1. AUTHORITY FOR ADVANCE RULINGS

1. Business connection – Income deemed to accrue or arise in India – Article 4(1) of Dtaa with U.a.e.

1. Liaison office in India which is only meant to provide information about the technology being used by the principal company and to receive and reply trade enquiries of the customers with no right to enter into negotiations with the customers in India for import or purchase of goods from the principal company would not constitute a "business connection" within the meaning of s. 9(1)(i) and no income would accrue to applicant through such liaison office.
    

2. Since there is no tax regime for individuals in UAE they are not covered by the expression "resident of a Contracting State" as contained in art. 4(1) of the DTAA between India and UAE. As such, the applicant is not entitled to claim the benefit of the DTAA.
   
   Gutal Trading Est., In re. – [2005] 278 ITR 643 (AAR)/ 198 CTR 417

1. The applicant, owned by a non-resident UAE national, was based in Dubai and its legal status was "individual establishment" under the UAE Law. It was the agent of GVB, a group of foreign companies. The applicant proposed to set up communication channels in India, termed as "liaison offices" by the Reserve Bank of India, for performing the following acts : (a) to hold seminars and conferences to cover information about the technology used by GVB in manufacturing reflective glasses of different kinds and to give reply to queries of the customers; (b) to receive trade enquiries and pass on the same to the Dubai office or directly to GVB; (c) to transmit information received from the Dubai office or GVB to the customers, consumers and other organizations; (d) to collect feed back and pass on the same to the Dubai office or directly to GVB. But under no circumstances was a liaison office in India to be allowed to carry on negotiations by itself, in import or purchase of the goods by the Indian customers in any manner. All the expenses to be incurred for the maintenance of the liaison office were to be met by the applicant and the liaison office would be merely a cost centre having no element of profit to meet the expenses incurred therein.
    

2. On these facts, the applicant sought a ruling on the following questions (a) whether the applicant could be said to have earned any income by the setting up of the proposed liaison offices; (b) if so, whether such income could be said to accrue or deemed to accrue or arise in India; (c) whether the applicant could be said to have any "business connection" within the meaning of section 9 of the Income-tax Act, 1961, so as to attract tax liability in India; (d) whether, in view of the saving clause as contained in Article 5 of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion between India and the UAE, the activity of the proposed liaison offices could be said to be treated outside the purview of "permanent establishment" and accordingly no income could be deemed to accrue or arise in India.

1. The assessee, a non-resident company was registered in the Republic of Malta. The assessee filed its return of income for the assessment year 1996-97, claiming relief available under the DTAA, entered into by the Republic of Malta and the Republic of India which came into force on 8-2-1995.
    

2. The Asst. Commissioner rejected the claim of the assessee. On appeal, the Commissioner reversed the decision of the Assistant Commissioner. However, the Tribunal held that the assessee could avail the benefit of agreement only from the assessment year 1997-98.
    

3. On appeal, the assessee submitted that (i) in the absence of punctuations in clause 29(2), the word ‘that refers to the fiscal year and not to calendar year; (ii) since the agreement came into force in February, 1995, the benefit should be given from the next fiscal year, i.e. the year starting from 1-4-1995 to 31-3-1996 and; (iii) that the assessee’s request for clarification from CBDT was referred to the Chief Commissioner, who advised the assessee that benefit under the agreement was available for the fiscal year starting from 1-4-1995.

Judgment

The Hon’ble High Court held that

1. Section 90 is not a charging section. It gives relief to the taxpayers from paying tax in two countries if conditions in the section are fulfilled. It empowers the Central Government to enter into agreement with foreign countries for granting relief in respect of double taxation. By agreement or treaty made under this section, no tax liability is created; but assessee can resort to the agreement for reducing or negativing the tax liability provided that his claim is coming within the four corners of the agreement.
    

2. With regard to the contention of absence of punctuation, even if comma or any other punctuation mark is put after the words ‘calendar year next’ in Article 29(2) of the treaty it would not convey a meaning helpful to the assessee. The expression ‘calendar year next following that’ could not qualify the word ‘fiscal year’ even if a comma was put anywhere else. The absence of punctuation in the relevant clause, create no ambiguity and, hence, absence of punctuation is irrelevant to interpret Article 29(2) of the treaty. It was only a desperate attempt of the assessee to show that there was some ambiguity in the sentence.
    

3. After a careful and close reading of article 29(2) of the treaty in question, it was clear that it gave only one meaning and there was no ambiguity in the wordings used. It was very clear that in India, benefit could be availed only for the fiscal year stating from 1-4-1996 to 31-3-1997, starting after the first day of next calendar year following in which the agreement came into force (February 1995). The agreement came into force in the year 1995. Next calendar year was 1996-96. Hence, benefit could be availed for the fiscal year starting from 1-4-1996; i.e., the next calendar year (assessment year 1997-98), The words ‘fiscal year’ in India and in Malta are also explained in the agreement. If the interpretation preferred by the assessee was taken, the words ‘calender year’ were unnecessarily used in the agreement. Further, as per the normal English grammar, the relative pronoun ‘that’ will only refer to the nearest proximate subject otherwise it will be an error of proximity and ‘that’ cannot refer to the fiscal year, but, only to ‘calendar year next’ which term was used immediately before the same. Even if the word ‘that’ used immediately after ‘calendar next’ refers to ‘fiscal year’, one could not come to the meaning attributed by the assessee. Words in the agreement could not be re-written merely because it would be more beneficial to the assessee. When the words are clear, there is no necessity to go into the intention of the Government in making the treaty. There is no scope for any equitable interpretation. No absurdities or anomalies will result from placing such an interpretation. The plain meaning has to be adopted in taxation matters especially when there is no ambiguity. The view adopted by the Tribunal and the revenue was correct. The appeal was to be dismissed.

Case referred to

Large number of cases were referred to.

3. TRIBUNAL

4. Non-resident assessee – Penalty u/s 271(1)(c) r/w sections 148 &149 – Notice u/s 148 issued beyond statutory period u/s 149 – Whether penalty imposed u/s 271 (1)(c) liable to be cancelled

It is open to assessee to set up/raise question of validity of assessment in appeal against levy of penalty. Where notice u/s 148 had been issued beyond statutory period prescribed u/s 149(3), assessment made on the basis of such notice would be null and void. Since very basis of imposition of penalty ceased to exist by virtue of void assessment order, penalty imposed u/s 271(1)(c) was liable to be cancelled.

Tidewater Marine International Inc. vs, DCIT [2005] 96 ITD 406 (Delhi)]

1. Proceedings under section 147 were initiated against the non-resident assessee and a notice u/s 148 was issued in the name of one ‘T’ treating it as the agent of the assessee.
    

2. The assessment was completed u/s 143(3)/148, accordingly. Thereafter, penalty proceedings u/s 271(1)(c) were initiated and penalty was levied by the Assessing Officer.
    

3. On appeal, the Commissioner (Appeals) confirmed the same.
    

4. In the appeal, before the ITAT the assessee, contended that since the notice u/s 148 was issued beyond a period of two years from the end of the relevant assessment years, the assessment was improper and invalid.
    

5. In turn, the revenue submitted that for the first time, the assessee had raised the plea before the Tribunal challenging the validity of the assessment order and, therefore, it might not be admitted at that stage.

On appeal, the Tribunal held as under:

1. It is open to the assessee to set up/raise the question of validity of assessment in the appeal against the levy of penalty. Since the question of validity of assessment made in the matter was raised, which was a pure question of law and not involving any investigation into the facts as the same were on record, the additional ground raised by the assessee was admitted for decision.
    

2. Section 149(3) provides that no notice u/s 148 shall be served on a person treating as agent of a non-resident u/s 163 after expiry of the period of two years from the end of the relevant assessment year. In the instant case, notice u/s 148 was issued beyond the period of two years from the end of the relevant assessment years in the name of ‘T’ treating it as agent of non-resident assessee. Thus, it would appear that a valid and proper notice u/s 148 was not issued and served on the assessee, which is a condition precedent for assumption of valid jurisdiction for initiating proceedings u/s 147.
    

3. Since initiation of the reassessment proceedings were vitiated as the notice u/s 148 had been issued beyond the statutory period prescribed u/s 149(3), consequently, assessment made on the basis of such notice would be null and void.
    

4. Since the very basis of imposition of penalty ceased to exist by virtue of void assessment order, the penalty imposed u/s 271(1)(c) was liable to be cancelled.

In the result, the appeals of the assessees were to be allowed.

5. Non-resident assessee – Leasing out its aircrafts to Air india –Whether engaged in business of operation of aircraft – Whether provisions of sec. 44bba applicable – Whether liable to tax u/s 9(1)(i)

As the non-resident assessee was leasing out its aircrafts to Air India, it was not carrying on business of operation of aircraft and therefore, rental income received by the assessee from Air India was not to be brought to tax under provisions of section 44BBA. The leasing income liable to tax u/s 9(1)(i).

Caribjet Inc. vs. DCIT [2005] 4 SOT 18 (Mum)

1. The assessee, a non-resident, had entered into agreements with Air India (AI) for wet leasing the aircrafts at the disposal of Air India.
    

2. When the assessing authority sought to assess the income of the assessee under the regular provisions of the Act, the assessee contended that its income should be assessed u/s 44BBA. Alternatively, the assessee contended that income deeming to accrue or arise in India was only such portion as was attributable to the operations carried out by it in India and, therefore, in terms of sec. 9(1)(i), only the proportionate amount could be considered as taxable income in India.
    

3. The Assessing Officer held that the entire income arising to the assessee out of the wet leasing of the aircraft to AI arose or accrued in India and, therefore, was liable to be taxed under the regular provisions of the Act.
    

4. He held that the assessee could not be assessed u/s 44BBA.
    

5. As the assessee had not maintained any regular accounts relating to expenditure and other items with reference to its operations in India, the Assessing Officer estimated the income at 29.7% of the revenues derived out of the contract entered into with AI. The estimation rate of 29.7% had been adopted by the assessing authority from the Arbitration Award of the Tribunal for International Arbitration in London. The Court of Arbitration had an occasion to estimate the income of the assessee arising as its Indian revenue in an arbitration proceedings instituted at the instance of the assessee and AI, which was necessitated because of disputes between them.
    

6. On appeal, the Commissioner (Appeals) upheld the impugned order.

1. The assessee, a non-resident French company had executed three contracts with ONGC. Out of these contracts, two were manning and management services contracts for supervision of drilling activities carried on by ONGC on its own rigs.
    

2. The assessee engaged the services of a number of technicians to execute the contracts.
    

3. The assessee paid salary to expatriate employees and claimed the same as deductible expenditure. However, in case of manning and management contracts, for services rendered on ONGC rigs in respect of expatriates whose stay in India did not exceed 183 days during the previous year, the assessee did not deduct tax at source on the ground that the salaries paid to such expatriates were exempt under Article XIV(2) of the DTAA between India and France. The assessee also claimed that income from manning and management contracts was taxable as technical fees as per Article XVI and not as business profits under Article III of DTAA.
    

4. The Assessing Officer assessed the assessee under section 44B, and, therefore, denied the benefit of provisions of Article XIV(2) of the DTAA to the assessee. He further held the assessee to be an assessee in default under section 201(1).
    

5. On appeal, the Commissioner (Appeals) upheld the impugned order.

On appeal, the Tribunal held as under:

1. There was no dispute that the assessee had permanent establishment in India. The assessee had accepted that the income from manning and management services was to be assessed as business income. The Assessing Officer had assessed the assessee’s income under section 44BB. No appeal against that order was filed.
    

2. It was submitted by the assessee that there could not be any estoppel against the statutory provisions in a case where an agreed assessment was made by merely following instruction of the CBDT and applying the provisions of section 44BB, read with section 90(2).
    

3. In order to examine that issue, provisions of Articles XIV and XVI of DTAA were required to be considered. The persons carrying on a trade or industrial activities, having permanent establishment in India, would fall under condition (c) of Article XIV (2).
    

4. Since the assessee had a permanent establishment in India, condition (c) would be applicable. There was no dispute that the assessee agreed to be assessed under the provisions of section 44BB for manning and management services rendered by it.
    

5. The next question to be decided in the instant case was whether remuneration paid outside India by the assessee could be treated to have been deducted in computing the profit of permanent establishment chargeable to tax in India. The contention of the assessee that in computing profits in India the salary of the expatriates had not been debited in the accounts of the Permanent Establishment had no relevance when income was computed in accordance with the provisions of section 44BB. Thus, the payment made to expatriate technicians on account of remuneration by the assessee, having permanent establishment in India, irrespective of their stay in India, was liable to tax in India.
    

6. The next question that arose for consideration was whether 90 per cent deduction allowed under deeming provisions of section 44BB would include salary/remuneration paid to expatriates. In interpreting a provision creating a legal fiction, the Court is to ascertain for what purpose, the fiction is created and after ascertaining that, the Court is to assume all those facts and consequences which are incidental or inevitable corollaries to give effect to the fiction. Therefore, the deeming provisions of section 44BB not only aim at estimation of income but by necessary implication also decide that remuneration paid to expatriates is included in 90 per cent of the amount allowed as deduction under section 44BB.
    

7. The income of the technicians being chargeable to tax in India irrespective of the period of stay, the assessee was liable to deduct tax at source while making the payment to expatriates. Non-existence of similar provision as that of section 44AD explaining expenditure deemed to have been allowed would not make any difference. Therefore, the assessee was a defaulter under section 201(1).

Note: It was also held by the Tribunal that:

1. The value of free boarding and lodging facilities provided to expatriate technicians by the assessee was to be charged as perquisite.
    

2. The salary paid by the assessee to expatriate technicians in respect of off-period was in nature of salary paid for earned leave period and was liable to be included for computation of deduction of tax at source.