2008 (12) TMI 235 - AT - Income Tax

Issues Involved:
1. Assessment of income under DTAA between India and Germany.
2. Allowance of expenses incurred by the PE in India.
3. Levy of interest under sections 234B and 234C of the IT Act.
4. Applicability of section 44DA retrospectively.
5. Non-discrimination clause under Article 24(2) of the DTAA.
6. Rate of tax applicable to fees for technical services.

Detailed Analysis:

1. Assessment of Income under DTAA between India and Germany:
The assessee, a non-resident company and tax resident of Germany, argued that its income should be assessed at 10% under Article 12(2) of the DTAA between India and Germany. However, the AO assessed the income at 20% as per sections 44D and 115A of the IT Act, without allowing deductions for expenses incurred by the PE in India. The CIT(A) confirmed this view, stating that income should be computed on gross fees received, applying the provisions of section 115A, and the rate of tax should be 20%.

2. Allowance of Expenses Incurred by the PE in India:
The assessee contended that under Article 7(3) of the DTAA, all expenses incurred for the purpose of the business of the PE, including executive and general administrative expenses, should be allowed. However, the AO and CIT(A) held that the expenses are subject to domestic law, specifically section 44D, which prohibits any deduction against income by way of royalty or fees for technical services. The Tribunal upheld this view, stating that the provisions of section 44D are non obstante and override sections 28 to 44C, thereby disallowing any deductions.

3. Levy of Interest under Sections 234B and 234C of the IT Act:
The Revenue challenged the CIT(A)'s decision to delete the interest levied under sections 234B and 234C. The Tribunal, following the Special Bench decision in Motorola Inc. and the Uttaranchal High Court decision in Halliburton Offshore Services Inc., held that no interest under sections 234B and 234C can be charged where tax is deductible at source under section 195. Consequently, the issue was decided against the Revenue.

4. Applicability of Section 44DA Retrospectively:
The assessee argued that section 44DA, introduced by the Finance Act, 2003, should be applied retrospectively as it is clarificatory in nature. The Tribunal rejected this contention, noting that section 44DA applies prospectively to agreements made after 31st March 2003, while section 44D applies to agreements made before 1st April 2003. The Tribunal cited the decision in Steel Authority of India Ltd., affirming that section 44DA is not retrospective.

5. Non-Discrimination Clause under Article 24(2) of the DTAA:
The assessee argued that applying section 44D amounts to discrimination under Article 24(2) of the DTAA. The Tribunal held that Article 24(2) does not apply where Article 7(3) applies, as the non-discrimination clause is not in conflict with the provisions of Article 7(3). Therefore, the contention that the determination of profits under domestic law amounts to discrimination was rejected.

6. Rate of Tax Applicable to Fees for Technical Services:
The assessee contended that the rate of tax should be 10% as per Article 12(2) of the DTAA. The Tribunal noted that Article 12(5) excludes the applicability of paragraphs 1 and 2 of Article 12 when the beneficial owner of the income carries on business through a PE in the other Contracting State. Thus, the income is governed by Article 7, which does not specify a rate of tax, and therefore, the domestic law rate of 20% as per section 115A applies. The Tribunal rejected the assessee's contention.

Conclusion:
The Tribunal upheld the orders of the CIT(A), confirming the assessment of income at 20% without allowing deductions for expenses incurred by the PE in India as per sections 44D and 115A. The Tribunal also ruled that no interest under sections 234B and 234C can be charged where tax is deductible at source. The appeals of the Revenue and the cross-objections of the assessee were dismissed.

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