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2016 (4) TMI 413 - AT - Income TaxTDS u/s 194J - disallowance under section 40(a)(ia) as payments made to the Indian sub consultants, for delay in deposit of TDS effected on such payments - existence of PE in India - Held that - Requirement of Article 5(1) of the DTAA is not satisfied in the present case. Carrying on of business involves the carrying on in a country of virtually any activity related to the business of the enterprise. As we have already seen the availability of office space for use by the Assessee at the premises of GRSE was for the limited purpose of rendering of services agreed between the Assessee and GRSE. The commentaries of Philip Baker on Treaties and OECD guidelines and decisions referred to by the learned counsel for the Assessee support the plea of the Assessee that it had no PE in India. The Revenue came to the conclusion that the Assessee had a PE in India mainly on the basis of existence of an office at GRSE s shipyard. That alone was not sufficient to come to such a conclusion. The fact that the Assessee filed a return of income including all receipts from the contract with GRSE cannot be the basis to come to a conclusion that there was an admission by the Assessee that it had a PE in India. Existence of PE in India has to be established on the basis of evidence and by application of the requirements as contemplated in DTAA. On the question whether the Assessee having filed a return of income admitting income on the basis that it had a PE in India can thereafter make a claim that there was no PE of the Assessee in India without filing a revised return of income we are of the view that the action of the ld. AO of not allowing the claim of the Assessee due to failure to file the revised return, is bad in law. We therefore agree with the contention of the Assessee that there was no PE in India during the previous year. This conclusion will hold good even for AY 2005-06. As already held that there was no PE in India in the form of fixed place of business through which the business of the Assessee was wholly or partly carried on in India. As such, the Assessee would be entitled to the benefit of the provisions of section 115A of the Act and be taxed at 20% of the Gross receipts. We also hold that tax liability borne by GRSE will also need to be grossed up for arriving at Gross receipts of the Assessee and after such grossing up such receipts have to be taxed at 20%. Levy of interest u/s.234-B & 234-C - Held that - Once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remedy-less and therefore can take action against the payer under the provisions of Sec.201 of the Income Tax Act and compute the amount accordingly. No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non- resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. The provisions of Sec.209(1)(d) have been amended by the Finance Act, 2012 but those amendments are not relevant for the present case which relates to AY 2007-08. We therefore hold that the assessee was not liable to pay any interest under sec.234-B.
Issues Involved:
1. Existence of Permanent Establishment (PE) in India. 2. Taxability of payments received in USD. 3. Disallowance under section 40(a)(i) of the Act for payments made to Appledore without TDS. 4. Disallowance under section 40(a)(ia) of the Act for payments made to Indian sub-consultants. 5. Grossing up of USD component of receipts. 6. Disallowance of prior period expenses. 7. Levy of interest under sections 234B and 234C of the Act. Detailed Analysis: 1. Existence of Permanent Establishment (PE) in India: The Assessee, a foreign company from the UK, provided consultancy services to GRSE for shipyard modernization. The Revenue argued that the Assessee had a PE in India based on the office space provided by GRSE and the presence of the Assessee’s personnel in India. However, the Assessee contended that the office space was used solely for the project and not for any other business activities, and thus did not meet the "disposal test" for a PE. The Tribunal agreed with the Assessee, concluding that there was no PE in India as the office space was not at the Assessee’s disposal for its own business and the Assessee’s presence in India was limited to the project with GRSE. 2. Taxability of Payments Received in USD: The Assessee argued that the payments received in USD for services rendered from the UK were not taxable in India as they were not attributable to a PE in India. The Tribunal held that since there was no PE in India, the payments received in USD were not taxable in India under Article 13(2) of the DTAA. The Tribunal also noted that the Assessee was entitled to the benefit of section 115A of the Act, which taxes income by way of fees for technical services at 20% on a gross basis. 3. Disallowance under Section 40(a)(i) of the Act for Payments Made to Appledore Without TDS: The Assessee made payments to Appledore, a UK-based sub-consultant, without deducting tax at source. The Revenue disallowed these payments under section 40(a)(i) of the Act. The Assessee argued that the payments were not taxable in India as the services were rendered outside India. The Tribunal, however, upheld the Revenue’s disallowance, citing the amendment to section 9 of the Act by the Finance Act, 2010, which deemed such payments to accrue or arise in India regardless of where the services were rendered. 4. Disallowance under Section 40(a)(ia) of the Act for Payments Made to Indian Sub-Consultants: The Revenue disallowed payments made to Indian sub-consultants for delay in depositing TDS under section 194J of the Act. The Tribunal upheld this disallowance, noting that the Assessee had failed to deduct tax at source on these payments. 5. Grossing Up of USD Component of Receipts: The Revenue grossed up the USD component of the Assessee’s receipts, arguing that the tax on these receipts was borne by GRSE. The Tribunal agreed with this approach, citing section 195A of the Act, which requires grossing up of income when the tax is borne by the payer. 6. Disallowance of Prior Period Expenses: The Revenue disallowed certain expenses as prior period expenses. The Assessee argued that these expenses were genuine and should be allowed in the relevant period. The Tribunal directed the AO to allow these expenses in the appropriate assessment year, either in the year the work was done or the year the invoices were raised. 7. Levy of Interest Under Sections 234B and 234C of the Act: The Assessee contended that it was not liable for interest under sections 234B and 234C as the entire tax was deductible at source by the payer. The Tribunal agreed, noting that the payer’s failure to deduct tax at source did not absolve the Assessee from its tax liability, but it did eliminate the requirement for the Assessee to pay advance tax. Conclusion: The Tribunal partly allowed the Assessee’s appeals, concluding that there was no PE in India, and thus the payments received in USD were not taxable in India. However, the disallowances under sections 40(a)(i) and 40(a)(ia) were upheld, and the grossing up of the USD component of receipts was also upheld. The Tribunal directed the AO to allow prior period expenses in the appropriate assessment year and ruled that no interest under sections 234B and 234C was payable by the Assessee.
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