2016 (8) TMI 1412 - AT - Income Tax

Application of transfer pricing regulations on the Liaison Office of the assessee - addition made on account of Arm s Length Price - Held that - As decided in assessee e own case 2010 (10) TMI 597 - ITAT, DELHI Provision taxing of a non-resident U.K. company in a manner which is more burdensome vis- -vis an Indian company would lead to discrimination. This would also amount to unfavourable treatment being meted out to a U.K. company vis- -vis the Indian company doing identical business in India. Accordingly the assessee is entitled to protection of Art. 26 of the Indo-UK Treaty and should not have been subjected to tax on gross basis, but on net basis. The net profit was to be determined in accordance with the Indian Income Tax Act provisions for determining profits and gains of business from sections 28 to 43 B i.e. limits laid down in the domestic law of allowance of expenditure u/s. 30,31,32,36,37,40,43B etc would have to be taken in to account. In our view this is the purport of Article 7.5 read with Article 26 of the DTAA between India and UK - Decided in favour of the assessee. Application of mark-up of 27.08% instead of 16.21% proposed by the TPO - Held that - matter relating to the determination of Arm s Length Price of the services rendered by the Liaison Offices was referred by the AO to the TPO who passed the order dated 18.01.2013 u/s 92CA(3) of the Act holding that Arm s Length margin should be taken at 16.21% as against 15% in the earlier year of the cost incurred by the LO. However, the AO worked out the Arm s Length Price by applying the mark-up of 27.08% instead of @ 16.21% of the cost and made the addition of ₹ 1,12,009/- by holding that income was to be added to the Liaison Offices costs incurred by the assessee, under transfer pricing provisions for the reason that the Liaison Offices had provided services to its head office. This issue is co-related with the issues raised in Ground Nos. 4, 5 and 7 to 11 which we have already adjudicated in the former part of this order in favour of the assessee, so it becomes academic in nature and hence dismissed Treating of the receipts from operation & maintenance agreement (O&M) project of Godavari as FTS within the meaning of explanation-II to Section 9(1)(vii) of the Act and Article 13(4)(c) of the DTAA between India and UK and taxing the same on gross basis u/s 44D - Held that - As decided in assessee s own case 2012 (5) TMI 806 - ITAT DELHI assessee had also not make available any knowledge, skill etc. to M/s Spectrum within the meaning assigned to it under Article 13(4)(c) of the DTAA to FTS under the treaty. Accordingly, assessee cannot be taxed on gross basis and Section 44AD has no application to the facts of the instant case. Furthermore, Article 13(4)(c) read with Article 26 of DTAA does not permit the revenue authorities to discriminate against the assessee, a UK registered company and accord it less favourable treatment than a domestic company and therefore, section 44AD cannot be invoked in assessee s case. Thus, looking from any angle, the income received by the assessee from M/s Spectrum was not a fee for technical services, we therefore direct the AO to compute assessee s income and profit and gains of business from operation and maintenance of power plant of net profit and loss basis. Assessee was making available technical knowledge, experience, skill, know-how or processes as per the provisions of Article 13(4)(c) of the DTAA to M/s SPGL under the O&M - Held that - As decided in assessee s own case 2012 (5) TMI 806 - ITAT DELHI The income so received for executing the work contract did not fall within the definition of FTS u/s 9(1)(vii) Explanation 2 of the IT Act nor as defined in Article 13(4) of DTAA between India and UK. The assessee had also not make available any knowledge, skill etc. to M/s Spectrum within the meaning assigned to it under Article 13(4)(c) of the DTAA to FTS under the treaty. Accordingly, assessee cannot be taxed on gross basis and Section 44AD has no application to the facts of the instant case. Furthermore, Article 13(4)(c) read with Article 26 of DTAA does not permit the revenue authorities to discriminate against the assessee, a UK registered company and accord it less favourable treatment than a domestic company and therefore, section 44AD cannot be invoked in assessee s case. Thus, looking from any angle, the income received by the assessee from M/s Spectrum was not a fee for technical services, we therefore direct the AO to compute assessee s income and profit and gains of business from operation and maintenance of power plant of net profit and loss basis. Treating the other incomes from Godavari Operation & Maintenance Project as FTS and taxing the same on gross basis instead of net basis u/s 44D - Held that - The identical issue relating to the treatment of the other income as FTS and taxing as business income on net basis u/s 44D of the Act has been decided for the assessment years 2007-08 and 2008-09 respectively held nterest received by the assessee in U.K. on bank accounts maintained in U.K. cannot be taxed in India. We find force in the submissions of the assessee as on the point of law there is no dispute between the assessee and the Revenue. The assessee has only current account in India and all the interest amount has arisen out of Bank accounts in U.K. and, therefore, the same should not have been subjected to tax in India at all. We allow this ground of appeal. The AO is directed to exclude interest earned outside India under Article 12(2) of the DTAA and tax interest earned in India as normal income. AO is at liberty to examine such interest income whether taxable as income from other sources or as business income. Interest on foreign bank accounts accruing outside India - Held that - The income so received for executing the work contract did not fall within the definition of FTS u/s 9(1)(vii) Explanation 2 of the IT Act nor as defined in Article 13(4) of DTAA between India and UK. The assessee had also not make available any knowledge, skill etc. to M/s Spectrum within the meaning assigned to it under Article 13(4)(c) of the DTAA to FTS under the treaty. Accordingly, assessee cannot be taxed on gross basis and Section 44AD has no application to the facts of the instant case. Furthermore, Article 13(4)(c) read with Article 26 of DTAA does not permit the revenue authorities to discriminate against the assessee, a UK registered company and accord it less favourable treatment than a domestic company and therefore, section 44AD cannot be invoked in assessee s case. Thus, looking from any angle, the income received by the assessee from M/s Spectrum was not a fee for technical services, we therefore direct the AO to compute assessee s income and profit and gains of business from operation and maintenance of power plant of net profit and loss basis. Taxation of Foreign Exchange Fluctuation - Held that - There is no dispute to the well settled legal proposition that if profit or loss on account of foreign exchange fluctuation arises out of capital assets, then it will be capital receipt and in case it arises out of trading business, then it should be treated as trading income. The AO is directed to verify the same and act accordingly. Taxing the interest on Income Tax Refund @ 40% of gross basis - Held that - In the present case, nothing is clear from the orders of the authorities below that what were the clauses in the DTAA between India and UK. The claim of the assessee that the said income was not connected to execution of any profit conducted during the year and was not connected to the PE of the assessee, however, in the absence of the clear facts on record, it is difficult to take a just decision. Therefore, we deem it appropriate to remand this issue back to the file of the AO to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. Adjustment of unabsorbed brought forward losses, unabsorbed depreciation and the interest charged u/s 234B of the Act, we deem it appropriate to remand these issues to the file of the AO to be adjudicated after considering the relevant facts already available on the record and after providing due and reasonable opportunity of being heard to the assessee. - Appeal of the assessee is partly allowed and partly allowed for statistical purposes.

Summary

Issues Involved:
1. Legality of the order passed u/s 143(3) read with section 144C of the Income Tax Act.
2. Calculation of total income by the AO.
3. Application of transfer pricing regulations on the Liaison Office (LO) of the assessee.
4. Determination of Arm’s Length Price (ALP) and markup percentage.
5. Treatment of receipts under the Operation and Maintenance Agreement (O&M) as Fees for Technical Services (FTS).
6. Taxation of other incomes from the Godavari Operation & Maintenance Project.
7. Adjustment of unabsorbed brought forward losses and unabsorbed depreciation.
8. Charging of interest u/s 234B.

Detailed Analysis:

1. Legality of the Order Passed u/s 143(3) read with Section 144C:
The assessee contended that the order passed was bad in law. However, this ground was general and did not require adjudication.

2. Calculation of Total Income by the AO:
The assessee challenged the computation of total income at ?386,356,928 against the returned income of ?9,66,73,030, claiming it to be illegal and erroneous. The tribunal did not provide specific detailed analysis on this point separately but addressed it within the context of other issues.

3. Application of Transfer Pricing Regulations on the Liaison Office (LO):
The assessee argued that applying transfer pricing regulations on the LO was erroneous. The tribunal referred to its previous orders (ITA Nos. 1410 to 1413/Del/2007, 1682 & 1683/Del/2008, and 1297/Del/2008) where it was held that the LO's activities did not constitute a Permanent Establishment (PE) under Article 5 of the DTAA. The tribunal decided this issue in favor of the assessee.

4. Determination of Arm’s Length Price (ALP) and Markup Percentage:
The AO applied a markup of 27.08% instead of the 16.21% proposed by the TPO. This issue was linked to the transfer pricing regulations applied to the LO. Since the tribunal decided the application of transfer pricing regulations in favor of the assessee, this issue became academic and was dismissed.

5. Treatment of Receipts under the O&M Agreement as FTS:
The AO treated the receipts from the Godavari O&M project as FTS under Section 9(1)(vii) and Article 13(4)(c) of the DTAA, taxing them on a gross basis. The tribunal referred to its previous orders (ITA Nos. 5437 & 5438/Del/2011) and held that the income from the O&M project should be taxed on a net basis as business income, not as FTS. This issue was decided in favor of the assessee.

6. Taxation of Other Incomes from the Godavari O&M Project:
The AO taxed various other incomes on a gross basis. The tribunal followed its earlier decisions and directed that these incomes should be taxed on a net basis. Specific incomes like interest from foreign banks, profit on sale of fixed assets, and exchange gains were discussed, and the tribunal directed the AO to follow the principles laid down in previous orders, ensuring fair treatment.

7. Adjustment of Unabsorbed Brought Forward Losses and Unabsorbed Depreciation:
The assessee raised additional grounds regarding the adjustment of unabsorbed losses and depreciation. The tribunal admitted these grounds, citing the Supreme Court's decision in National Thermal Power Co. Ltd. Vs CIT, and remanded the issue back to the AO for fresh adjudication.

8. Charging of Interest u/s 234B:
The tribunal noted that there was no discussion on the applicability of interest u/s 234B in the orders of the AO or DRP. It remanded this issue back to the AO for fresh adjudication, considering the relevant facts and providing a reasonable opportunity for the assessee to be heard.

Conclusion:
The appeal was partly allowed and partly allowed for statistical purposes, with several issues remanded to the AO for fresh adjudication in accordance with the tribunal's directions and previous judgments.