2012 (5) TMI 806 - AT - Income Tax

Summary

Issues Involved:
1. Classification of receipts as fees for technical services (FTS).
2. Taxability of interest accrued in foreign bank accounts.
3. Inclusion of doubtful debts recovered in gross receipts.
4. Permanent Establishment (PE) status of liaison offices.
5. Chargeability of interest u/s 234B.
6. Remand report for allowable expenses.

Summary of Judgment:

Issue 1: Classification of Receipts as Fees for Technical Services (FTS)
The Tribunal affirmed the CIT(A)'s decision that the receipts from M/s. Godavari EPC Project and M/s. Spectrum Power Generation Ltd. were not FTS. It was held that the income from the operation and maintenance (O&M) of the power plant did not fall within the definition of FTS u/s 9(1)(vii) Explanation 2 of the IT Act or Article 13(4) of the DTAA between India and the UK. The income should be taxed on a net basis as business income, not on a gross basis.

Issue 2: Taxability of Interest Accrued in Foreign Bank Accounts
The Tribunal ruled that interest earned on bank accounts maintained in the UK cannot be taxed in India under Article 12(2) of the DTAA. The interest income from UK bank accounts should be excluded from taxable income in India, while interest earned in India should be taxed as normal income.

Issue 3: Inclusion of Doubtful Debts Recovered in Gross Receipts
The Tribunal found that the doubtful debts recovered, which were previously disallowed, should not be included in the gross receipts for the assessment year 2005-06 to avoid double disallowance. The receipts from the Godavari O&M Project should be taxed on a net basis.

Issue 4: Permanent Establishment (PE) Status of Liaison Offices
The Tribunal held that liaison offices (LOs) in India are fundamentally cost centers and do not generate any notional income. The LOs facilitate communication and compliance with regulatory authorities and do not provide any benefit to the head office in the UK. Therefore, no income should be added to the costs incurred by the LOs.

Issue 5: Chargeability of Interest u/s 234B
The Tribunal ruled that no interest u/s 234B is chargeable as the entire income of the foreign company is liable for deduction of tax at source u/s 195 of the Income Tax Act. This decision is supported by various judgments, including "Jacabs Civil Incorporated" and "SNC Lavalin International Inc."

Issue 6: Remand Report for Allowable Expenses
The Tribunal found no requirement for the CIT(A) to call for a remand report from the AO, as the CIT(A) had followed the Tribunal's order and recorded factual findings. The CIT(A) correctly allowed the expenses claimed by the assessee without giving an opportunity to the AO for further scrutiny.

Conclusion:
The appeal filed by the Department for the assessment year 2005-06 is dismissed. The assessee's appeals for the assessment years 2007-08 and 2008-09 are allowed. The impugned orders passed by the AO are canceled, and the Tribunal's decisions are upheld.