2023 (5) TMI 269 - AT - Income Tax

Attribution of profit to PE qua the offshore supply of plants and equipments - AO and DRP have held that offshore supply of equipment, being integrally connected to the service and installing activity undertaken by the PE in India, assessee s income has to be computed u/s 44BB - HELD THAT - Undisputedly, in the past assessment years the AO has taken a consistent approach of attributing 1% of the receipts from offshore supplies as profits of the PE in India. Thus, in terms of Article 7(6), profits attributable to the PE have been consistently computed by adopting a particular method. In the impugned assessment year, AO has made a departure by discarding the earlier method and adopting a new method of computing profit u/s 44BB - While doing so, the AO, as it appears, has not taken note of the method of determination of profit attributable to the PE adopted in the past assessment years. DRP has completely ignored the submissions of the assessee and has proceeded to accept the view of the Assessing Officer without saying how the factual position is different from the past assessment years. Thus, it is manifest, both the AO and learned DRP have failed to provide any good and sufficient reason while departing from the methodology adopted by the department in respect of attribution of profit to the PE on receipts from offshore supply of equipment in past assessment years. Therefore, the decision of the departmental authorities militate against the specific provision contained under Article 7(6) of the tax treaty. The decision taken by the departmental authorities in computing profit of the assessee under section 44BB of the Act is unsustainable, as, it is not consistent with the position taken on the issue in past assessment years. Therefore, while deleting the addition made by the AO, we direct him to attribute 1% of the receipts from offshore supply of equipment as profit of the PE and accordingly compute the income of the assessee.

Summary

Issues Involved:

1. Taxability of receipts from offshore supply of equipment.
2. Attribution of profit to the Permanent Establishment (PE) in India.
3. Consistency in the method of attributing profit to the PE as per Article 7(6) of the India-Singapore DTAA.
4. Levy of interest under sections 234A and 234B of the Income-tax Act, 1961.

Summary:

1. Taxability of Receipts from Offshore Supply of Equipment:
The assessee, a non-resident corporate entity from Singapore, engaged in offshore supply of equipment and related services, did not offer receipts from offshore supply of equipment for taxation in India, arguing that no part of such activity was carried out in India and the title over the goods passed overseas. The Assessing Officer (AO) observed that the supply of plants and equipment was integrally connected to the installation and commissioning activity, hence part of a composite contract, and proceeded to tax the receipts under section 44BB of the Income-tax Act at 10% on a gross basis, determining the income from offshore supply at Rs.18,08,04,057/-.

2. Attribution of Profit to the Permanent Establishment (PE) in India:
The assessee contended that there was no PE in India and even if there was, the offshore supplies were not connected to the activities of the PE and hence not taxable in India. The AO and the Dispute Resolution Panel (DRP) held that the offshore supply of equipment was directly connected to the service and installation activity carried out through the PE and thus taxable under section 44BB. The assessee argued that a consistent revenue recognition policy had been followed from assessment years 2010-11 to 2016-17, where 1% of the gross receipts from offshore supply of equipment were attributed to the PE. This position was accepted by both the Revenue and the assessee to avoid protracted litigation.

3. Consistency in the Method of Attributing Profit to the PE as per Article 7(6) of the India-Singapore DTAA:
Article 7 of the India-Singapore DTAA provides that profits attributable to the PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. The AO's departure from the earlier method of attributing 1% of the receipts from offshore supplies to the PE and adopting a new method under section 44BB was without providing any good and sufficient reason. The Tribunal noted that both the AO and the DRP failed to provide any valid ground for this departure, making the decision unsustainable as it contradicted Article 7(6) of the DTAA.

4. Levy of Interest under Sections 234A and 234B of the Income-tax Act, 1961:
The levy of interest under sections 234A and 234B was deemed consequential in nature and not required to be adjudicated upon.

Conclusion:
The Tribunal directed the AO to attribute 1% of the receipts from offshore supply of equipment as profit of the PE and accordingly compute the income of the assessee, thereby allowing ground nos. 10 and 11. Other grounds not pressed were dismissed, and ground no. 15 was dismissed as premature. The appeal was partly allowed.