2023 (6) TMI 351 - AT - Income Tax

Applicability of section 44BB - mandation of existence of PE in India - India-UK DTAA - whether section 44BB will apply in absence of PE? - HELD THAT - Section 44BB provides that notwithstanding anything contained in sections 28 to 41 and section 43 43A, 10% of the gross receipt of a non-resident engaged in the business of providing services or facilities or supplying plant machinery on hire which is used in prospecting for or extraction of mineral oils shall be deemed to be the profits gains of business. Thus, this section has rightly been contended by ld. Counsel of the assessee that it is a computation provision. Thus, this section provides a presumptive taxation rate for computation of profits but does not override provision of sections 5, 9 or section 90 of the Income-tax Act, 1961. Case law referred by assessee in this regard i.e. Sedco Forex International 2017 (11) TMI 78 - SUPREME COURT fully supports this proposition as expounded that sections 4, 5 9 are to be kept in mind, where assessment is done u/s 44BB. It is settled proposition that unless Revenue is able to prove that the assessee has a PE in India, its business profits cannot be subject to tax in India. This view is supported by decision of R B Falcon Offshore Ltd 2010 (9) TMI 741 - ITAT, DELHI In this case, ITAT clearly held that in absence of a PE, section 44BB has no application. As referred in Hon ble Supreme Court decision in the case of ADIT vs. E-Funds 2017 (10) TMI 1011 - SUPREME COURT burden of proving the existence of PE lies on the Revenue which has not been discharged. In this view of the matter, assessee succeeds that there is no finding of PE in this case, hence section 44BB will not apply. Decided in favour of assessee.

Issues Involved:
1. Computation of Income.
2. Document Identification Number (DIN) Missing.
3. Existence of Permanent Establishment (PE).
4. Application of Section 44BB to Offshore Sales.
5. Attribution of Profits to Alleged PE.
6. Addition under Section 44BB(1).
7. Deduction of Arm's Length Remuneration.
8. Attribution of 1% of Sales.
9. Factual Inaccuracies in AO's Order.
10. Penalty under Section 270A.

Summary:

1. Computation of Income:
The assessee contested the computation of income at Rs 144.78.05.266/- by the AO against the returned income of Rs. 83,91,03,650/-.

2. Document Identification Number (DIN) Missing:
The assessee argued that the DRP's order dated 16.12.2022 did not bear the mandatory DIN, rendering the order and the consequent final assessment order void ab initio.

3. Existence of Permanent Establishment (PE):
The AO held that the assessee had a PE in India under the India-UK DTAA, but failed to specify the relevant provision of Article 5 under which PE was created and how conditions for its existence were satisfied. The DRP considered the issue of PE academic and did not address it.

4. Application of Section 44BB to Offshore Sales:
The AO and DRP applied Section 44BB to the income from the supply of goods and equipment to ONGC, despite the assessee's contention that no part of the manufacture or sales function had taken place in India. The DRP relied on the Supreme Court decision in ONCC vs CIT to include offshore supplies within Section 44BB's ambit.

5. Attribution of Profits to Alleged PE:
The AO and DRP did not establish how the profits from the sale of goods and equipment were attributable to the alleged PE of the assessee in India.

6. Addition under Section 44BB(1):
The AO made an addition of Rs.60,87,01,615/- under Section 44BB(1) towards profits and gains of business or profession, representing 10% of the total contract revenue, without appreciating that the provision does not apply to the sale of goods and equipment.

7. Deduction of Arm's Length Remuneration:
The AO and DRP did not allow the deduction of arm's length remuneration already offered to tax in the hands of the assessee's project office in India.

8. Attribution of 1% of Sales:
The AO and DRP did not apply the attribution of 1% of sales as profits attributable to the alleged PE as prescribed under Circular No.1767 dated 1.07.1987 issued by the CBDT.

9. Factual Inaccuracies in AO's Order:
The AO passed the final assessment order based on several factually incorrect findings, despite specific directions from the DRP to verify these inaccuracies.

10. Penalty under Section 270A:
The AO initiated a penalty under Section 270A of the Act.

Judgment:
The Tribunal held that Section 44BB is a computation provision and does not override sections 5, 9, or 90 of the Income Tax Act. It found no evidence of a PE in India, making Section 44BB inapplicable. The appeal was allowed, and the stay application was dismissed as infructuous. The judgment emphasized that the burden of proving the existence of PE lies on the Revenue, which was not discharged in this case.

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