2025 (1) TMI 384 - AT - Income Tax

Validity of Reassessment proceedings - reason to believe - assessee has not offered to tax certain receipts from Jindal Steel and Power Limited - HELD THAT - We observed that as per the information on record, the AO was of the opinion that there is substantial receipts not offered to tax by the assessee and accordingly, he reopened the assessment. Even though there is a small factual error, however the gross amount in terms of rupees mentioned in the reasons supplied to the assessee and the additions made in the assessment order are same. Therefore, we are not inclined to proceed with the objections raised by the assessee for reopening of the assessment. Consideration received for supply of drawings and designs should be classified as Fees for Technical Services (FTS) or Business Profits under the Double Taxation Avoidance Agreement (DTAA) between India and Germany - Coming to the issue on merits, we observed that the assessee has declared three invoices in its return of income as exempt from tax however when the case was reopened it has filed its return of income by bringing on record facts clearly and it was submitted before the AO as well as ld. CIT (A) that two invoices of Euro 2,35,000 and 30,500 relates to supply of drawings and designs to Jindal Steel and Power Limited and which is exempt from tax on the basis of ITAT, Vishakhapatnam decision which is in favour of the assessee (it is decided in the case of M/s. SMS Schloemann Siemag AG Germany 2001 (4) TMI 62 - ANDHRA PRADESH HIGH COURT which is the sister concern of the assessee). With regard to third invoice of Euro 9,49,600, it was submitted before the ld. CIT (A) that it is relating to supply of equipment. CIT (A) appreciated the above facts on record and deleted the addition made by the AO relating to supply of equipments. However, he did not consider the decision of ITAT, Vishakhapatnam relating to supply of drawings and designs as royalty/FTS and he proceeded to sustain the addition on the two invoices which assessee has not declared in their return of income. After considering the factual matrix on record, we observed that the ITAT, Vizag has considered the similar issue on record and decided the issue of supply of drawings and designs in favour of the assessee even though as royalties. However, the provisions of royalties and FTS are similar in nature, therefore, we are inclined to accept the submissions of the assessee and we direct the AO to delete the additions proposed in this case. Claim of the appellant to treat the proceeds towards such supervisory services as non-taxable business profits in the absence of Permanent Establishment ( PE ) in India for relevant contracts in terms of Article 7 of the DTAA - CIT (A) has enhanced the addition on the other supervisory services provided by the assessee in the new project for a period of 30 days - HELD THAT - CIT (A) has enhanced the addition with the observation that the project in which the assessee has provided supervisory services for a period of less than six months still he treated the assessee as a deemed PE and proceeded to enhance the addition. As per the facts on record, assessee has followed contract completion method and accordingly, offered to tax in AY 2016-17 and assessee has submitted the relevant Balance Sheet in its paper book. For the sake of verification, we deem it fit and proper to remit the issue back to the file of AO whether the assessee has offered the relevant revenue based on the method followed by it i.e. contract completion method in the AY 2016-17. In case, it is found that assessee has offered the same in the year of completion, no further addition can be made in the present assessment year. Accordingly, ground no.4 is remitted back to the file of AO with the limited purpose to verify the above aspect after giving opportunity of being heard to the assessee. Hence, ground no.4 is allowed for statistical purposes.

1. ISSUES PRESENTED and CONSIDERED

The judgment addresses several core legal questions:

Whether the reassessment proceedings initiated by the Assessing Officer (AO) were valid.
Whether the consideration received for supply of drawings and designs should be classified as "Fees for Technical Services" (FTS) or "Business Profits" under the Double Taxation Avoidance Agreement (DTAA) between India and Germany.
Whether the supervisory services provided by the assessee constituted a Permanent Establishment (PE) in India under the DTAA between India and Switzerland.
Whether the income from supervisory services should be taxed as FTS or Business Profits.
Whether the interest under section 234B and penalties under section 271(1)(c) were applicable.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reassessment Proceedings

Legal Framework and Precedents: The reassessment was conducted under section 148 of the Income-tax Act, 1961. The Supreme Court's decision in CIT v. Sun Engineering Works Pvt. Ltd. was considered.
Court's Interpretation and Reasoning: The court upheld the AO's decision to initiate reassessment, noting that the AO had a valid reason to believe income had escaped assessment.
Key Evidence and Findings: The AO observed discrepancies in the income reported from Jindal Steel and Power Limited.
Application of Law to Facts: Despite minor factual errors, the court found the AO's reasons for reassessment valid.
Treatment of Competing Arguments: The assessee's objections to the reassessment were dismissed as the court found the AO's reasons substantial.
Conclusions: The reassessment proceedings were deemed valid.

Classification of Income from Drawings and Designs

Legal Framework and Precedents: The classification hinged on Article 12 of the Indo-Germany DTAA and section 9(1)(vii) of the Income-tax Act.
Court's Interpretation and Reasoning: The court considered past ITAT decisions and the nature of the contracts.
Key Evidence and Findings: The court noted the contractual terms and prior ITAT rulings favoring the assessee's classification as business profits.
Application of Law to Facts: The court applied the DTAA provisions, finding the income should not be taxed as FTS.
Treatment of Competing Arguments: The court favored the assessee's argument based on consistent past rulings.
Conclusions: The income from drawings and designs was not taxable as FTS.

Supervisory Services and Permanent Establishment

Legal Framework and Precedents: Article 5 and Article 7 of the DTAA between India and Switzerland were pivotal.
Court's Interpretation and Reasoning: The court examined the duration of supervisory activities and the method of accounting used by the assessee.
Key Evidence and Findings: Evidence showed supervisory activities lasted less than six months, affecting PE status.
Application of Law to Facts: The court considered the contract completion method and prior acceptance of the assessee's accounting practices.
Treatment of Competing Arguments: The court remitted the issue for verification of income declaration in the completion year.
Conclusions: The case was remanded to verify the accounting treatment and PE status.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes: "The AO has rightly considered the income returned in the revised return as starting point and not the income returned in response to notice u/s 147 of the Act."
Core Principles Established: The court reinforced the principle that reassessment requires valid reasons and that DTAA provisions take precedence in classifying income.
Final Determinations: The reassessment proceedings were valid; income from drawings and designs was not taxable as FTS; supervisory services' taxability was remanded for further verification.

The judgment provides a comprehensive analysis of the issues related to international taxation, emphasizing the importance of DTAA provisions and consistent application of accounting methods in determining tax liabilities.

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