M/S. ROLLS ROYCE INDUSTRIAL POWER (INDIA) LTD,NEW DELHI vs. DDIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I-2’, NEW DELHI Before Sh. N. K. Saini, AM and Ms. Suchitra Kamble, JM ITA No. 801/Del/2014 : Asstt. Year : 2006-07 M/s Rolls Royce Industrial Power Vs Dy. Director of Income Tax, (India) Ltd., C-37, Connaught Circle-2(1), International Taxation, Place, New Delhi-110001 New Delhi-110002 (APPELLANT) (RESPONDENT) PAN No. AAACR7629B Assessee by : Sh. Pradeep Dinodia, Adv. & Sh. R.K. Kapoor, CA & Ms. Pallavi Dinodia, CA Revenue by : Sh. Anand Kedia, CIT DR Date of Hearing : 13.05.2016 Date of Pronouncement : 11.08.2016 ORDER Per N. K. Saini, AM:

This is an appeal by the assessee against the order dated 15.01.2014 passed by the AO u/s 144C(13) r.w.s. 143(3)/147 of the Income Tax Act, 1961 (hereinafter referred to as the Act).

“1.0 That the order passed u/s 143(3) read with section 144C of the Income-tax Act, is bad in law. 2.0 The computation of the total income of the assessee by the AO at the instance of the DRP at

ITA No. 801/Del/2014 2 Rolls Royce Industrial Power (India) Ltd. Rs. 386,356,928/- as against returned income of 9,66,73,030/- is wholly illegal, untenable and on erroneous grounds. 3.0 That the contentions of the Ld. AO/TPO/DRP are bad in law and against the jurisdictional hierarchy to be followed by the Ld. AO/TPO. The Ld. TPO and consequently the Ld. DRP and Ld. AO have erred in not following the Hon'ble Delhi ITAT's ruling of the previous years in the assessee's own case on the sole ground that the tax department is in appeal before the Hon'ble Delhi High Court. GROUNDS OF APPEAL AGAINST TRANSFER PRICING ADJUSTMENTS Liaison office 4.0 The Ld. TPO has erred in law in applying the transfer pricing regulations on the LO of the assessee. 5.0 That the Ld. TPO and consequently DRP/AO erred in law in holding that LO is providing services to its Head Office and is required to receive a markup on total cost of 16.21% based on certain comparables found by the TPO. 6.0 Without prejudice to ground 5 above, the Ld. AO has grossly erred in law in applying a markup of 27.08% instead of 16.21% as proposed by the Ld. TPO in its order.

ITA No. 801/Del/2014 3 Rolls Royce Industrial Power (India) Ltd. 7.0 The TPO and consequently, the AO and DRP have grossly erred in law and in the facts of the assessee's case in not appreciating the Functions, Assets and Risks (FAR) of the LO of the assessee which are not equivalent to a commercial establishment providing services as alleged by Ld. TPO. 8.0 The TPO and consequently, the AO and DRP have grossly erred in law and in the facts in conducting an erroneous search process and as a result choosing inappropriate comparables for the purpose of benchmarking the transactions of the LO. 9.0 Without prejudice to the above grounds no. 8, the TPO and consequently, the AO and DRP have grossly erred in law and in the facts by not providing the details of the search process applied by the Ld. TPO and the PLI of the comparables selected by him to the assessee for its objections. 10.0 That the Hon'ble DRP has grossly erred on the facts and circumstances in disregarding the objections filed by the assessee to the comparables chosen by the TPO and proceeding to uphold the selection of comparables without giving any cogent reasons. 11.0 That the addition of Rs. 1,12,009/- to the taxable income of the assessee under the TP regulations is prayed to be deleted, following the order of the Hon'ble ITAT Delhi Bench in the assessee's own case.

ITA No. 801/Del/2014 4 Rolls Royce Industrial Power (India) Ltd. GROUNDS OF APPEAL FOR ADJUSTMENTS OTHER THAN TRANSFER PRICING Grounds for O&M Godavari Project 12.0 The Ld. AO/DRP has grossly erred in law and in facts of the case in treating the receipts of the assessee under the Operation and Maintenance Agreement (O&M) as Fees for technical Service u/s 9(1)(vii) of the Act and Article 13(4)(c) of the DTAA between India and UK and taxing the same on a gross basis. 13.0 That the opinion of the Ld. AO/DRP that the assessee is making available technical knowledge, experience, skill, know-how or processes as per the provisions of Article 13(4)(c) of the DTAA to M/s SPGL under the O&M is unreasonable, erroneous, factually incorrect and illegal. 14.0 The taxation of receipts of the assessee under the Godavari O&M Project of Rs. 349,470,079/- on a gross basis at the rate of 30% u/s 44D read with Section 115A of the Act by the Ld. AO and upheld by DRP is erroneous and bad in law. 15.0 That the Ld. AO at the instance of DRP has grossly erred in law in proposing tax on a gross basis on all the following other incomes of the assessee from Godavari Operation & Maintenance Project instead of on net basis by not following the order of the Hon'ble Delhi ITAT in the assessee's own case:

ITA No. 801/Del/2014 5 Rolls Royce Industrial Power (India) Ltd. i. Interest from Foreign banks 3,250,114/- ii.Interest from Indian banks 676,473/- iii. Profit on sale of fixed assets 122,643/- iv.Liabilities no longer required written back 222,756/- v. Exchange Gain 3,601,893/- vi. Interest on income tax refund 10,554,212/- vii.Income from insurance deductibles 13,724,655/- viii. Miscellaneous 159,171/- ----------------- 3,23,11,917/- 16.0 Without prejudice to the ground 15 above- a) Interest on foreign bank of Rs.32,50,114/- is interest on deposits in UK bank accounts and is not liable to be taxed in India. b) Interest on Indian bank accounts of Rs.6,76,476/- has already been considered as Other Income as per computation of income and taxed accordingly. c) Profit on sale of fixed assets Rs. 1,22,643/- has already been considered under head capital gain in computation of income and cannot be held to be Other Income & taxed on gross basis. Grounds for EPC Godavari Project 17.0 That the Ld. AO/DRP has grossly erred in law in proposing tax on a gross basis on the other income of the assessee from its EPC Godavari project of Rs. 44,59,4667- from which Rs. 1,72,320/- has already been shown as income from other sources in computation of income.

ITA No. 801/Del/2014 6 Rolls Royce Industrial Power (India) Ltd. 18.0 That the Ld. AO7DRP has grossly erred in law in proposing tax on gross basis on the Interest Income on the foreign bank deposits of Rs. 42,87,146/- (included in other income of Rs. 44,59,466/-), which does not accrue or arise in India. The same has been upheld by the Delhi ITAT in the assesse's own case. Grounds for Rihand Project 19.0 That the Ld. AO7DRP has grossly erred in law in proposing tax on a gross basis on the other income of the assessee from its Rihand project of Rs.3,457/- which is interest on foreign bank deposits and is not taxable in India. Other Grounds 20.0 The aforesaid grounds of appeal are without prejudice to one another. 21.0 The appellant craves leave to add, amend, alter, change vary or substitute any of the aforesaid grounds or raise an additional ground if it becomes necessary to do so in the interest of justice.” 3. The assessee has also raised following additional grounds:

“22. That the learned Assessing Officer has grossly erred in law and on facts and circumstances of the assessee's case in not allowing the adjustment of unabsorbed brought forward losses and unabsorbed

ITA No. 801/Del/2014 7 Rolls Royce Industrial Power (India) Ltd. depreciation of the Income Tax Act while determining the taxable income for the current year. 23. That the learned Assessing Officer failed to give the adjustment of brought forward losses and unabsorbed depreciation as per law although the same was claimed in the Return of Income and all the details/information for the same was available before him in the Return of Income and Tax Audit Report filed by the assessee. 24. That the Learned DRP and consequently Assessing Officer have erred in law and on facts and in the circumstances of the case in erroneously charging the interest u/s 234B while computing demand.” 4. As regards to the admission of the additional grounds the ld. Counsel for the assessee submitted that these grounds are purely legal grounds for which no investigation is required to be made as all the relevant material is available on the record. Therefore, these grounds may be admitted. The reliance was placed on the decision of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. Vs CIT reported at 229 ITR 383.

ITA No. 801/Del/2014 8 Rolls Royce Industrial Power (India) Ltd. 6. After considering the submissions of both the parties, we are of the view that the additional grounds raised by the assessee are purely legal ground and go to the root of the matter so these deserve to be admitted in view of the ratio laid down by the Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. Vs CIT (1998) 229 ITR 383 (supra) wherein it has been held as under:

“The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assessee correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commission of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner (Appeals)

ITA No. 801/Del/2014 9 Rolls Royce Industrial Power (India) Ltd. is too narrow a view to take of the powers of the Tribunal.” It has further been held that: “Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.” 7. Ground Nos. 1 to 3, 20 & 21 are general in nature, Ground Nos. 9 & 19 were not pressed so these ground do not require any adjudication on our part.

ITA No. 801/Del/2014 10 Rolls Royce Industrial Power (India) Ltd. Maintenance of huge power plants and other projects. The style of functioning of the assessee is that it negotiates an agreement and thereafter to execute the same sets project offices. The assessee filed the return of income on 20.11.2006 declaring an income of Rs.9,66,73,030/- which was processed u/s 143(1) of the Income Tax Act, 1961. Later on, the case was reopened by issuing the notice u/s 148 of the Act on 22.03.2011. In response to the said notice, the assessee submitted that its original return filed might be treated as return filed in response to the notice u/s 148 of the Act. Thereafter, the AO referred the matter to the TPO u/s 92CA of the Act for determination of Arm’s Length Price in respect of the activities of the Liaison Offices (LO) of the assessee. The AO held that the LO’s of the assessee are PE within the meaning of Article 5 of DTAA.

ITA No. 801/Del/2014 11 Rolls Royce Industrial Power (India) Ltd. 11. In his rival submissions the ld. DR supported the order of the AO.

“53. 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 read with section 115A of the Income Tax Act, whereas a domestic company doing exactly the same works contract would be taxed @ 2% under section 194C of the Act 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 mis- interpreting Art. 7.5 of the Treaty and applying section 44D, without allowing the expenditure

ITA No. 801/Del/2014 12 Rolls Royce Industrial Power (India) Ltd. allowable under sections 29-44 of IT Act, would amount to more than 100% of its revenue. If we see assessment year 2000-01 at page 308, the total cost is 81% of the revenue and the assessee is left with 19% of the revenue to incur indirect cost etc., whereas by invoking section 44D, the Revenue has taxed 30% of gross receipts. So, in effect at least 11% in excess of gross receipts has to be paid by the assessee which is a non-resident company, and which is not the case with a domestic company similarly or identically placed. A domestic company, even if it makes a profit of 19% in the example given above, it will be subjected to 35% tax which will be 6.65% of its revenue as against 30% in the assessee’s case. Thus the assessee had been discriminated against and the protection under Art. 26 of the DTAA be provided to the assessee. 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. The training as cited by the CIT DR on plant of Spectrum personnel at the second stage was only at the time the contract was go come to an end after 10 years, i.e. February 2007. We do not know whether any such training was actually conducted by the assessee for Spectrum. For the years under our review, i.e. assessment years 1998-99 to 2004-05, there is no provision and the CIT DR has not been able to point out any provision in the contract

ITA No. 801/Del/2014 13 Rolls Royce Industrial Power (India) Ltd. wherein the assessee was to train Spectrum personnel. In the absence of any such training to be provided, it cannot be said that anything was made available by the assessee to Spectrum. What to talk of training, we have also seen from the contract that there was no personnel envisaged to be present in the facility during its operation by the assessee. There was no close coordination of the personnel of the assessee and Spectrum as was the case before the Supreme Court in Continental Construction and Oberoi Hotels. The basic element of passing of technical knowledge, skill to the client is wholly absent in this case. The Ericsson’s case proceeded on completely different line wherein in that case 214 ITR page 211 para 2, the case proceeded on the basis that Ericsson was rendering consultancy and technical services to Indian companies in the field of its specialty and receiving remuneration therefor. There was no dispute in that case before AAR that it was fees for technical services. The dispute was as it was fees for technical services, would it under the Swedish Treaty be taxed on gross basis or net basis. The Swedish Treaty did not contain any provision available for FTS of making available the technical skills to the client. We, therefore, do not see Ericsson’s case to have any bearing on the case at hand. Similarly, in the Tri-star’s case, the question was completely different where technical services were being rendered and made available to the client and as rightly pointed out by Shri Dinodia the question in all the three judgements of Continental Construction, Oberoi Hotels and Tri-star was deduction under Chapter VIA and not interpretation of a deeming fiction envisaged by Section 9(1)(vii) and the interpretation of over-riding provisions

ITA No. 801/Del/2014 14 Rolls Royce Industrial Power (India) Ltd. under the Double Tax Avoidance Agreement between India and UK. The numerous judgements cited by the assessee clearly point out to the fact that making available technical knowledge, experience, skill, know-how, a process or development and transfer of technical plant of a technical design is essential to fall within the definition of fees for technical services under the Indo-UK Treaty. Respectfully following these decisions, 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. We have also carefully considered the matter. Art.26 of the DTAA, sub- clauses (1) and (2) of the same read as under:- “Art. 26 – Non discrimination: 1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on the enterprises of that other State on the same activities in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the

ITA No. 801/Del/2014 15 Rolls Royce Industrial Power (India) Ltd. other Contracting State has in the first mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of the Convention.” 54. In view of the above provision taxing of a non- resident U.K. 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. The net profit was to be determined in accordance with the Indian Income Tax Act provisions for determining profits and gains of business from sections 28 to 43 –B of the Income Tax Act i.e. limits laid down in the domestic law of allowance of expenditure u/s. 30,31,32,36,37,40,43B etc would have to be taken in to account. In our view this is the purport of Article 7.5 read with Article 26 of the DTAA between India and UK.” So, respectfully following the aforesaid referred to order, this issue is decided in favour of the assessee.

ITA No. 801/Del/2014 16 Rolls Royce Industrial Power (India) Ltd. 14. The facts related to this issue in brief are that the matter relating to the determination of Arm’s Length Price of the services rendered by the Liaison Offices was referred by the AO to the TPO who passed the order dated 18.01.2013 u/s 92CA(3) of the Act holding that Arm’s Length margin should be taken at 16.21% as against 15% in the earlier year of the cost incurred by the LO. However, the AO worked out the Arm’s Length Price by applying the mark-up of 27.08% instead of @ 16.21% of the cost and made the addition of Rs.1,12,009/- by holding that income was to be added to the Liaison Offices costs incurred by the assessee, under transfer pricing provisions for the reason that the Liaison Offices had provided services to its head office. This issue is co-related with the issues raised in Ground Nos. 4, 5 and 7 to 11 which we have already adjudicated in the former part of this order in favour of the assessee, so it becomes academic in nature and hence dismissed.

ITA No. 801/Del/2014 17 Rolls Royce Industrial Power (India) Ltd. 16. As regards to this issue the ld. Counsel for the assessee submitted that the AO had followed his order for the assessment year 2005-06 which has been adjudicated by the ITAT in favour of the assessee. A reference was made to para 6 at page no. 5 of the order dated 04.05.2012 in ITA No. 1599/Del/2011 and subsequently for the assessment years 2007-08 & 2008-09 in ITA Nos. 5437 & 5438/Del/2011 respectively wherein it has been held that the income must be taxable on a net basis after allowing deduction in respect of costs incurred, as it is not FTS but business income arising out of works contract on O&M maintenance of power plant.

ITA No. 801/Del/2014 18 Rolls Royce Industrial Power (India) Ltd. given in para 62 at page no. 28 of the said order and read as under:

“62. Apropos Ground No. 3(d), it has been observed by the Tribunal that income of Godavari (O&M) Project is to be assessed on a net basis and therefore, such incomes get netted from expenses and are, therefore, allowed in the relevant year. The findings of the Tribunal are as under:- “In the instant case, the assessee has undertaken a work contract for operation and maintenance of power plant for its owner M/s Spectrum vide contract dated 14.3.1995. 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

ITA No. 801/Del/2014 19 Rolls Royce Industrial Power (India) Ltd. 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. We direct accordingly.” 19. So, respectfully following the aforesaid referred to order in assessee’s own case, the AO is directed to decide the issue as per the aforesaid directions given for the assessment years 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.

ITA No. 801/Del/2014 20 Rolls Royce Industrial Power (India) Ltd. order. The aforesaid contention of the ld. Counsel for the assessee was not controverted by the ld. DR.

“81. Coming to Ground No. 1(c), the Tribunal has held that income of Godavari (O&M) Project is to be assessed on a net basis and therefore, such incomes are to be netter from expenses and therefore, allowed in the relevant year. The findings of the Tribunal are as under:- “In the instant case, the assessee has undertaken a work contract for operation and maintenance of power plant for its owner M/s Spectrum vide contract dated 14.3.1995. 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

ITA No. 801/Del/2014 21 Rolls Royce Industrial Power (India) Ltd. 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. We direct accordingly.” So, respectfully following the aforesaid referred to order in assessee’s own case, this issue is decided in favour of the assessee.

ITA No. 801/Del/2014 22 Rolls Royce Industrial Power (India) Ltd. order dated 15.10.2010 for the assessment years 1998-99 to 2004-05 in ITA Nos. 1410 to 1413/Del/2007, 1682 & 1683/Del/2008 and 1297/Del/2008 respectively. Subsequently, the said order has been followed for the assessment years 2005-06 & 2007-08 and 2008-09 in ITA Nos. 1599/Del/2011 and 5437 & 5438/Del/2011 respectively. It was also pointed out that various receipts mentioned in the aforesaid ground no. 15 relating to the year under consideration were credited to the profit and loss account in the schedule of other income which comprises of interest on foreign bank account accruing outside India (Rs.32,50,114), interest from Indian bank account (Rs.6,76,473/-), profit on sale of fixed assets (Rs.1,22,643/-), liabilities no longer required written back (Rs.2,22,756/-), exchange gain (Rs.36,01,893/-), interest on income tax refund (Rs.1,05,54,212/-), income from insurance deductible (Rs.1,37,24,625/-) and miscellaneous income (Rs.1,59,171/-).

ITA No. 801/Del/2014 23 Rolls Royce Industrial Power (India) Ltd. taxing as business income on net basis u/s 44D of the Act has been decided vide paras 40 to 42 at page nos. 19 & 20 in ITA Nos. 5437 & 5438/Del/2011 for the assessment years 2007-08 and 2008-09 respectively (supra) which read as under:

“40. With regard to the grounds taken by the assessee for taxing of interest income in various years the AO’s finding is that interest income is chargeable under Art. 12(2) of the DTAA has been upheld by the CIT(A) and the finding given by him is that these incomes were not related to execution of any projects as relevant projects are stated to have been completed and Art. 12(2) of DTAA gives taxing rights to the source state in respect of income that arises in that state and profits on such interest may be taxed on gross basis at a rate not exceeding 15%. The stand of the assessee is that the interest has mainly arisen in respect of bank balances in U.K., viz., in Nat West Bank and Chase Manhattan Bank. Therefore, applying the source Rule as opined by the CIT(A) under Art. 12(2), the interest received by the assessee in U.K. on bank accounts maintained in U.K. cannot be taxed in India. We find force in the submissions of the assessee as on the point of law there is no dispute between the assessee and the Revenue. The assessee has only current account in India and all the interest amount has arisen out of bank accounts in U.K. and, therefore, the same should not have been subjected to tax in India at all. We allow this ground of appeal. The AO is directed to exclude interest earned outside India under Article 12(2) of the DTAA and tax interest earned in India as normal income. AO is at liberty to examine such

ITA No. 801/Del/2014 24 Rolls Royce Industrial Power (India) Ltd. interest income whether taxable as income from other sources or as business income. We direct accordingly. 41. Therefore, the issue is covered in favour of the assessee by the aforesaid Tribunal order and accordingly, Ground No. 2 is rejected. The Tribunal has, in effect, held that the interest earned in the U.K. Banks is not taxable in India, whereas other interest earned in India is taxable as other income. 42. The assessee had, during the year, credited the receipts to the Profit and Loss Account, in the Schedule of other income and it was mainly interest on foreign bank accounts amounting to Rs.58,65,222/- accruing outside India and liabilities amounting to Rs.33,29,254/- no longer required written back, profit on sale of FA, of Rs.6,25,000/- and provision written back and misc. income of Rs.7,83,618/-. All these items have been dealt with by the Tribunal (supra) for assessment year 2004-05. In accordance with the Tribunal order, the interest earned on foreign bank accounts is not chargeable to tax in India and the balance other income requires to be taxed on net basis.” So, respectfully following the aforesaid referred to order, the AO is directed to decide this issue in accordance with the aforesaid directions given by the ITAT in the order pertaining to the earlier assessment years.

ITA No. 801/Del/2014 25 Rolls Royce Industrial Power (India) Ltd. 27. In the present case, it is noticed that the issues raised by the assessee in grounds 16(a), 16(b) & 18 are covered vide para 83 at page no. 38 of the aforesaid referred to order dated 04.05.2012 which read as under:

“83. With regard to ground No. 2, the Tribunal has held that the interest earned in the U.K. Banks is not taxable and the other interest earned in India is taxable in India as other income. The findings of the Tribunal are as under:- “With respect to the grounds taken by assessee for taxing of Interest income in various years the AO’s finding is that interest income is chargeable under Art. 12(2) of the DTAA has been upheld by the CIT(A) and the finding given by him is that these incomes were not related to execution of any projects as relevant projects are stated to have been completed and Art. 12(2) of DTAA gives taxing rights to the source state in respect of income that arises in that state and profits on such interest may be taxed on gross basis at a rate not exceeding 15%. The stand of the assessee is that the interest has mainly arisen in respect of bank balances in U.K. viz., in Nat West Bank and Chase Manhattan Bank. Therefore, applying the source rule as opined by the CIT(A) under Art. 12(2), the interest received by the assessee in U.K. on bank accounts maintained in U.K. cannot be taxed in India. We find force in the submissions of the assessee as on the point of law there is no dispute between the assessee and the Revenue. The assessee has only current account in India and all

ITA No. 801/Del/2014 26 Rolls Royce Industrial Power (India) Ltd. the interest amount has arisen out of Bank accounts in U.K. and, therefore, the same should not have been subjected to tax in India at all. We allow this ground of appeal. The AO is directed to exclude interest earned outside India under Article 12(2) of the DTAA and tax interest earned in India as normal income. AO is at liberty to examine such interest income whether taxable as income from other sources or as business income. We direct accordingly.” 28. In view of the above these issues are decided in faour of the assessee.

“46. Apropos Ground No. 1(d), this issue is also covered in favour of the assessee by the Tribunal order(supra), wherein it has been held as follows:- “Ground taken with regard to Profit on sale of assets under Art. 14 of DTAA as per local laws in India arises only in assessment year 2000-01. The assessee has submitted that profit on sale of assets can only be taxed if the gross block of the particular assets of the assessee ceases to exist. Till such time profit or loss on the sale of such

ITA No. 801/Del/2014 27 Rolls Royce Industrial Power (India) Ltd. assets is irrelevant as according to the assessee, the gross block continues to exist even after crediting the sale to the WDV of the assets, no profit or loss should have been recognized. The AO is directed to verify this position. If the gross block exists of the particular assets even after crediting the sale amount, WDV of that block of assets would get reduced and that would not be subjected to tax separately. In case it exceeds the WDV of the Block of assets, then it would be brought to tax u/s 50 of the Income Tax Act. We direct accordingly.” 47. The Tribunal, with regard to EPC Project, held that tax is to be levied if the block ceases to exist. Undeniably, the same principle is applicable here also. However, undisputedly, the block has not ceased to exist and, therefore, tax is not exigible.” So, respectfully following the aforesaid referred to order, this issue is set aside to the AO to be decided in accordance with the aforesaid directions given by the ITAT in earlier years.

“42. The assessee had, during the year, credited the receipts to the Profit and Loss Account, in the Schedule of other income and it was mainly interest

ITA No. 801/Del/2014 28 Rolls Royce Industrial Power (India) Ltd. on foreign bank accounts amounting to Rs.58,65,222/- accruing outside India and liabilities amounting to Rs.33,29,254/- no longer required written back, profit on sale of FA, of Rs.6,25,000/- and provision written back and misc. income of Rs.7,83,618/-. All these items have been dealt with by the Tribunal (supra) for assessment year 2004-05. In accordance with the Tribunal order, the interest earned on foreign bank accounts is not chargeable to tax in India and the balance other income requires to be taxed on net basis. 49. With regard to Ground No. 1(e), the Tribunal has held that income of Godavari (O&M) Project is to be assessed on a net basis and that therefore, such incomes get netted from the expenses, due to which, they are allowed in the relevant year. 50. The Tribunal’s findings in this regard are as follows:- “In the instant case, the assessee has undertaken a work contract for operation and maintenance of power plant for its owner M/s Spectrum vide contract dated 14.3.1995. 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

ITA No. 801/Del/2014 29 Rolls Royce Industrial Power (India) Ltd. 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. We direct accordingly.” 51. The matter being covered by the Tribunal order as above, the other income should be taxed on net basis. Accordingly, Ground No. 1(e) is accepted.” 31. So, respectfully following the aforesaid referred to order of the Tribunal, the issues under consideration are decided in favour of the assessee in the same manner as has been done by the ITAT while deciding the cases of the assessee for the other years.

ITA No. 801/Del/2014 30 Rolls Royce Industrial Power (India) Ltd. 26 of the aforesaid referred to order dated 04.05.2012 which read as under:

“57. Concerning Ground No. 3(b), it has been held by the Tribunal that if foreign exchange is earned on trading basis, only then it is taxable, but it is earned on capital assets, it is not taxable. “With regard to the ground taken for taxation of Foreign Exchange Fluctuation in assessment year 2002-03, there is no dispute to the well settled legal proposition that if profit or loss on account of foreign exchange fluctuation arises out of capital assets, then it will be capital receipt and in case it arises out of trading business, then it should be treated as trading income. The AO is directed to verify the same and act accordingly.” 58. It is seen that as contended that the fluctuation is on the deposits in the U.K. Bank Accounts. It is exempt, as such. The Tribunal has held that the interest is exempt as per the DTAA between India and U.K. and therefore, the fluctuation will follow the same principle, as has also been held in “Woodward Governor India Pvt. Ltd.”, 312 ITR 254 (SC).” So, respectfully following the aforesaid referred to order, the AO is directed to decide this issue as per the aforesaid directions given in the said order dated 04.05.2012.

ITA No. 801/Del/2014 31 Rolls Royce Industrial Power (India) Ltd. 33. Other issue agitated by the assessee vide Ground No. 15(vi) relates to the taxing the interest on Income Tax Refund @ 40% of gross basis.

ITA No. 801/Del/2014 32 Rolls Royce Industrial Power (India) Ltd. sources and where taxed as per Section 115A of the Act read with the benefit of DTAA which should be granted since it is not connected to the PE of the assessee in the year in which it arises. The reliance was placed on the judgment of the Hon’ble Uttrakhan High Court in the case of B J Services Company Middle East Ltd. Vs ACIT, Range-1, Dehradun reported at 2015-TII-55-HC-UKHAND-INTL (copy of the said order was furnished which is placed on the record).

ITA No. 801/Del/2014 33 Rolls Royce Industrial Power (India) Ltd. DTAA between India and UK. The claim of the assessee that the said income was not connected to execution of any profit conducted during the year and was not connected to the PE of the assessee, however, in the absence of the clear facts on record, it is difficult to take a just decision. Therefore, we deem it appropriate to remand this issue back to the file of the AO to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. The AO while deciding this issue shall also consider the judgments cited by ld. Counsel for the assessee and the ld. CIT DR. Accordingly, this issue is remanded back to the file of the AO.

ITA No. 801/Del/2014 34 Rolls Royce Industrial Power (India) Ltd. forward losses and unabsorbed depreciation was not allowed by the AO. It is also not clear as to whether charging of interest u/s 234B of the Act was applicable in this case or not because there is no such discussion either in the assessment order or the order of the DRP. Accordingly, the issues raised by the assessee in the additional ground are restored to the AO for adjudication in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

Sd/- Sd/- (Suchitra Kamble) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 11/08/2016 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR