Indo-Canadian DTAA is based on UN Model

TAXING income of a non-resident company is always a tricky business. In this case, the issue largely revolves around the attribution of profits between the Head Office (HO) and the Permanent Establishment (PE) in India. Although the assessee opted for assessment under the provisions of Indo-Canadian DTAT but it also expressed its desire to be assessed under the Income Tax Act if the benefits are denied under the first option. Revenue stoutly resisted such switchover from DTAT to Income Tax Act as the tax rate was lower on fee for technical services but the Tribunal allowed it. However, the assessee was not allowed deduction of expenses as per the Act. Brief facts of the case : The appellant, a Canadian resident, entered into an agreement in July, '99 with NHPC which was executed in India. The appellant company is a joint venture company incorporated only for the execution of the Chamera Hydro Project in HP. Except the execution of the Project, the appellant company has not executed any other contract either in India or outside India. The whole of the activity pertains to only execution of the Chamera Project. The other contractor involved in this regard is M/s Jai Prakash Industries Ltd of India. It is the contention of the assessee that even prior to setting up of the PE in India, the work pursuant to the agreement commenced but the same was executed by raising the bills after the PE was established. That is why value of the work done prior to setting up of the PE is reflected as opening work-in-progress and claimed as expenditure on debit of profit and loss account. The assessee filed its return and later revised the income attributable to India by writing a letter to the AO. Before the CIT (A) it further revised it upwards. The AO however rejected the claim of revision of income made under the letter without filing any revised return and held that income shown in the project office in the return on the basis of project accounts would form the basis of assessment. The claim of apportionment and attribution was thus rejected. The CIT(A) on his part not only substantially upheld the basis of assessment but further enhanced the assessment by disallowing a sum in respect of guarantee and insurance expenses as such expenses were found not relating to Chamera Project. He further noted that the assessee established its PE in India with the approval of RBI on 16.8.2000. The agreement for execution of Chamera Project was made in India. The assessee has credited all contract receipts from Chamera Project and deducted all contract expenses relating thereto in the profit and loss account in the books of accounts of PE in India as furnished to RBI. The auditor's report certifies that the accounts relate to Project Office of the Indian operations. This indicates that all activities were carried out through the PE in India. The contract receipts were received in Canada on behalf of the project office in India for the services rendered in India. The appellant has not substantiated the claim that the project proceeds have been included in the Corporation result filed with Canadian tax authorities since the income is emanating from a source in India. Even under Article 7(1) and 7(2) of the DTAA between India and Canada, the contract proceeds attributable to PE in India is taxable in India. Arguing on behalf of the assessee, the Counsel said that the Supreme Court decision in the case of Goetze India (2006-TIOL-198- SC-IT) would not adversely affect the claim of the assessee made by a simple letter instead of filing a revised return. He submitted that the claim of attribution has been considered by AO as well as by learned CIT(A) on merits. The claim was not rejected on the ground that the claim was not made by filing revised return. Since claim has been examined in detail by AO as well as by CIT(A), mere on technical grounds, the claim should not be rejected. Referring to the OECD Model Convention and the provisions of the Indo-Canada treaty, the counsel further observed that the distinction between HO and PE for the purpose of attribution of income is also recognized by Article 7(3) of the DTAA. as per provisions of section 9(1)(1) where all the operations of the business of the non-resident are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Having heard the arguments the Tribunal observed that ++ As per Section 5(2) read with Section 9(1)(i) it can be held that the income accruing by way of execution of the Chamera Project in India accrues in India and accordingly liable to tax in India; ++ Comparing the clause (1) of Article 7 of DTAA between India and Canada, we find that the same is based on UN Model Convention and not on OECD Model Convention. As per UN Model Convention, not only the profits as is attributable to that permanent establishment is taxable but even the profit attributable to sales in other contracting State of same or similar kind as sold through that permanent establishment are also taxable; ++ It may also to be noted that the reference to sale of goods or merchandise in clause (b) of Article 7(1) shall also mean to include rendering of services also. Applying the above principle as well as on interpretation of Section 7(1) of DTAA, not only the profit attributable to the permanent establishment but also that attributable to rendering of same or similar services as rendered through PE shall also be taxable; ++ In the present case, there was composite contract for rendering services in connection with setting up of Hydro Electric project. Even if it is considered that part of work in relation of such services were carried out outside India, the services are the same as rendered by the PE in India. It is also fact that the invoices were raised through the PE in India which are accounted for in the books of project office set up in India. The work executed has been effected through the PE in India. Thus, even if admitting that merely 30% of the Part A work as contained in Document No.2 to the agreement dated 18.7.99 is attributable to HO in Canada, since it is of the same or similar kind as effected through the PE in India, profit attributable to such transaction is also chargeable to tax in India. ++ The contention of the counsel for assessee would have been valid had the Article 7 of the DTAA would have been on the basis of OECD Model Convention. However, the fact remains that the same is not so and in view of clause (b) of Sub Article (1) of Article 7 of DTAA, whole of the profit in respect of Chamera Project is to be taxed in India. Thus, though in view of Section 5(2) read with Section 9(1) (i) of the Act, and also read with Article 7(1) of the DTAA, broadly the principle of attributions are acceptable yet in view of clause (b) of Sub Article (1) of Article 7 of DTAA between India and Canada, no part of the profit from the execution of Chamera Project can be excluded while computing the profit of the appellant non- resident in India. While discussing the alternate contention of the assessee which also wants to be not governed by the provisions of the DTAA and may be taxed as per the Income Tax Act, the Tribunal held that ++ since what is received by the assessee from the execution of Chamera Project can be described as "fees for technical services" as defined in Explanation 2 in Section 9(1)(vii) of the Act, the income be computed as per the provisions of Section 44D of the Act and the tax may be charged as per Section 115A of the Act; ++ the services of the assessee are technical services as defined in Explanation 2 to Section 9(1)(vii) of the Act. The assessee also do not dispute that the services are technical services. As per Section 44D while computing the income by way of fees for technical services, no deduction in respect of any expenditure or allowance is to be allowed. As per Section 115A(1)(b) where the total income of a foreign company includes any income by way of fees for technical services received from an Indian concern, the amount of income tax on the income by way of fees for technical services shall be 20% where such fees for technical services are received in pursuance of an agreement made after 31 May. 97. Since admittedly the assessee received fees for technical services as defined in Explanation 2 to Section 9(1)(vii). the same can be taxed as per the provisions of Section 44D read with Section 115 A of the Act. Since the assessee has chosen to be governed by the provisions of the Income-tax Act, the AO shall compute the income as per Section 44D read with Section 115A of the Act.