The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, held that the force of attraction rule will not apply, unless there is even a remote link between the activities of other projects with the PE in question.
The aforesaid observation was made by the Delhi ITAT, when appeals were filed before it by the assessee, as against the final assessment orders passed by the Assessing Officer for the assessment year 2008-09, in pursuance to the directions of learned Dispute Resolution Panel (DRP).
The grounds of the assessee’s appeal being against the invoking of the provisions of Section 44DA of the Income Tax Act, for taxing the revenues earned by the Appellant under its contract with Jaypee Ventures Limited (JVL), without any specific allegation that the Appellant constitutes a PE in respect of the said contract, the brief facts relating to this issue were that, the assessee was a non-resident corporate entity incorporated under the laws of Germany and was a tax resident of Germany.
The assessee was earlier known as ‘Lahmeyer International GmbH’. However, subsequently, due to business restructuring its name changed to ‘Lahmeyer Holding GmbH’.
As stated, the assessee was an engineering consulting company offering plan, design and consultancy in relation to complex infrastructure projects. It so happened that, in the assessment years under dispute, the assessee, as stated, had undertaken contract work with certain Government/SemiGovernment projects, such as, Jammu and Kashmir State Power Development Corporation– Baglihar Project (JKSPDC-BCS), JKHCL and JVL projects.
Insofar as receipts from contract with JKSPDC- Baglihar Project is concerned, the assessee itself had admitted the existence of PE and offered the income to tax, by applying the rate of 20%. However, insofar as the other two projects are concerned, viz., JKHCL and JVL, though, the assessee by treating such receipts as Fee for Technical Services (FTS) under Article 12 of India-Germany Double Taxation Avoidance Agreement (DTAA), had offered to tax at 10% on gross basis, however, the Assessing Officer did not accept assessee’s claim.
And as far as the contract with JKHCL is concerned, the Assessing Officer referring to clause 4.3 of the contract observed that, since JKHCL has made office space available to the assessee, it will constitute a Permanent Establishment (PE) of the assessee in India in terms of Article 5(2) read with Article 5(1) of the tax treaty. Further, the Assessing Officer also observed that since the assessee had a PE in respect of JKSPDC- Baglihar Project, the activities of other contracts being connected to that PE, would also be taxable in India under section 44DA of the Income Tax Act.
Without prejudice, the Assessing Officer observed that irrespective of the fact whether the PE in respect of JKHCL and JVL projects are existing or not, since, the assessee had a PE in India in the form of JKSPDC-Baglihar Project, applying the Force of Attraction Rule which states that the profits of an enterprise of a contracting State shall be taxable only in that State unless the enterprise carries on business in the other contracting State through a Permanent Establishment situated therein,all receipts earned in India would be connected to the said PE, and hence, taxable under Section 44DA. And, accordingly, he brought to tax, the receipts by applying the provisions of section 44D/44DA of the Income Tax Act.
The assessee contested the aforesaid decision of the Assessing Officer by filing objections before the DRP. However, the DRP sustained the additions made by the Assessing Officer, and hence the present appeal of the assessee before the Delhi ITAT.
Hearing the opposing contentions of both sides as presented by Sh. Satyan Sethi, the Advocate of the assessee, and by Ms. Rashmita Jha, the CIT(DR), on behalf of the Revenue, the Delhi ITAT observed:
“Having considered the rival submissions, we find, while deciding identical issue in assessee’s own case in assessment years 2006- 07 and 2007-08, the Tribunal had decided identical issue in favour of the assessee. Respectfully following the decision of the Coordinate Bench, we decide the ground in favour of the assessee.”
“Having heard the parties, we direct the Assessing Officer to factually verify assessee’s claim and grant credit for TDS in accordance with law”, the coram of G S Pannu, the President and Saktijit Dey, the Judicial Member ruled.
Thus, the ITAT held:
“In the result, the appeals are partly allowed.”
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