2022 (10) TMI 905 - AT - Income Tax

Addition u/s 44DA - activities connected to PO/PE in India - services rendered by the overseas employees of home office of the assessee from Hong Kong for the activities performed for the project CMRL/KMRL - HELD THAT - On careful examination and consideration of the findings of the ld. CIT (Appeals), the evidences placed on record by the assessee, we do not see any infirmity in the order passed by the ld. CIT (Appeal) in holding that the assessee has rightly offered the OCI as fees for technical services under the provisions of section 115A of the Act and the addition made under section 44DA of the Act is liable to be deleted. Ground raised by the Revenue is rejected. Additional ground of appeal raised by the assessee in its cross objection with respect to allowability of deduction under section 37(1) of the Act pertaining to Education Cess, Senior Higher Education Cess is concerned, it is the submission of the ld. Counsel that this ground is not pressed.

Summary

Issues Involved:

1. Taxability of Overseas Consultancy Income (OCI) under Section 44DA of the Income Tax Act, 1961.
2. Effective connection of OCI with Permanent Establishment (PE) in India.
3. Allowability of deduction under Section 37(1) of the Act pertaining to Education Cess, Senior & Higher Education Cess.

Detailed Analysis:

1. Taxability of Overseas Consultancy Income (OCI) under Section 44DA of the Income Tax Act, 1961:

The Revenue's appeal raised the issue of whether the CIT (Appeals) erred in deleting the addition of Rs. 6,55,71,253/- made under Section 44DA, treating 50% of the OCI as business income effectively connected to the PE in India. The Appellant, a tax resident of Hong Kong, provided technical and management services for the Chennai Metro Rail Project (CMRL) and Kolkata East West Metro Rail Project (KMRL). The Appellant divided its services into offshore (rendered from Hong Kong) and onshore (rendered in India) services. The offshore income was offered to tax at 10% on a gross basis as Fee for Technical Services (FTS) under Section 115A, while the onshore income was offered as business income on a net basis.

The Assessing Officer (AO) treated 50% of the OCI as business income under Section 44DA, estimating the expenditure at 50% due to the absence of detailed expenditure records. The AO's decision was based on the assertion that the services rendered from overseas were effectively connected to the PE in India. The CIT (Appeals) deleted this addition, concluding that the offshore services were not effectively connected to the PE in India.

2. Effective Connection of OCI with Permanent Establishment (PE) in India:

The CIT (Appeals) and the Tribunal examined whether the offshore services rendered by the Appellant's employees from Hong Kong were effectively connected to the PE in India. The CIT (Appeals) found that the contract allowed certain services to be rendered from overseas and that the offshore services had no link with the services rendered by the PE/PO in India. The Tribunal upheld this view, noting that the offshore services did not require inputs from the PE in India and were not reviewed, edited, or amended by the PE.

The Tribunal relied on the ITAT judgment in JC Bamford Excavators Ltd. and the Supreme Court decision in Ishikawajima Harima Heavy Industries Ltd., which clarified that effective connection requires more than a mere relation to the PE. The Tribunal concluded that the offshore services were not effectively connected to the PE, and thus, the OCI was rightly offered as FTS under Section 115A.

3. Allowability of Deduction under Section 37(1) of the Act Pertaining to Education Cess, Senior & Higher Education Cess:

The assessee's cross-objection included an additional ground regarding the allowability of deduction under Section 37(1) for Education Cess, Senior & Higher Education Cess. However, the assessee's counsel did not press this ground, leading to its dismissal as not pressed.

Conclusion:

The Tribunal upheld the CIT (Appeals) decision, rejecting the Revenue's appeal and concluding that the OCI was correctly offered as FTS under Section 115A, not being effectively connected to the PE in India. The cross-objection filed by the assessee was dismissed as infructuous, and the additional ground regarding Education Cess was dismissed as not pressed. The appeal of the Revenue and the cross-objection filed by the assessee were dismissed.