2006 (3) TMI 199 - AT - Income Tax

Double Taxation Relief - DTAA between India and Netherlands - received arbitration award - payment taxable under Article 7 - No Permanent Establishment - Levy of interest u/s 234D - HELD THAT - We find that the language of Article 7(1) of DTAA between India and Netherlands is unambiguous and clearly lays down that if an enterprise carries on business in the other State through a Permanent Establishment situated therein, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that Permanent Establishment. Here in this Article there is no mention of any condition of there being a PE in that other State to be in existence in the year of receipt of income by the enterprise. In these facts since the assessee was having a PE in India and also the income of Rs. 30.78 crores received from NMPT being attributable to the PE in India and there being no condition that PE should be in existence in India in the year of receipt of the amount by the enterprise, we hold that the arbitration award of Rs. 30.78 crores received by the assessee-company from NMPT project has rightly been taxed by the Assessing Officer as income of the assessee-company for the assessment year 2001- 02. In view of our finding that the assessee was having PE in India and the income of Rs. 30.78 crores was attributable to PE in India and accordingly taxable in the hands of the assessee for the relevant assessment year 2001-02, we consider that the issue of applicability of provision of section 176(3A) of the Act is not relevant. Accordingly, the issue is decided in favour of the revenue and the Grounds of appeal Nos. 1 and 2 of the assessee are dismissed. Taxing the arbitration award - The language of section 176(3A) lays down that the amount received will be taxed as income in the like manner as if such sum were received before such discontinuation of business. Accordingly, it cannot be said that as per the wording of section 176(3A) of the Act such income can be taxed in the hands of the assessee on a gross basis. We direct the Assessing Officer to tax the receipt of arbitration award of Rs. 30.78 crores, not on gross basis and to allow the allowable deductions thereon, if had not been allowed already in the earlier assessment years. We order accordingly. Deduction of arbitration proceedings related expenses incurred against the arbitration award - We find no justification for not allowing the genuine expenses incurred by the assessee in relation to the arbitration award amount received by it. While deciding the Grounds of appeal Nos. 1 and 2 in this appeal, we have held that the assessee was having a PE and the amount of Rs. 30.78 crores received by the assessee is attributable to the PE in India and accordingly the allowable expenses in relation to this amount of Rs. 30.78 crores have to be allowed as allowable deduction to the assessee. Accordingly the Assessing Officer is directed to examine and allow the genuine and allowable expenses incurred by the assessee in relation to the arbitration award amount received by the assessee. We direct accordingly. Levy of interest u/s 234D - The provision of section 234D was not in the statute book during the relevant period and was inserted by the Finance Act, 2003 with effect from 1-6-2003. In this case the processing u/s 143(1)(a) was made on 25-2-2003 wherein the order was passed granting refund to the assessee and on which date the provision of section 234D had not come on the statute. In these facts of the case we are of the view that the decision of the Delhi Tribunal in Glaxo Smithkline Asia (P.) Ltd.'s case 2005 (8) TMI 301 - ITAT DELHI-C is applicable and accordingly the interest u/s 234D of the Act is not chargeable to the assessee and the ground of appeal No.6 of the assessee is allowed. In the result, the appeal is partly allowed.

Issues Involved:
1. Taxability of arbitration award under Article 7 of the India-Netherlands tax treaty and section 176(3A) of the Income-tax Act.
2. Taxation of the arbitration award on a gross basis.
3. Set-off of unabsorbed depreciation and current year's depreciation.
4. Deduction of arbitration proceedings related expenses.
5. Levy of interest under section 234D.
6. Jurisdiction of CIT(A) to direct reopening of past years' assessments.
7. Tax rate applicable under Article 24 of the India-Netherlands tax treaty.
8. Deletion of interest under section 234B.
9. Disallowance of lease rent payment.

Issue-wise Detailed Analysis:

1. Taxability of Arbitration Award:
The assessee, an international dredging contractor, received Rs. 30.78 crores as an arbitration award from NMPT during the assessment year 2001-02. The CIT(A) held this amount taxable under Article 7 of the India-Netherlands tax treaty, despite the absence of a Permanent Establishment (PE) in India during the said year. The Tribunal upheld this decision, noting that the PE existed during the earlier assessment years (1995-96 and 1996-97) and the income was attributable to the PE. The Tribunal emphasized that the DTAA does not require the PE to be in existence in the year of receipt of income.

2. Taxation on a Gross Basis:
The Tribunal ruled that the arbitration award should not be taxed on a gross basis. It directed the Assessing Officer to allow allowable deductions if not already allowed in earlier assessment years, citing that section 176(3A) does not mandate gross taxation.

3. Set-off of Unabsorbed Depreciation:
The Tribunal directed the Assessing Officer to verify if the assessee claimed the loss of the Indian branch against the income of the head office in the Netherlands. If not claimed, the set-off should be allowed under section 72 of the Income-tax Act.

4. Deduction of Arbitration Expenses:
The Tribunal found no justification for disallowing genuine expenses related to the arbitration award. It directed the Assessing Officer to examine and allow these expenses as deductions.

5. Levy of Interest under Section 234D:
The Tribunal ruled in favor of the assessee, stating that section 234D, inserted by the Finance Act, 2003 with effect from 1-6-2003, was not applicable to the assessment year 2001-02. Consequently, interest under section 234D was not chargeable.

6. Jurisdiction of CIT(A) on Reopening Past Assessments:
The Tribunal clarified that the CIT(A) did not direct the reopening of past assessments but merely suggested that the Assessing Officer consider the issue. Therefore, this ground of appeal was dismissed.

7. Tax Rate under Article 24 of the India-Netherlands Tax Treaty:
The Tribunal admitted the additional grounds of appeal regarding the applicable tax rate and remitted the issue to the Assessing Officer for consideration and decision on merits.

8. Deletion of Interest under Section 234B:
The Tribunal upheld the CIT(A)'s decision to delete the interest under section 234B, noting that all payments to non-residents are subject to TDS under section 195, and the assessee was not liable for advance tax.

9. Disallowance of Lease Rent Payment:
The Tribunal upheld the CIT(A)'s direction to determine the fair value of the dredger hire by comparing it with transactions between unrelated parties. It dismissed the revenue's appeal, which argued for considering related party transactions.

Conclusion:
The assessee's appeal was partly allowed, addressing issues related to deductions and set-offs, while the revenue's appeal was dismissed, upholding the CIT(A)'s decisions on interest and lease rent payments.

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