2016 (9) TMI 10 - AT - Income Tax

Income derived from two pipeline projects - Rate of tax under Indo-Russia DTAA - business income OR fee for technical service - Held that - The Tribunal decision rendered in the case of Voith Siemens Hydro (2010 (3) TMI 1112 - ITAT DELHI ) is squarely applicable in the present case and as per this decision of the tribunal in the light of the facts of the present case, the activities undertaken by the assessee does not fall within the exclusion category of Explanation (2) to Section 9(1)(vii) of the Income tax Act, 1961. Not justified on the part of the A.O. and DRP to say that with regard to the scope of activities of the assessee company, cooperation agreement is not valid and they have to go by consortium agreement. They have also not brought on record any evidence to show that the assessee has undertaken any extra activity in addition to the activities falling within its scope of work as per the co operation agreement. Hence, even if extra responsibility of the assessee is there as per the consortium agreement and as per the terms of contract awarded by GAIL to the consortium, the assessee has not done those extra activities and the consideration received by the assessee is as per the co operation agreement for the activities provided in the co operation agreement and having accepted by the A. O. the amount of consideration received by the assessee at 3% of gross receipts of the consortium, it has to be accepted that the same is for providing FTS as per the co operation agreement. No case has been made out by the A.O. to show that Section 115A and Section 9(1)(vii) are not applicable in the present case as per which the income of the assessee with regard to PDPL project is liable to tax @ 10% as has been claimed by the assessee. We, therefore, direct the A.O. to apply the provisions of Sub clause BB of clause (b) of sub-section (1) of Section 115A along with Section 9(1)(vii) of the Act. No reason to interfere in the CIT(A) s order under challenge reversing Assessing Officer s finding treating assessee s income from the two pipeline projects as business income instead of that declared under the head fee for technical services. The Revenue s sole substantive ground is declined.

Summary

Issues Involved:
1. Determination of whether the Foreign Company had a business connection in India.
2. Assessment of the primary responsibility of the execution of the contract by the assessee.
3. Classification of income as Fees for Technical Services (FTS) or business income.

Issue-wise Detailed Analysis:

1. Determination of Business Connection in India:
The Revenue argued that the CIT(A) erred in law and on facts by holding that the Foreign Company did not have any business connection in India. The assessee, a Russian company involved in constructing oil pipeline projects, declared a loss and offered tax at 10% on certain receipts under Article 12 of the Indo-Russia Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) sought to tax these receipts as business income, asserting that the assessee had a business connection in India due to its role in overall project management and supervision of the pipeline projects. However, the CIT(A) and the tribunal had previously treated similar receipts as fees for technical services, not business income. The CIT(A) found no change in facts from previous years and directed the AO to apply the provisions of Section 115A along with Section 9(1)(vii) of the Income Tax Act, 1961, confirming that the income should be taxed as fees for technical services.

2. Assessment of Primary Responsibility for Contract Execution:
The Revenue contended that the primary responsibility for executing the contract lay with the assessee, involving activities beyond merely providing technical services. The AO noted that the assessee’s responsibilities included project management, site reviews, and overall supervision, which indicated business activities rather than technical services. However, the CIT(A) and the tribunal, referencing previous decisions, concluded that the actual activities undertaken by the assessee were confined to providing technical services as per the cooperation agreement with its consortium partner. The tribunal emphasized that the scope of work outlined in the cooperation agreement did not amount to construction work but was limited to design, engineering, and technical supervision, thereby classifying the income as fees for technical services.

3. Classification of Income as Fees for Technical Services (FTS) or Business Income:
The Revenue challenged the CIT(A)’s direction to treat the income as fees for technical services (FTS) and tax it accordingly. The tribunal reviewed the provisions of Section 9(1)(vii), Section 44DA, and Section 115A of the Income Tax Act, 1961, and concluded that the activities undertaken by the assessee did not fall within the exclusion category of Explanation (2) to Section 9(1)(vii). The tribunal noted that the AO had accepted the income declared by the assessee based on the cooperation agreement, which allocated 3% of the gross receipts of the consortium to the assessee for providing technical services. The tribunal found no evidence that the assessee undertook any construction work, and thus, the income should be classified as fees for technical services and taxed at 10% as per Section 115A.

Conclusion:
The tribunal upheld the CIT(A)’s order, rejecting the Revenue’s appeal and confirming that the assessee’s income from the pipeline projects should be treated as fees for technical services and not business income. The tribunal found no distinction in facts or law from previous years and directed the AO to apply the provisions of Section 115A along with Section 9(1)(vii) of the Income Tax Act, 1961. The Revenue’s appeal was dismissed.