, supervision of construction work, etc. The Tribunal concluded that these services fall under the exclusion provided in Explanation 2 of Section 9(1)(vii) as they are related to construction activities. Therefore, the income should be taxed under the normal provisions of the Income Tax Act as business income.

2. Applicability of Article 12(6) and Article 7 of the DTAA:
The Tribunal also considered the applicability of the DTAA between India and the USA. Article 12(6) of the DTAA states that the provisions of Article 12(2) (which deals with the taxation of FTS) shall not apply if the beneficial owner of the FTS carries on business in the other contracting state through a permanent establishment (PE). In such cases, the provisions of Article 7 regarding the computation of business profits shall apply.

The Tribunal noted that the assessee has a PE in India and is carrying on business through this PE. Therefore, the income should be computed as business profit under Article 7 of the DTAA, which allows for the deduction of expenses incurred for the purpose of the business of the PE. The Tribunal also referred to various judicial precedents and the explanatory memorandum to the Finance Act, 2003, which clarified that even prior to the insertion of Section 44DA, FTS provided through a PE in India was to be taxed on a net basis under the provisions of the treaty.

Conclusion:
The Tribunal upheld the order of the CIT(A) and concluded that the income received by the assessee from the NH-45 project is not taxable as FTS under Section 44D but under the normal provisions of the Income Tax Act as business income. The Tribunal also confirmed that the provisions of Article 7 of the DTAA between India and the USA are applicable, allowing the computation of income after deducting all expenses incurred by the PE.

Order:
The appeals of the revenue for both the assessment years 2006-07 and 2008-09 were dismissed. The order was pronounced in the open court on 12.02.2016.