MTR Corporation Ltd., New Delhi V. DCIT, New Delhi

ITA 2009/DEL/2015

AI Insights

The case revolves around the taxability of income received by MTR Corporation Ltd., a non-resident entity, from DAMEPL for consultancy services. The core issue was whether this income should be taxed under section 44DA of the Income Tax Act, which applies to income connected with a PE in India, or under section 115A, which pertains to Fees for Technical Services (FTS) without a PE. The Assessing Officer initially treated the income as business income under section 44DA, citing the presence of a PE due to the duration and nature of the assessee's employees' stay in India and the facilities provided by DAMEPL. However, the Tribunal disagreed, emphasizing that the assessee did not have control over the premises and thus did not have a PE in India.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 300552 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowedAllowed
• Bench Allotted: D
• Next Hearing Date: 16-02-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 06-04-2015
• Other Referred Cases: ADIT Vs. M/s. E-Fund IT Solutions Inc., Formula One World Championship Ltd. Vs. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DURGESH SHANKAR
• Keywords: Double taxation relief; Permanent establishment
• Section: 143(3); 115A; 44DA; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No.2009/Del/2015 Assessment Year: 2011-12 MTR Corporation Ltd., Kachwaha & Partners, Advocates, 1/6, Shanti Niketan, New Delhi Vs. DCIT, Circle-2(2)(1), International Taxation, New Delhi PAN :AAGCM5321E (Appellant) (Respondent) ORDER PER SAKTIJIT DEY, JM: Captioned appeal has been filed by the assessee assailing the final assessment order dated 05.02.2015 passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’) for the assessment year 2011-12, in pursuance to direction of learned Dispute Resolution Panel (DRP). Appellant by Sh. Durgesh Shankar, Advocate Ms. Salini, Advocate Ms. Akansha Mohan, Advocate Ms. Ananya Saluja, Advocate Respondent by Sh. Sanjay Kumar, Sr. DR Date of hearing 17.02.2023 Date of pronouncement 16.05.2023 ITA No.2009/Del/2015 AY: 2011-12 2 | P a g e 2. Though, the assessee had raised multiple grounds, both on merits as well as on legal issues, however, the core issue arising for consideration is whether the amount received by the assessee from Delhi Airport Metro Express Pvt. Ltd. (in short ‘DAMEPL’) is taxable under section 44DA of the Act, as held by the departmental authorities, or under section 115A read with section 9(1)(vii) of the Act as per assessee. 3. Briefly the facts relating to the issue in dispute are, the assessee is a non-resident corporate entity having its headquarter in Hong Kong and is a tax resident of Hong Kong. As stated by the Assessing Officer, the assessee is engaged in the business of providing engineering and project management consultancy services. The DAMEPL floated a global tender for providing engineering and project management consultancy services for the airport line of Delhi Metro. The assessee participated in the tender and was successful. Accordingly, the work was entrusted to the assessee by executing a contract on 19.05.2008. After execution of contract, the assessee commenced it work. In the year under consideration, the assessee received an amount of Rs.28,51,54,304/- from DAMEPL. The assessee treated the aforesaid receipts as Fee for Technical Services (FTS) within the ITA No.2009/Del/2015 AY: 2011-12 3 | P a g e meaning of section 9(1)(vii) of the Act, and in the return of income filed for the impugned assessment year on 28.07.2011, offered it to tax on gross basis by applying the rate of 10% in terms with section 115A of the Act. In course of assessment proceeding, the Assessing Officer called upon the assessee to furnish the contract with DAMEPL, the nature of work executed and various other details, including the details of personnel, who visited India in connection with the contract. After verifying the terms of the contract as well as various other details furnished by the assessee, the Assessing Officer noticed that, in total, 24 employee had visited India during the relevant year. Out of which, 21 stayed in India for more than 183 days. Based on these facts, the Assessing Officer formed the view that the assessee had a Permanent Establishment (PE)/business connection in India. Accordingly, vide order-sheet entry dated 05.02.2014, he called upon the assessee to explain, why the receipts from DAMEPL should not be treated as business income at the hands of the assessee. In response to the query raised by the Assessing Officer, the assessee furnished a detailed reply on 26.03.2014, stating that there is no business connection in India in terms with section 9(1)(i) of the Act. It was further submitted by the assessee ITA No.2009/Del/2015 AY: 2011-12 4 | P a g e that entire burden lies on the Revenue to establish, how and in what manner the business connection exists. For such proposition, assessee relied upon certain judicial precedents. Further, the assessee submitted that tenure of both the contracts would make it clear that neither they are extendable, nor extended. It was submitted, apart from the contract with DAMEPL, the assessee had no other contract in India with anyone. 4. As per the contract with DAMEPL, after expiry of period of contract and completion of the work, in terms with the conditions of the contract, the assessee has to withdraw from India. Thus, it was submitted by the assessee that there was no business connection in India. After perusing the submission of the assessee, the Assessing Officer was not convinced. He observed, since, India had no Double Taxation Avoidance Agreement (DTAA) with Hong Kong, taxability of income received by the assessee has to be governed under the provisions of the Income Tax Act. He observed that the assessee itself has treated the receipts as FTS and offered it to tax under section 115A of the Act. He observed that the expression “business connection” used in section 9(1)(i) of the Act is similar to the concept of PE under the international ITA No.2009/Del/2015 AY: 2011-12 5 | P a g e tax laws and tax treaties. Rather, he observed, the expression “business connection” will have a wider connotation as compared to the concept of PE. He observed, the time spent by the employees of a non-resilient entity in execution of any project/contract plays a very significant role in determination of PE/business connection. He observed that in case of the assessee, the employees have stayed in India for a period of more than 183 days. Referring to certain clauses in the contract with DAMEPL, the Assessing Officer observed that the assessee has been provided space with various other facilities by DAMEPL. Further, he observed that the assessee has entered into a separate agreement for secondment of its employee to the office of DAMEPL in order to complete the consultancy project undertaken by it. However, salaries of the seconded employees were paid by the assessee. Referring to various terms of the secondment agreement, the Assessing Officer observed that the assessee has employed two teams of employees, viz., offshore and onshore, who were responsible for consultancy project undertaken by the assessee and role of both the teams have been specified in the agreement. Thus, on the aforesaid factual analysis, the Assessing Officer observed that it is not a case of simple consultancy but a ITA No.2009/Del/2015 AY: 2011-12 6 | P a g e case of consultancy service effectively connected to the business presence of the assessee in India. The Assessing Officer observed that from the nature of work executed by the assessee and the number of days spent by the employees in India, it cannot be said that the services are independent in nature. Hence, shall be categorized as FTS. Thereafter, referring to certain judicial precedents the Assessing Officer ultimately concluded that since the assessee had a PE/business connection in India, the receipt from DAMEPL amounting to Rs.28,51,54,300/- has to be assessed as income from business and profession under section 44DA of the Act. Accordingly, attributing the entire receipt to the PE and deducting therefrom salary cost of the seconded employees amounting to Rs.7,09,36,400/-, the Assessing Officer brought the balance amount of Rs.21,41,30,900/- to tax under section 44DA of the Act by applying rate of 40%. Accordingly, he proposed the draft assessment order. Against the draft assessment order, assessee raised objections before learned DRP. However, learned DRP endorsed the draft assessment order. Accordingly, the final assessment order was passed. 5. Before us, learned counsel submitted that in course of assessment proceeding, the Assessing Officer never expressed his ITA No.2009/Del/2015 AY: 2011-12 7 | P a g e intention of invoking section 44DA of the Act. Therefore, the assessee had no opportunity to make submissions against applicability of the said provision. He submitted, while upholding the finding of the Assessing Officer in the draft assessment order, learned DRP has gone completely wrong by stating that there exists a DTAA between Indian and Hong Kong. He submitted, extensive submissions filed by the assessee have been completely ignored. 6. Drawing our attention to the provisions contained under section 44DA of the Act, learned counsel submitted, the expression ‘Permanent Establishment’ used in section 44DA refers to its definition in section 92F(iiia) of the Act. He submitted, as per the definition of PE in section 92F(iiia), PE means a fixed place of business, through which, the business of the enterprise is wholly or partly carried on. Proceeding further, he submitted, section 44DA uses both the terms ‘Permanent Establishment’ and ‘fixed place of profession’. He submitted, the terms ‘business and professional services’, as per section 44DA of the Act are different. Therefore, to come within the purview of section 44DA of the Act, so far as professional services are concerned, it must be provided from a fixed place of profession situated in India. He submitted, ITA No.2009/Del/2015 AY: 2011-12 8 | P a g e the expression ‘fixed place of profession’ has not been defined in the statute. Thus, he submitted, since the assessee has no fixed place of profession in India, section 44DA is not attracted. Without prejudice, he submitted, the principal test to ascertain, as to whether an enterprise has a fixed place of business or not is that place of business or premise has to be at the disposal of the enterprise. He submitted, a particular place would be treated to be at the disposal of the enterprise when the enterprise had right to use the said place and has a control thereupon. He submitted, the burden is entirely on the Revenue to establish the aforesaid facts. In this context, he relied upon a decision of the Hon’ble Supreme Court in case of ADIT Vs. M/s. E-Fund IT Solutions Inc. [2018] 13 SCC 294. He also relied upon a decision of the Hon’ble Supreme Court in case of Formula One World Championship Ltd. Vs. CIT, [2017] 15 SCC 602. Thus, he submitted, since, the assessee was not conducting any business in India through a fixed place of business, there cannot be any PE of the assessee in India. Thus, he submitted, in absence of a PE or fixed place of profession in India, the provision of section 44DA of the Act would not be applicable. Without prejudice to the aforesaid submission, learned counsel submitted, in case, it is held that section 44DA of ITA No.2009/Del/2015 AY: 2011-12 9 | P a g e the Act is applicable, the entire expenditure incurred by the assessee in term of its audited accounts should be allowed and income is to be computed accordingly. 7. Per contra, learned Departmental Representative submitted, the assessee itself has accepted that the receipts from DAMEPL are in the nature of FTS and has offered it to tax. Referring to clauses of contract reproduced in the final assessment order, learned Departmental Representative submitted, the assessee has been provided an office space with all other facilities in the premises of DAMEPL. Thus, he submitted, the assessee had a fixed place of business in India from where it is carrying out its business wholly or partly. He submitted, the employees of the assessee have regularly visited India and have stayed for more than 183 days. Thus, he submitted, when the assessee has a fixed place of business in India and its employees have visited India and stayed for considerable length of time, it has to be held that the assessee has a PE in India. He submitted, once, the fact that the assessee has a PE in India is established, automatically, receipt from DAMEPL, even if in the nature of FTS, would be treated as income from business and profession and taxed under section 44DA of the Act. Thus, he submitted, the departmental ITA No.2009/Del/2015 AY: 2011-12 10 | P a g e authorities have correctly brought the receipts to tax under section 44DA of the Act. As regards assessee’s alternative contention that, in case, the receipts are held to be taxable under section 44DA of the Act, the corresponding expenses should be allowed, learned DR submitted, the issue can be examined by the Assessing Officer with reference to the audited accounts and other evidences furnished by the assessee. In rejoinder, learned counsel submitted, in all earlier years, assessee’s income declared under section 115A has been accepted. 8. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. Undisputedly, the assessee has received certain consideration from DAMEPL for rendition of engineering and project management consultancy services. Since, there is no DTAA between India and Hong Kong, the assessee, being tax resident of Hong Kong, has treated the receipts from DAMEPL as FTS in terms with the provisions contained under the domestic law and offered it to tax under section 115A of the Act. Whereas, the Revenue has assessed the income under section 44DA of the Act. At this stage, it is necessary to look into the provisions of section 44DA of the Act, which read as under: ITA No.2009/Del/2015 AY: 2011-12 11 | P a g e “Special provision for computing income by way of royalties, etc., in case of nonresidents. 44DA. (1) The income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after the 31st day of March, 2003, where such non-resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession, as the case may be, shall be computed under the head “Profits and gains of business or profession” in accordance with the provisions of this Act : Provided that no deduction shall be allowed,— (i) in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or (ii) in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to its head office or to any of its other offices. (2) Every non-resident (not being a company) or a foreign company shall keep and maintain books of account and other documents in accordance with the provisions contained in section 44AA and get his accounts audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and furnish along with the return of income, the report of such audit in the prescribed form72 duly signed and verified by such accountant. Explanation.—For the purposes of this section,— (a) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (b) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (c) “permanent establishment” shall have the same meaning as in clause (iiia) of section 92F.] 9. As could be seen from the aforesaid provision, it gets attracted on fulfillment of the following conditions: i. The income must be in the nature of royalty or FTS. ITA No.2009/Del/2015 AY: 2011-12 12 | P a g e ii. It must have been received by a non-resident or a foreign company from an Indian entity in pursuance to an agreement executed after 31 st day of March, 2003. iii. Non-resident or foreign company carries on business in India through a Permanent Establishment (PE) or performs professional services from a fixed place of profession situated therein. iv. The right, property or contract in respect of which the royalty or FTS is paid is effectively connected with such PE or fixed place of profession. 10. On fulfillment of the aforesaid additions, the receipts of the assessee shall be computed under the head ‘profit and gains from business or profession’ in terms with the provisions contained therein. 11. The first contention of the assessee is that since professional services rendered by the assessee are not through any fixed place of profession, the receipts are not taxable under section 44DA of the Act. In this context, learned counsel has submitted, the expression ‘fixed place of profession’ has not been defined under the statute, hence, it will not come within the purview of the definition of PE under section 92F(iiia) of the Act. ITA No.2009/Del/2015 AY: 2011-12 13 | P a g e 12. In our view, the aforesaid contention of the assessee is far- fetched, hence, not acceptable. The expression ‘fixed place of profession’ is used in the context of a non-resident, which is not a foreign company. Though, the expression ‘fixed place of profession’ has not been defined specifically under the provisions of the Act, however, the term ‘Permanent Establishment’ used in section 44DA, in turn, refers to the definition of ‘Permanent Establishment’ under section 92F(iiia) of the Act. As per definition of PE under section 92F(iiia), it includes fixed place of business, through which, the business of the enterprise is wholly or partly carried on. Thus, the fixed place of profession is akin to fixed place of business. Therefore, assessee’s contention in this regard are rejected. 13. However, the crux of the matter is whether the assessee had a PE in India. The departmental authorities have concluded the existence of PE based on the fact that the employees of the assessee have visited India and they have been provided space in the premises of DAMEPL. On a perusal of the agreement between the parties, it is observed that the contractee is to provide office space with some other facilities to the employees of the assessee in India to carry out their activities. Such premises and facilities ITA No.2009/Del/2015 AY: 2011-12 14 | P a g e have been given free of charge. However, the question, which arises, is, whether access given to the assessee of the office premises of the contractee would constitute service PE or for that matter any other PE. 14. We have already referred to the definition of PE under section 92F(iiia) of the Act, wherein, it has been defined to include fixed place of business from where the assessee carries on its business wholly or partly. In our view, the facts on record do not reveal that the space and facilities provided to the assessee by DAMEPL can be construed to be a fixed place of business from where the assessee carries on its business wholly or partly. In case of ADIT Vs. E-Funds IT Solution Inc. (supra), the Hon’ble Supreme Court has observed that the principal test to ascertain, whether an establishment has a fixed placed of business or not, is to see whether such physically located premise is at the disposal of the enterprise. The Hon’ble Court has observed, merely giving access to a place to the enterprise for the purpose of project will not amount to putting the premise at the disposal of the enterprise. Putting the premise at the disposal of an enterprise would mean, when the enterprise has right to use the said place and has control thereupon. The Hon’ble Court has held that the ITA No.2009/Del/2015 AY: 2011-12 15 | P a g e burden is entirely on the Revenue to establish that the enterprise has effective control over the premise. 15. In the facts of the present appeal, the Revenue has failed to establish through corroborative evidence that the assessee is having control over the premise. Admittedly, it is the DAMEPL, which is having control over the premises and the assessee has been given access to the premise and provided certain space and facilities. No corroborative evidence has been brought on record to demonstrate that the assessee carries on business in India wholly or partly through a fixed place of business. That being the factual position emerging on record, applying the ratio laid down in the judicial precedents cited before us by the learned counsel for the assessee, we hold that the assessee does not have any PE in India. That being the fact, the provisions of section 44DA would not be applicable. Therefore, in our view, the income offered by the assessee under section 115A read with section 9(1)(vii) of the Act has to be accepted. More so, considering assessee’s contention that in the preceding assessment years, similarly declared income has been accepted has not been controverted by the Revenue. Accordingly, we delete the addition made by the Assessing Officer under section 44DA of the Act. ITA No.2009/Del/2015 AY: 2011-12 16 | P a g e 16. As regards legal grounds raised by the assessee, at the time of hearing, learned Departmental Representative has placed before us official documents to demonstrate that the direction of learned DRP have been issued properly and the assessment order has been passed within the period of limitation. Such factual position brought on record could not be controverted by learned counsel for the assessee. Therefore, the legal grounds raised by the assessee are dismissed. 17. Rest of the grounds having become infructuous are not adjudicated. 18. In the result, the appeals is partly allowed, as indicated above. Order pronounced in the open court on 16 th May, 2023 Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 16 th May, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi