2007 (8) TMI 374 - AT - Income Tax

Summary

Issues Involved:
1. Existence of Permanent Establishment (PE) in India.
2. Taxability of income earned by the appellant in India.
3. Admissibility of grounds of appeal not raised before the Assessing Officer (AO).
4. Recovery of bad debts and its taxability.

Issue-wise Detailed Analysis:

1. Existence of Permanent Establishment (PE) in India:
The primary issue in the appeals was whether the appellant had a Permanent Establishment (PE) in India during the relevant financial years. The appellant argued that it did not have a PE in India as its project office was operational for only 153 days, which was less than the six months required under the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands. The CIT(A) and AO, however, held that the appellant had a PE in India, based on several factors including the maintenance of a bank account and books of account beyond the period of six months. The Tribunal found that the existence of a PE requires both a fixed place of business and the carrying on of business from that place. Since the appellant's dredger left India on 28th July 1999, there was no fixed place of business or business activity thereafter. Therefore, the Tribunal concluded that the appellant did not have a PE in India.

2. Taxability of Income Earned by the Appellant in India:
Given that the appellant did not have a PE in India, the Tribunal held that the income earned during the 153 days of operation was not taxable in India. The Tribunal emphasized that under Section 90(2) of the Income Tax Act, the provisions of the DTAA override the provisions of the Act if they are more beneficial to the assessee. Since there was no PE, the income could not be taxed in India.

3. Admissibility of Grounds of Appeal Not Raised Before the AO:
The Tribunal addressed the issue of whether the CIT(A) was correct in dismissing the grounds of appeal because they were not raised before the AO. The Tribunal cited several judicial precedents, including the Supreme Court's decision in the Jute Corporation of India Ltd. case, which held that an appellate authority has the power to consider new grounds of appeal. The Tribunal concluded that the CIT(A) erred in not admitting the grounds of appeal, especially since the issue of PE was fundamental to the assessment.

4. Recovery of Bad Debts and Its Taxability:
For the assessment year 2001-02, the appellant argued that the recovery of bad debts should not be taxed as it did not have a PE in India during the initial year or any subsequent year. The Tribunal found that the CIT(A) had correctly deleted the addition of Rs. 1,14,21,186, as the amount was not actually received by the appellant and was a hypothetical figure based on a uniform exchange rate. The Tribunal reiterated that the recovery of bad debts could at most be considered an auxiliary activity, which is exempt from being considered a PE under Article 5 of the DTAA.

Conclusion:
The Tribunal allowed the appeals for the assessment years 2000-01 and 2001-02, concluding that the appellant did not have a PE in India and therefore, the income earned was not taxable in India. The Tribunal also directed the AO to vacate the assessment regarding the recovery of bad debts. The Department's appeal for the assessment year 2001-02 was dismissed. The Tribunal emphasized that the AO should not have proceeded with the assessment based on a non-est return and highlighted the duty of the AO to apply the correct law, even if it benefits the assessee.