2022 (11) TMI 1345 - AT - Income Tax

Fee for Technical Services (FTS) - PE in India - Applicability of Force of Attraction Rule - amount received from contract with Andhra Pradesh Transmission Corporation (AP Transco) atxed applying the rate of 20% - HELD THAT - Undisputedly, the projects from which the assessee has earned revenue in the year under consideration were continuing from preceding assessment year. We have noted, while considering identical nature of dispute arising between the parties, the Coordinate Bench 2019 (12) TMI 812 - ITAT DELHI relating to assessment years 2001-02 to 2005-06, has not only held that there is no PE of the assessee in India, insofar as, the AP Transco project is concerned, but also held that Force of Attraction Rule will not apply As duration of services rendered for AP Transco project in terms with the agreement is for a period of less than 6 months. The aforesaid factual position has not been controverted by the Revenue. That being the case, there is no PE in terms with Article 5(1) read with Article 5(2)(i) of the Tax Treaty. Therefore, the decision of the Coordinate Bench (supra) will squarely apply to the facts of the present appeal. That being the case, respectfully following the decision of the Coordinate Bench, we direct the Assessing Officer to delete the addition. Ground nos. 1 and 2 are allowed. Taxability of revenue earned from contract with Jaiprakash Industries Ltd. by applying the provisions of section 44DA of the Act - As on going through the decision of the Tribunal in preceding assessment years, we find that the Tribunal did not accept assessee s claim that the revenue earned from the contract with the Jaipraksh Industries Ltd. is covered under section 44BBB of the Act, however, the Tribunal held that the assessee has no PE in India and in absence of PE, the revenue earned from Jaiprakash Industries Ltd., being in the nature of FTS will be taxable at the rate of 10%. Thus we direct the Assessing Officer to tax the revenue earned from the Jaiprakash Industries Ltd by applying the rate of 10% as provided under Article 12 of India Germany Tax Treaty. This ground is partly allowed. Applicability of Force of Attraction Rules to the revenue earned from contracts with AP Transco and Jaiprakash Industries Ltd . - As relying on assessee own case Force of Attraction Rule is not applicable to the revenue earned from the AP Transco and Jaiprakash Industries Ltd. Interest u/s 234B and 234C is not chargeable where tax is deductible at source - The reliance placed on GE Packages Power Inc. 2015 (1) TMI 1168 - DELHI HIGH COURT is apt.

Summary

Issues Involved:
1. Permanent Establishment (PE) status under Article 5 of the India-Germany DTAA.
2. Taxability of revenue earned from contracts.
3. Applicability of Section 44BBB and Section 44DA of the Income-tax Act, 1961.
4. Application of Force of Attraction Rule.
5. Levy of interest under Section 234B and 234C.

Issue-wise Detailed Analysis:

1. Permanent Establishment (PE) status under Article 5 of the India-Germany DTAA:

The assessee, a non-resident corporate entity from Germany, contested the decision of the departmental authorities that it had a PE in India under Article 5 of the India-Germany DTAA. The dispute centered around the revenue earned from a contract with Andhra Pradesh Transmission Corporation (AP Transco). The assessee argued that it did not have a PE in India and that the income should be taxed as Fee for Technical Services (FTS) under Article 12 of the DTAA at a rate of 10%. The Assessing Officer, however, held that the assessee had a PE in India and taxed the income at 20% under Section 44DA read with Section 115A. The Tribunal, referencing its decisions in previous years (2001-02 to 2005-06), concluded that the assessee did not have a PE in India for the AP Transco project and that the Force of Attraction Rule did not apply. Consequently, the Tribunal directed the deletion of the addition, allowing ground nos. 1 and 2 in favor of the assessee.

2. Taxability of revenue earned from contracts:

For the revenue earned from Jaiprakash Industries Ltd., the assessee claimed it should be taxed under Section 44BBB as income from business activities related to civil construction and turnkey power projects. The Assessing Officer rejected this claim, asserting that the income should be taxed under Section 44DA at 20%. The Tribunal, while not accepting the applicability of Section 44BBB, held that the revenue earned was in the nature of FTS and should be taxed at 10% in the absence of a PE. This decision was based on the Tribunal's findings in previous assessment years. Ground no. 3 was partly allowed, directing the Assessing Officer to apply a 10% tax rate.

3. Applicability of Section 44BBB and Section 44DA of the Income-tax Act, 1961:

The Tribunal examined the applicability of Section 44BBB and Section 44DA concerning the contracts with Jaiprakash Industries Ltd. and Jaiprakash Power Ventures Ltd. It was determined that Section 44BBB did not apply, but the revenue should be taxed as FTS under Article 12 of the India-Germany DTAA at a 10% rate. The Tribunal found no evidence of a PE in India for these contracts and directed the Assessing Officer to apply the 10% tax rate. This decision was consistent with the Tribunal's earlier rulings.

4. Application of Force of Attraction Rule:

The Tribunal addressed the applicability of the Force of Attraction Rule to the revenue earned from the contracts with AP Transco and Jaiprakash Industries Ltd. It was concluded that the Force of Attraction Rule did not apply, as there was no PE involved in these transactions. This decision was based on the Tribunal's previous findings, which were reiterated in the current judgment. Ground no. 4 was decided in favor of the assessee.

5. Levy of interest under Section 234B and 234C:

The assessee challenged the levy of interest under Section 234B and 234C. The Tribunal, referencing its earlier decisions, held that interest under these sections is not chargeable where tax is deductible at source. This ground was decided in favor of the assessee, consistent with the Tribunal's previous rulings.

Conclusion:

Both appeals were partly allowed, with the Tribunal directing the Assessing Officer to apply a 10% tax rate on the revenue earned from the contracts, rejecting the applicability of the Force of Attraction Rule, and ruling against the levy of interest under Sections 234B and 234C. The order was pronounced in the open court on 16th November 2022.