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2008 (7) TMI 459 - AT - Income Tax

Issues Involved:
1. Preliminary objection: COD approval
2. Existence of PE (Permanent Establishment) in India
3. Taxability of receipts as Fees for Technical Services (FTS)
4. Attribution of profits to PE in India
5. Taxability of specific receipts under DTAA

Summary:

Preliminary Objection: COD Approval
When the appeals were taken up for hearing, the learned counsel for the assessee requested an adjournment to await COD approval, citing the Supreme Court judgment in Oil & Natural Gas Commission vs. CCE. However, the CIT-Departmental Representative referenced the Madras High Court judgment in CIT vs. Combustion Engineering Company Inc. (USA), which held that COD approval is not necessary for non-resident assessees represented by a PSU. The Tribunal upheld this view, rejecting the adjournment request and proceeding to hear the appeals.

Existence of PE in India
The first ground in the appeal contested the existence of a PE in India. This ground was not pressed during the hearing, and the Tribunal upheld the finding that there existed a supervisory PE in India under art. 5 (2)(i) of the double tax treaty.

Taxability of Receipts as Fees for Technical Services (FTS)
The assessee argued that the drawings and designs constituted "plant" and were not taxable. The Tribunal, referencing the terms of the contract and relevant schedules, held that the services rendered were technical services and not plant. The Tribunal also noted that these services fall under Expln. 2 below s. 9(1)(vii)(b) of the IT Act.

Attribution of Profits to PE in India
The assessee contended that no profits could be attributed to the PE in India as the design and engineering were prepared in Germany. The Tribunal found merit in this argument but noted that the PE in India likely played a role in the effective commissioning of the plant. Therefore, it was fair to estimate 10% of the total receipts as profits attributable to the PE in India, referencing the Supreme Court judgment in CIT & Anr. vs. Hyundai Heavy Industries Co. Ltd.

Taxability of Specific Receipts under DTAA
- Design Engineering Receipts: The Tribunal accepted that these receipts should be taxed as FTS under art. 12 of the DTAA at 10%.
- Training Receipts: The Tribunal rejected the contention that these receipts were not taxable, holding that under art. 12 of the DTAA, training services are also considered technical services and are taxable as such.

Conclusion
Both appeals were partly allowed, and the AO was directed to modify the assessments accordingly.

 

 

 

 

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