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2014 (10) TMI 471 - AT - Income TaxFees for Technical Services Article 12 Indo-German DTAA Establishment of PE - Whether the assessee's supervisory services are in the nature of Fees for Technical Services (FTS) taxable u/s 9(1)(vii)/Article 12 of India-German DTAA or whether the services constitute a Permanent Establishment (PE) in India taxable under S.9(1)(i)/Article 7 read with Article 5 of the India-German DTAA Held that - For Article 12(5) to apply, the condition precedent is for the assessee to have a Permanent Establishment through which its activities are carried out and such a condition is not met - Article 12(5) which takes the scope of services out of FTS and into Article 7 read with Article 5 does not apply to the assessee's case - the basis for AO's invoking the provisions of Article-5 of DTAA is on the basis of the fact that three of the technicians deputed for supervising the activities in the case of M/s. Jindal Steel Power Ltd., has stayed in India exceeding 183 days and filed their returns with ITO (International Taxation), Mumbai - Had the AO examined the total period of deputing technicians to India and also examined whether establishment where assessee had any 'permanent place' to supervise the activities, then, issue could be examined in the light of service PE considerations - AO only undertook the issue of stay of technicians in India cannot be considered for examining the 'permanent establishment' of assessee in its supervising work - AO has not made out any case for invoking Article-7 of DTAA. Supervisory activities have to be in connection with the non-resident s building site, construction or assembly project - the receipts of the assessee are in the nature of FTS and do not fall under Article 7 read with Article 5, there is no need to adjudicate this contention - it is incorrect to aggregate all contracts of the foreign company in India and consider it as one - Unless otherwise linked with each other, contracts should be individually assessed with respect to the duration test relying upon ADI T V/s. Valentine Maritime (Mauritius) Ltd. 2010 (4) TMI 1 - ITAT BOMBAY-L - the assessee's supervisory activities do not constitute a Permanent Establishment in India under the provisions of the Indian Income Tax Act as well as Article 5 of the India-German Treaty - Assessee should be assessed for its supervisory activities under Article 12 of the India-Germany DTAA Decided in favour of assessee. Reopening of assessment u/s 147 Held that - DRP has erred in considering that the case is covered under clause(b) of Explanation-2 to section 147 - This is not a case of 'understating the income' as the same income received by the assessee was brought to tax at a different rate - There is no difference between the returned income and assessed income, up to the draft order stage - It is also not a case where assessee claimed excess loss or deduction or allowance - The issue was considered by the DRP as 'excess relief in return' - However, the word 'relief' cannot be used in the context of availing lesser rate of tax - If one compares the sub-clause-ii in clause (c) of Explanation-2, it specifically states that 'income has been assessed to a low rate' and sub-clause-iii specifically for a situation where such 'income has been made subject of excessive relief' under this Act - under clause-(c) where assessment has been made, reopening can be done where income has been assessed to a low rate or excessive relief was allowed - Assessee has offered the income under provisions of section 9(1)(vii) offering gross receipts to tax at 10% of the gross receipts whereas the AO considered the income at 42.23% on the net income. The DRP has wrongly considered assessee's case as a case of claiming excess relief in the return which situation was not considered in clause (b) of the provisions of section 147 - assessee's contention that neither clause (b) nor clause (c) of the Explanation would apply is a valid contention - reopening of assessment on the facts of the case is not justifiable - the contention of the assessee is accepted that the amount can only be brought to tax as fees for technical services and cannot be considered as business income Decided in favour of assessee.
Issues Involved:
1. Permanent Establishment (PE) and its implications under the DTAA between India and Germany. 2. Classification of income as Fees for Technical Services (FTS) or Business Profits. 3. Validity of reopening assessments under Section 148 of the Income Tax Act. 4. Deductibility of costs and expenditures. 5. Levy of interest under Sections 234A, 234B, and 234C. 6. Grant of TDS credit. Issue-Wise Detailed Analysis: 1. Permanent Establishment (PE) and its Implications: The primary issue was whether the foreign company had a Permanent Establishment (PE) in India under Article 5 of the DTAA between India and Germany. The Assessing Officer (AO) concluded that the company had a PE due to the technicians' stay exceeding 183 days. However, the Tribunal found that the supervisory activities performed by the company did not constitute a PE as per Article 5(1) and 5(2)(i) of the DTAA. The Tribunal emphasized that the company did not have a fixed place of business in India, and the technicians were working at the project sites provided by the clients, not at a place owned by the company. 2. Classification of Income as Fees for Technical Services (FTS) or Business Profits: The Tribunal examined whether the income should be classified as FTS under Article 12 or as business profits under Article 7 of the DTAA. The Tribunal referred to the jurisdictional High Court's decision in Clouth Gummiwerke Akrineqesellschaft vs. CIT, which held that supervisory activities fall under FTS. The Tribunal concluded that the income should be taxed as FTS under Article 12 of the DTAA, not as business profits under Article 7. 3. Validity of Reopening Assessments under Section 148: The Tribunal addressed the validity of reopening assessments for the assessment years 2005-06, 2006-07, and 2008-09 under Section 148. The Tribunal found that the reopening was not justified as there was no understatement of income or excessive claim of deductions by the assessee. The Tribunal held that the reopening was based on a change in the rate of tax, which does not fall under the conditions specified in Explanation 2 to Section 147. 4. Deductibility of Costs and Expenditures: The Tribunal addressed the issue of deductibility of costs and expenditures. The AO had allowed a deduction of 50% of the gross receipts towards expenditure. The Tribunal found that since the income was to be taxed as FTS and not as business profits, the question of deductibility of costs and expenditures became academic and did not require further adjudication. 5. Levy of Interest under Sections 234A, 234B, and 234C: The Tribunal examined the levy of interest under Sections 234A, 234B, and 234C. The Tribunal directed the AO to verify the assessee's claim regarding the computation of interest under Section 234A. For interest under Sections 234B and 234C, the Tribunal referred to the Bombay High Court's decision in DIT (International Taxation) NGC Network Asia LLP, which held that where tax is deductible at source, the assessee's liability to interest does not arise. 6. Grant of TDS Credit: For the assessment year 2009-10, the Tribunal directed the AO to verify the assessee's claim regarding the grant of TDS credit amounting to Rs. 24,13,136 and to grant appropriate relief in accordance with the law. Conclusion: The Tribunal allowed the appeals, holding that the supervisory activities did not constitute a PE in India, and the income should be taxed as FTS under Article 12 of the DTAA. The Tribunal also found the reopening of assessments under Section 148 to be invalid and directed the AO to verify and grant appropriate relief for TDS credit and recompute interest as per the relevant provisions.
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