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2019 (12) TMI 812 - AT - Income TaxRegional existence of place of PE - supervisory PE under Art. 5(2)(i) r.w. Art.5(1) of the DTAA - Income accrued in India - force of attraction rule - treaty between India and Germany DTAA - HELD THAT - The location where the activities would be performed by the assessee in respect of the specific projects was dictated by the client s project site or as agreed with the clients and was undertaken outside India. Further, restriction on the activities which may be undertaken by project office is stipulated in the approval issued by the Government. Therefore, it cannot be said that the PE constituted in India by the assessee under Phase-II of the contracts with JKSPDC was involved in any way in the earning of income from technical services rendered by the assessee and other contracts in India. We find force in the contention of the assessee, that the PE constitute in India by the assessee under Phase-II of the contract with JKSPDC did not play any role or contributed in any manner to the execution of the other contracts or earning of FTS under other contracts and cannot thus be said to be involved with any other projects in India. Accordingly, FTS received by the assessee from rendering of technical services and other contracts cannot be said to be involved directly or indirectly in any manner to the PE constituted in India under the contract with JKSPDC- Phase-II and are formed for the purpose of deliberate avoidance of tax. We find merit in the argument of the Ld. AR that such income by way of FTS is to be subjected to tax @ 10% under article 12 of the treaty and cannot be subject to tax @ 20% as contemplated by the Assessing Officer. Regional existence of place of PE and the article 5(1) in the form of JKSPDC-BCS as well as there is existence of supervisory PE under article 5(2)(i) in the form of JKSPDC-BCS was not established by the Revenue from any documentary evidence on record. Similarly, the nature of business of the assessee remains unchanged and the assessee is engaged in the business of providing consultancy services to various projects in India. The assessee is an engineering consultancy services that offers wide range of planning, designing and consultancy services etc. in relation to complex infrastructure projects in India. The assessee rendered engineering consultancy services mainly in relation to power projects. PE in respect of JKSPDC-Baglihar Phase II Project has rightly been offered to tax at 20% by the assessee as it is the only project which has PE. The Force of Attraction rule will not be applicable in other projects as the same do not constitute either PE or does not come under the purview of the DTAA. The contradictions pointed out by the Revenue do not demonstrate that the other projects constitute PE. In fact, for applying force of attraction, there should be some common link to each of the contracts/projects such as the common expats, the common nature of the contract/projects, the commonality of the location, the common contracting parties etc. which are absent in the present case. Therefore, the applicability of rule of force of attraction does not apply in the present assessee s case. Thus, the treatment given by the assessee for offering tax @20% in one project and 10% in rest of the projects was rightly done. Taxability of reimbursement of expenses - HELD THAT - these expenses were actually incurred by the assessee and there is no element of income involved in these expenses. This has been demonstrated by the assessee during the Assessment Proceedings as well as before the CIT(A). But both the Revenue authorities have not taken cognizance of the same. Besides that, revenue could not point out that there is any element of income involved in the said expenses as well as could not demonstrate that there was any mark up to these expenses. Therefore, Ground No. 2 of the assessee s appeal allowed Interest u/s 234B and 234C is not chargeable where tax is deductible at source. The reliance placed on GE Packaged Power Inc. 2015 (1) TMI 1168 - DELHI HIGH COURT is apt.
Issues Involved:
1. Application of the "Force of Attraction" rule under the Double Taxation Avoidance Agreement (DTAA) between India and Germany. 2. Taxability of reimbursement of expenses as income. 3. Levy of interest under Sections 234A, 234B, and 234C of the Income Tax Act, 1961. 4. Initiation of reassessment proceedings under Section 147 of the Income Tax Act, 1961. 5. Applicability of Section 44BBB of the Income Tax Act, 1961. 6. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961. Detailed Analysis: 1. Application of the "Force of Attraction" Rule: The primary issue was whether the "Force of Attraction" (FOA) rule under the DTAA between India and Germany applied to the Assessee's revenues. The Assessee argued that the FOA rule should not apply as the Permanent Establishment (PE) in India under the contract with Jammu and Kashmir State Power Development Corporation (JKSPDC) was not involved in other projects. The Tribunal found merit in the Assessee's argument that the PE constituted under the JKSPDC contract did not play any role in other contracts, and thus, the FOA rule was not applicable. Consequently, revenues from other contracts were to be taxed at 10% under Article 12 of the DTAA, rather than 20% as applied by the Assessing Officer. 2. Taxability of Reimbursement of Expenses: The Assessee contended that reimbursements received were on a cost-to-cost basis without any markup and thus should not be taxed as income. The Tribunal agreed, noting that the Revenue failed to demonstrate any element of income or markup in these reimbursements. Thus, the Tribunal ruled in favor of the Assessee, holding that such reimbursements should not be taxed. 3. Levy of Interest under Sections 234A, 234B, and 234C: The Assessee argued that interest under these sections was not chargeable as the tax was deductible at source. The Tribunal upheld this view, citing the Supreme Court decision in IAN Peter Morris v. Asst. CIT, which held that interest is not chargeable where tax is deductible at source. Therefore, the Tribunal ruled that the interest levied under Sections 234A, 234B, and 234C was not applicable. 4. Initiation of Reassessment Proceedings under Section 147: In the appeal for A.Y. 2002-03, the Assessee challenged the initiation of reassessment proceedings under Section 147. However, this ground was not pressed by the Assessee and was dismissed by the Tribunal. 5. Applicability of Section 44BBB: For A.Y. 2004-05 and 2005-06, the Assessee argued that it should be covered under Section 44BBB, which provides for a presumptive taxation scheme for foreign companies engaged in the business of civil construction. The Tribunal dismissed this ground, agreeing with the Revenue that the Assessee was not covered under Section 44BBB. 6. Initiation of Penalty Proceedings under Section 271(1)(c): The Assessee also challenged the initiation of penalty proceedings under Section 271(1)(c) for A.Y. 2002-03. However, this ground was not pressed by the Assessee and was dismissed by the Tribunal. Conclusion: The Tribunal allowed the appeals for A.Y. 2001-02, 2002-03, and 2003-04, ruling in favor of the Assessee on the primary issues of the FOA rule, taxability of reimbursements, and levy of interest. For A.Y. 2004-05 and 2005-06, the appeals were partly allowed, with the Tribunal ruling against the Assessee on the applicability of Section 44BBB but in favor on other issues.
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