2016 (6) TMI 522 - AT - Income Tax

Determination of Permanent Establishment (PE) - whether the computation of period of stay of the different projects carried out by the assessee at different sites of the assessee company is to be combined together for determining the period of stay and aggregate duration of period is to be seen or duration of execution of each of the projects is to be examined separately to test the time limit of 9 months, as stipulated in Article 5 - Para 2(i) of Indo-Mauritius Double Taxation Avoidance Agreement? - Held that - As only one project was carried out during the year i.e. contract number D4522, the duration of which was for 3 months only. Thus, in view of legal position as has been decided by the Tribunal in assessee s own case as well as on the facts of the year before us, we find that the assessee had no PE in India in the year under consideration in terms of Article 5(2)(i) of the Act Indo-Mauritius treaty. Thus, we do not find any force in the ground raised by the Revenue and uphold the factual findings of Ld. CIT(A), respectfully following the order of the Tribunal for assessment year 1997-98. Thus, grounds raised by the Revenue are dismissed. - Decided in favour of assessee Indian liaison office of M/s McDermott ETPM East Inc., Dubai - whether a separate legal entity, constituted a permanent establishment of the assessee in India? - Held that - PE of the assessee should be determined, keeping in view work carried out at its project sites. We have already held that on the basis of facts before us the work duration was less than 9 months. Thus, in our view, since the project of the assessee did not have work duration of more than 9 months during the year as per the facts brought before us as discussed in detail in earlier part of the order, an activity of the maintenance of back-up cum support office simpliciter shall not constitute PE of the assessee. - Decided in favour of the assessee Insurance receipts taxable u/s 44BB - Held that - In view of the aforesaid legal position, we hold that the said amount can be brought to tax only if the assessee has a PE in India for the concerned project. But the facts brought before us were not complete and clear. Further, there is no clarity as to the fact whether impugned receipts were with regard to which project and pertain to which period and whether the said project constituted a PE in the impugned period or not. The assessee has admitted the legal position that in case work duration of a project exceeds 9 months, then income from the said project would be liable to be taxed u/s 44BB. Therefore, we remit this issue back to the file of the AO to examine complete and correct facts. If these receipts pertain to project which did not constitute any PE in India then these receipts would not be taxable. In the case said project constituted a PE in India at the relevant point of time then AO is required to find out further whether the expenses/cost (for which recovery has been made by way of impugned insurance claim) were claimed as expenses or not. In case no claim was made of the expenses, then recovery thereof cannot be brought to tax at this stage Taxing amount received by the assessee primarily on account of discount earned, exchange gain and miscellaneous income - Held that - We have decided an identical issue in ground no 2 of A.Y. 1998-99 ( in the assessee s appeal) wherein the issue was sent back to the file of the AO for verification of facts for determination of PE of the related projects. We find it appropriate to send this issue also back to the file of the AO. The AO shall verify the requisite facts taking guidance from our order of A.Y. 1998-99 and the directions contained therein shall apply mutatis mutandis. With these directions, the issue is restored back to the file of the AO. Levy of penalty u/s 271(1)(c) - Held that - It is noted that the issues involved in the quantum appeal have either been allowed in the quantum appeal or these have been sent back to the file of the AO for verification of requisite facts. Thus, penalty is deleted on those additions which have been deleted in the quantum appeal. For the remaining issues which have been sent back to the file of AO, the penalty order does not survive as on date, and therefore, the same is set aside. The AO is free to initiate and levy the penalty as per law, if and as and when any addition is made in the fresh assessment order as may be passed by the AO, in pursuance to our directions Tax amount of the invoice raised to M/s Engineers India Ltd., which was not accepted by the said company - Held that - It is an accepted proposition that under mercantile system of accounting any income or expenses is taken into consideration on the basis of its accrual irrespective of its actual receipt or payment, as a case may be. But, what is important is that income/expense must first be accrued. If an income does not even get accrued, the same cannot be brought to tax merely on unilateral action taken by the assessee by mere issuing of an invoice. It is noted from the facts before us that invoice raised by the assessee has not been even accepted by the said party. There is nothing to show that whether the work for which invoice was raised has been accomplished or not and was accepted as such by the said company. Under such circumstances, there are serious doubts if at all if accrual of the income has taken place. The law in this regard is well settled law that mere making of a claim of income which does not give rise to any enforceable right does not result into any income. Though the position of law in this regard is clear, but in absence of complete facts before us we are not able to conclude this issue at this stage. We find that both of the lower authorities had dealt with this issue in highly surreptious and non-speaking manner. Under these circumstances, we find it appropriate to send this issue back to the file of the AO who shall take guidance from the observations given by us in this order. The assessee shall also bring on record complete facts with regard to the subsequent developments that might have taken place with regard to realization of the amount of the invoices from the said party, for which AO shall grant adequate opportunity of hearing

Summary

Issues Involved:
1. Determination of 'Permanent Establishment' (PE) and computation of period of stay under the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA).
2. Taxability of insurance receipts and miscellaneous income under Section 44BB of the Income Tax Act.
3. Attribution of income to the Indian liaison office and its status as a PE.
4. Validity of reassessment proceedings under Section 148 of the Income Tax Act.
5. Levy of interest under Sections 234A, 234B, and 234D.
6. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Determination of 'Permanent Establishment' (PE):
The primary issue was whether the computation of the period of stay for different projects executed by the assessee should be combined to determine the PE under Article 5 - Para 2(i) of the Indo-Mauritius DTAA. The Tribunal upheld the CIT(A)'s decision that each project should be considered separately. The Tribunal referenced its earlier decision for A.Y. 1997-98, stating that the threshold limit of 9 months should be applied independently to each project. The Tribunal dismissed the Revenue's appeal, confirming that the assessee did not have a PE in India as the duration of the work for each project was less than 9 months.

2. Taxability of Insurance Receipts and Miscellaneous Income:
The assessee contended that insurance receipts were not taxable in India as they were received outside India and were reimbursements for costs incurred. The AO included these receipts as taxable income under Section 44BB. The CIT(A) upheld this inclusion, stating that these receipts were connected to the business activities in India. The Tribunal remitted the issue back to the AO to verify if the receipts pertained to a project constituting a PE in India and whether the expenses were claimed earlier. The Tribunal directed that if no PE existed, the receipts would not be taxable.

3. Attribution of Income to the Indian Liaison Office:
The AO concluded that the Indian liaison office of McDermott ETPM East Inc., Dubai, constituted a PE of the assessee in India based on a survey operation. The CIT(A) upheld this view. However, the Tribunal found that the liaison office provided auxiliary services and did not engage in substantive business activities, thus not constituting a PE under Article 5(3)(e) of the DTAA. The Tribunal referenced the Supreme Court's judgment in DIT vs. Morgan Stanley and the Delhi High Court's judgment in U.A.E. Exchange Centre Ltd. vs. UOI to support its decision.

4. Validity of Reassessment Proceedings:
The assessee challenged the validity of the reassessment proceedings under Section 148. The Tribunal did not delve into the merits of the reassessment, treating the ground as infructuous since the substantive issues were decided on merits.

5. Levy of Interest under Sections 234A, 234B, and 234D:
The Tribunal dismissed the ground related to the levy of interest as being consequential to the main issues.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal set aside the penalty order, stating that the penalty proceedings could be initiated afresh if any addition was made in the reassessment order. The AO was directed to follow the Tribunal's directions in the quantum appeal.

Conclusion:
The Tribunal's comprehensive analysis upheld the CIT(A)'s decisions on several grounds, remitted certain issues back to the AO for verification, and provided clear directions on the treatment of various receipts and the status of the liaison office. The appeals were partly allowed for statistical purposes, with specific instructions for the AO to follow the Tribunal's orders from earlier years.