2016-TII-INSTANT-ALL-363
20 August 2016   

CASE LAWS

2016-TII-192-ITAT-DEL-INTL

ROLLS ROYCE INDUSTRIAL POWER INDIA LTD Vs DDIT: DELHI ITAT (Dated: August 11, 2016)

Income tax - Sections 9(1)(vii), 44D, 92CA, 143(1) & 148 - India-UK DTAA - Articles 5, 7.5, 12(2) & 13(4)(c).

Keywords - application of mark up - FTS - gross receipts - interest on I-T refund - liaison office - make available clause - PE - permanent establishment & technical skill

Whether the receipts from operation & maintenance of a power plant can be treated as 'FTS' and accordingly be taxed on gross basis u/s 44D, in absence of any technical skill made available by the assessee - NO: ITAT

Whether interest earned by a UK-resident outside India under Article 12(2) of the Indo UK DTAA, can be taxed in India - NO: ITAT

A) The assessee is a company incorporated under the laws of United Kingdom and its principle activities comprises of Erection, Commissioning, Supervision, Installation and Operations & Maintenance of huge power plants and other projects. The style of functioning of the assessee was that it negotiates an agreement and thereafter execute the same sets project offices. The assessee had filed its return declaring an income of Rs.9,66,73,030/- which was processed u/s 143(1). Later on, the case was reopened by issuing the notice u/s 148. In response, the assessee submitted that its original return filed might be treated as return filed in response to the notice u/s 148. Thereafter, the AO referred the matter to the TPO u/s 92CA for determination of ALP in respect of the activities of the Liaison Offices (LO) of the assessee. The AO also held that the LO's of the assessee were PE within the meaning of Article 5 of DTAA.

B) The assessee had also challenged the order of Revenue, whereby the receipts from operation & maintenance agreement (O&M) project of Godavari were treated as FTS within the meaning of explanation-II to Section 9(1)(vii) of the Act and Article 13(4)(c) of the DTAA between India and UK and were taxed on gross basis u/s 44D.

Having heard the parties, the High Court held that,

Liaison office vis-a-vis PE

+ it is noticed that the issue under consideration has been decided in favour of the assessee vide order dated 04.05.2012 in ITA Nos. 1410 to 1413/Del/2007 for the A.Ys 1998-99 to 2001-02 respectively, ITA Nos. 1682 & 1683/De/2008 for the A.Ys 2002-03 & 2003-04 respectively and ITA No. 1297/Del/2008 for the A.Y 2004-05. The Tribunal therein has held that:

["....In addition to our holding that the assessee is liable to tax on net basis, under Art. 26 of the Indo-UK Treaty, the assessee which is a non-resident company and is undertaking the Works Contract is being discriminated against and subjected to tax on gross basis @ 30% by artificially invoking section 44D r/w/s 115A, whereas a domestic company doing exactly the same works contract would be taxed @ 2% u/s 194C and also would be subject to tax on its net profits without the application of section 44D. If the case of the assessee is carefully seen, then the tax that has been levied by the AO by misinterpreting Art. 7.5 of the Treaty and applying section 44D, without allowing the expenditure allowable u/s 29-44 of I-T Act, would amount to more than 100% of its revenue. We have also considered the other aspects of the case that the agreement did not envisage any training of personnel or making available any skill, know-how, development and transfer of any design etc. as envisaged u/s 9(1)(vii) Explanation 2 or Article 13(4)(c) of the DTAA between India and UK by the assessee to Spectrum. The training in the pre-operational stage was of the assessee own work force. That was done prior to February 1997 which does not fall within this period. In the absence of any such training to be provided, it cannot be said that anything was made available by the assessee to Spectrum. Therefore, we hold that in any case as per Article 13.4(c) of the Indo-UK Treaty, the assessee has not made available any technical knowledge, experience, skill, know-how, or process or development and transfer of any technical plan, a technical design to Spectrum....In view of Article 26 of the DTAA, taxing of a nonresident UK company in a manner which is more burdensome vis-à-vis an Indian company would lead to discrimination. This would also amount to unfavourable treatment being meted out to a U.K. company vis-à-vis the Indian company doing identical business in India. Accordingly the assessee is entitled to protection of Art. 26 of the Indo-UK Treaty and should not have been subjected to tax on gross basis, but on net basis...."]

+ therefore, respectfully following the aforesaid order, this issue is decided in favour of the assessee;

Receipts from operation & maintenance agreement

+ it is noticed that an identical issue having similar facts has already been decided by the ITAT Delhi Bench "F", New Delhi in assessee's own case vide order dated 04.05.2012 in ITA Nos. 5437 & 5438/Del/2011 for the A.Ys 2007-08 and 2008-09 respectively, wherein it was held that: "....the assessee has undertaken a work contract for operation and maintenance of power plant for its owner M/s Spectrum. For undertaking the work contract, the assessee got a price for producing power by operating and maintaining the power plant. It has not rendered any technical services to M/s Spectrum so as to come within the meaning of FTS. The income so received for executing the work contract did not fall within the definition of FTS u/s 9(1)(vii) Explanation 2 of the IT Act nor as defined in Article 13(4) of DTAA between India and UK. The assessee had also not "make available" any knowledge, skill etc. to M/s Spectrum within the meaning assigned to it under Article 13(4)(c) of the DTAA to FTS under the treaty. Accordingly, assessee cannot be taxed on gross basis and Section 44AD has no application to the facts of the instant case. Furthermore, Article 13(4)(c) read with Article 26 of DTAA does not permit the revenue authorities to discriminate against the assessee, a UK registered company and accord it less favourable treatment than a domestic company and therefore, section 44AD cannot be invoked in assessee's case. Thus, looking from any angle, the income received by the assessee from M/s Spectrum was not a fee for technical services, we therefore direct the AO to compute assessee's income and profit and gains of business from operation and maintenance of power plant of net profit and loss basis...." So, respectfully following the aforesaid order, the AO is directed to decide the issue as per the aforesaid directions given for the A.Ys 2007-08 and 2008-09, since the facts for the year under consideration are identical to the facts involved in the case pertaining to the said assessment years.

Case remanded

 

2016-TII-431-ITAT-BANG-TP

MCAFEE SOFTWARE INDIA LTD Vs ACIT: BANGALORE ITAT (Dated: August 11, 2016)

Income Tax - Sections 10A, 143(3) & 144C.

Keywords - exclusion of comparables - functionally dissimilar - computation of tax - total turnover - export turnover & good comparable.

Whether when all the 16 comparable companies were considered by the Tribunal in a given case, where it is held that these are not good comparables, DR has not pointed out any difference in facts, it is to be held that such decision of Tribunal holds good and these companies have to be excluded from the final list of comparables - YES: ITAT

Whether for computing deduction u/s 10A, if any amount is reduced from the export turnover, the total turnover also will be automatically reduced by the same amount, as total turnover is sum total of export turnover and domestic turnover - YES: ITAT

The assessee is a company. It had filed an appeal against the order of CIT(A). The assessment order was passed by the AO u/s 143(3) r.w.s.144C for AY 2007-08, as per the directions of DRP. It was submitted by AR that in respect of TP issues, assessee had submitted a chart and a copy of the Tribunal order rendered in the case of Hewlett- Packard (India) Globalsoft P. Ltd,(M/s HPGS) 2015-TII-409-ITAT-BANG-TP. It was further submitted that as per this chart, TPO had selected 26 comparables and the assessee was seeking exclusion of 16 comparables out of these 26 comparables. It had also submitted that the request for exclusion was on this basis that these companies were functionally dissimilar and as per this Tribunal order rendered in the case of M/s HPGS Vs DCIT, the entire issue was covered in favour of the assessee because in this Tribunal order also, all these comparables were considered by the Tribunal and it was held that these comparables are not good comparables.

Regarding the non TP issues, AR submitted that the only issue was regarding computation of tax allowable u/s 10A and this issue was covered in favour of the assessee by the judgment of the Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd., 2011-TIOL-684-HC-KAR-IT.

Having heard the matter, the Tribunal held that,

Regarding Exclusion of comparables

+ regarding the TP issues, we find that out of 26 comparables selected by the TPO, the assessee is requesting for exclusion of 16 comparables and out of that, request for exclusion of 15 comparables is on this basis that these companies are functionally dissimilar and for exclusion of one i.e. M/s R. Systems International Ltd(Seg.), the request is on this basis that this company is having different financial year ending. The request of the assessee for exclusion of 16 comparables is covered in favour of assessee by the Tribunal decision rendered in the case of M/s HPGS Vs DCIT and page no.13 -39 of this Tribunal order are relevant for taking decision about exclusion of these 16 comparables. From the paras mentioned from the order of the Tribunal rendered in the case of M/s HPGS, it is seen that all these 16 comparables were considered by the Tribunal in that case and it was held by the Tribunal that these 16 comparables are not good comparable. Since DR of the revenue could not point out any difference in facts in the present case, we decide this issue in favour of assessee by respectfully following this Tribunal order and the AO/TPO is directed to exclude these 16 comparables from the final list of comparables. The AO should re-calculate the TP adjustment, if any, after excluding these 16 comparables. In the result, the appeal of the assessee stands allowed in the terms indicated above;

Regarding computation of deduction u/s 10A

+ regarding non-TP issues in respect of computation of deduction allowable to the assessee u/s 10A of the Act, we find that this issue is covered in favour of the assessee by this judgment of the Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd. In this case, it was held by the Karnataka High Court that total turnover is sum total of export turnover and domestic turnover and therefore, if any amount is reduced from the export turnover, the total turnover also will be automatically reduced by the same amount. Accordingly, we decide this issue in favour of the assessee by respectfully following this judgment of the Karnataka High Court.

Assessee's appeal allowed

 

 

 

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