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Income Tax Appellate Tribunal, DELHI BENCH ‘C’, NEW DELHI
Before: Sh. A. D. Jain, Vice-Dr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the assessee against the orders of ld. CIT(A)-2, Noida dated 27.07.2017.
Reimbursement of expenses:
2. Brief acts of the case are that first a drat Assessment Order u/s 143(3)/144C(1) of the Income Tax Act, 1961 for A.Y. 2012-13 was passed on 03.03.2016 at a total income of Rs.122,79,37,600/- as against total income of Rs.99,20,45,409/- shown in the return of income. The assessee did not file objections against the draft order before the ld. & 5896/Del/2017 2 Transocean Offshore International Ventures Ltd. & Transocean Offshore Deepwater Drilling Inc. DRP. The Assessment Order was thereafter passed by the Assessing Officer u/s 143(3)/144C(3)(b) of the Act. Aggrieved by the order of the AO, the assessee filed appeal before the ld. CIT(A).
3. The assessee has shown receipts of account of reimbursement of expenses of Rs.27,60,40,906/- and claimed that the same cannot give rise to income for taxation purposes. The Assessing Officer has held that since this particular receipt is on account of reimbursement of expenses incurred on behalf of customer, the same is to be included under the gross receipts chargeable u/s 44BB of the Act. The expenditure was incurred by the assessee on behalf of various customers.
4. It was submitted that the amount of receipts received on account of expenditure incurred were purely in nature of reimbursement of expenses incurred by the assessee for various contracting parties under the terms of the contract and therefore there was no element of income present in the same. Therefore, the same cannot be included in the gross receipts of the assessee for the computation of taxable income u/s 44BB of the Act.
In this connection, the assessee argued that the tax is levied on “income” of the assessee i.e. in other words tax cannot be levied where there is no income arising to the assessee. In this connection, the assessee relied on the following decisions wherein it has been held that there cannot be any levy of taxes where there is no income resulting to the assessee.
CIT Vs. Shoorji Vallabhdas & Co. 46 ITR 144 (SC) State Bank of Travancore Vs. CIT 158 ITR 102 (SC)
& 5896/Del/2017 3 Transocean Offshore International Ventures Ltd. & Transocean Offshore Deepwater Drilling Inc. Rajkot District Gopalak Co-op. Milk Producers Union Ltd. Vs. CIT 204 ITR 390 (Guj.)
The assessee further relied on the following case laws which state that reimbursement of expenses does not constitute income in the hands of the appellant and should not be subjected to tax.
Coca Cola India Inc. Vs. CIT 7 SOT 224 (Del.) CIT Vs. Industrial Engineering Projects Private Limited 202 ITR 1014 (Del.) CIT Vs. Dunlop Rubber Company Ltd. 142 ITR 493 (Cal.) Rolls Royce India Ltd. Vs. ITO 25 ITD 136 (Del. Trib.)
Further, merely because the income is determined on a presumptive basis, it was not sufficient to include any sort of receipt in the taxable income of the appellant. This is because provisions of presumptive taxation aim at merely estimating the taxable income of the appellant and any receipt not being in nature of “income”, cannot be included in the taxable income of the appellant.
In this connection, the assessee relied on the decision of the Tribunal in the case of Sedco Forex International Drilling Inc. 72 ITD 415, wherein the Tribunal held that reimbursement of expense will not be taxable if the recipient incurred the expenses on behalf of the payer.
It was further submitted that the Hon’ble Jurisdictional Uttaranchal High Court has dismissed the appeal filed by the Revenue (ITA No. 06 of 2003) against the order of the Delhi Tribunal in the aforesaid case and confirmed that the & 5896/Del/2017 4 Transocean Offshore International Ventures Ltd. & Transocean Offshore Deepwater Drilling Inc. reimbursement of expenses will not be taxable as income in the hands of the recipient.
The assessee was further stated that there is a decision of the Hon’ble jurisdictional High Court in the case of CIT Vs. Halliburton Offshore Services Inc. (300 ITR 265) in favour of the Department. However, subsequent to the said decision, Hon’ble Jurisdictional High Court in case of DIT(IT) Vs. M/s Schlumberger Asia Service Ltd (317 ITR 156) held that reimbursement of customs duty is not taxable, under the provisions of section 44BB of the Act.
In view of the foregoing submissions and decision of the Hon’ble Jurisdictional High Court and the Hon’ble High Court of Uttrakhand, we hereby hold that the reimbursements which are in the nature of material and fuel recharge are chargeable to tax.
The appeal of the assessee on this ground is dismissed.
Receipts for Demobilization Advance:
This issue has been adjudicated by the Co-ordinate Bench of Tribunal in the assessee’s own case for the A.Y. 2008-09 in wherein the issue has been adjudicated against the assessee relying on the judgment of Hon’ble Uttrakhand High Court in Sedco Forex International Drilling Ltd. 299 ITR 238 which has been confirmed by the Hon’ble supreme Court vide order dated 30.10.2017 (87 Taxmann 29). In the absence of any material change in the facts of the case and the legal proposition, we hereby decline to interfere with the order of the ld. CIT(A). & 5896/Del/2017 5 Transocean Offshore International Ventures Ltd. & Transocean Offshore Deepwater Drilling Inc.
Reimbursement of expenses:
As adjudicated above in ITA No. 5895/Del/2017.
Interest Income:
Brief facts of the case on this issue are that appellant has received interest income of Rs. 17,39,080/- on income tax refund in the relevant year under consideration. The Assessing Officer has held that the interest income received by the appellant on account of income tax refund is taxable at Maximum Marginal Rate of 40 per cent.
Before us, the ld. AR submitted that it is a tax resident of United States of America and entitled to benefits of the Double Tax Avoidance Agreement (“DTAA”) between India and United States. The interest received on the income-tax refund was claimed to be chargeable in terms of Article 11 of the Indo-US DTAA. It was argued that under the Act, the assessee was liable to be taxed on the amount under the residuary head and not under the business head. In view thereof, it was argued that the indebtedness cannot be said to be effectively connected with the business carried on by the PE. Since the domestic law was equally applicable to the assessee, therefore, it cannot be said, that the indebtedness was connected with the PE of the assessee. It was argued that the assessee was entitled to the beneficial provision of or interpretation under the domestic law in view of the provision contained in section 90(2) of the Act. Therefore, the PE was not the creditor of the income-tax department. Accordingly, the indebtedness was not effectively connected with the PE. It was further mentioned & 5896/Del/2017 6 Transocean Offshore International Ventures Ltd. & Transocean Offshore Deepwater Drilling Inc. that a debt-claim in respect of which interest was paid will be effectively connected with the PE and will form part of its business assets, if the economic ownership of the debt-claim, was allocated.
The ld. DR argued that the assessee was carrying on business through its Permanent Establishment in India and since interest income was not covered by the provision contained in section 44BB of the Act, he held that the AO was right in taxing the interest income as business income. It was argued that the interest had not arisen out of the business transactions, and it was received in the course of the business of the PE and, therefore, there was a direct nexus of the indebtedness with the assets of the business. It was submitted that if the assessee opted to be taxed under the DTAA, the classification of income was not required to be done under the five heads. In fact, no head of income had been prescribed under the treaty. Therefore, it cannot be said that the provisions contained in paragraph no. 2 of Article XI were analogous to the provisions contained in the Act regarding computation of income under the residuary head. It was argued that the expression used was to the effect that indebtedness was effectively connected with the PE and not that the interest income was effectively connected with the PE.
Heard the arguments of both the parties and perused the material available on record.
As per the provisions of Sec 90(2), in a case where the provisions of the DTAA apply to an assessee, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Although the words “more beneficial” has not been elaborated upon by any of the contending parties, it is & 5896/Del/2017 7 Transocean Offshore International Ventures Ltd. & Transocean Offshore Deepwater Drilling Inc. clear that application of the provision can be made after ascertaining- (i) tax payable by the assessee under the DTAA, and (ii) tax payable by the assessee under the Act. If tax payable under the Act is lesser than the tax payable under the treaty, it can be concluded that the provisions of the Act are more beneficial to the assessee. However, if the tax payable by the assessee under the treaty is lesser than the tax payable under the Act, the assessee shall have the benefit of the DTAA. If we compute the income of the assessee under the head “other sources”, the net income by way of interest received from the income-tax department shall amount to Rs. 17,49,080/-. This amount will be taxed at the rate applicable to a foreign company, which is more than 15%. Therefore, on making the assessment of tax under the treaty and the under the Act, it will be found that tax payable under the Act is more than the tax payable under the treaty. Accordingly, the aforesaid provision will come to the aid of the assessee to come to an automatic conclusion, without exercise of any option, that it should get the benefit under the DTAA. No other consideration is material for this purpose as ultimately what is to be seen is whether the provisions of the Act are more beneficial to the assessee or not. Accordingly, it can be held that the assessee is entitled to the benefit under the treaty.
Article VII deals with taxation of business profits and also provides for mechanism to compute the profits of the business. Paragraph no. 4 relieves the source State from the rigors of paragraphs nos. (1) and (2) in case the interest is found to be effectively connected with the PE, even if it is not in the nature of business income of the assessee but is effectively connected with the PE. If interest is the business income as a matter of fact, such income falls automatically within the ambit of Article & 5896/Del/2017 8 Transocean Offshore International Ventures Ltd. & Transocean Offshore Deepwater Drilling Inc. VII without even taking recourse of paragraph no. 4. Therefore, this paragraph contemplates a different condition upon whose satisfaction interest becomes taxable under Article VII. It is an accepted canon of interpretation that no part of the statute should be rendered null and void by interpretation. Therefore, some meaning has to be placed on the contents of this paragraph.
Interest income need not be necessarily business income in nature for establishing the effective connection with the PE because that would render provision contained in paragraph 4 of Article XI redundant Thus, there may be cases where interest may be taxable under the Act under the residuary head and yet be effectively connected with the PE. The bank interest in this case is an example of effective connection between the PE and the income as the indebtedness is closely connected with the funds of the PE.
The relevant Article of Indo-US DTAA with regard to interest are as under:
“ARTICLE 11 - Interest
Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed : (a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company) ; & 5896/Del/2017 9 Transocean Offshore International Ventures Ltd. & Transocean Offshore Deepwater Drilling Inc. and (b) 15 per cent of the gross amount of the interest in all other cases.
Notwithstanding the provisions of paragraph 2 of this Article, interest arising in a Contracting State : (a) and derived and beneficially owned by the Government of the other Contracting State, a political sub-division or local authority thereof, the Reserve Bank of India, or the Federal Reserve Bank of the United States, as the case may be, and such other institutions of either Contracting State as the competent authorities may agree pursuant to Article 27 (Mutual Agreement Procedure) ; (b) with respect to loans or credits extended or endorsed (i) by the Export Import Bank of the United States, when India is the first-mentioned Contracting State ; and (ii) by the EXIM Bank of India, when the United States is the first- mentioned Contracting State ; and (c) to the extent approved by the Government of that State, and derived and beneficially owned by any person, other than a person referred to in sub-paragraphs (a) and (b), who is a resident of the other Contracting State, provided that the transaction giving rise to the debt-claim has been approved in this behalf by the Government of the first mentioned Contracting State ; shall be exempt from tax in the first-mentioned Contracting State.
The term “interest” as used in this Convention means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from Government securities, and income from bonds or debentures, including premiums or prizes attaching to such securities, bonds, or debentures. Penalty charges for late payment shall not be regarded as interest for the purposes of the Convention. However, the term “interest” does not include income dealt with in Article 10 (Dividends).” & 5896/Del/2017 10 Transocean Offshore International Ventures Ltd. & Transocean Offshore Deepwater Drilling Inc. 23. On going through the above, it can be concluded that interest on income tax refund is not effectively connected with the PE either on the basis of asset-test or activity-test. Hence, it is taxable as per the provisions in the Para No. 2 of Article XI of Indo-US DTAA.
In the result, both the appeals of the assessee are partly allowed. Order Pronounced in the Open Court on 28/01/2022.