International Taxation

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March 2016

CA. Hinesh Doshi & CA. Ronak Soni

Kawasaki Heavy Industries Ltd vs. ACIT [TS-79-ITAT-2016 (Del)] dated 11th February, 2016


The assessee company is engaged in diversified business of ship building, consumer product such as motor cycles and all terrain vehicles. The assessee has two subsidiaries in India.

The assessee opened a liaison office (LO) in India with prior permission from Reserve Bank of India and the conditions laid down.

AO argued that the LO of the assessee is carrying out the entire business activity and has violated the terms and conditions laid down by the Reserve Bank of India as the power of attorney was given to the person in charge of LO.

The DRP also confirmed both on facts and in law the addition made by the AO to the appellant’s income. It also stated that the appellant has a fixed place permanent establishment in India in form of LO. Aggrieved by the DRP order assessee filed an Appeal with Delhi ITAT.


Whether the Liaison Office of the assessee constitutes Permanent Establishment in India and whether the LO filed a false declaration with the RBI and intended to work as fully functional branch office?


Delhi ITAT ruled that liaison office of assessee cannot be regarded as assessee’s fixed place PE in India and further noted that Revenue did not bring any documentary evidence in support of his contention that assessee has PE in India.

It rejects Revenue’s stand that in terms of power of attorney executed in favour of person in-charge of LO in India, assessee was engaged in core business activities in India and thus constituted its fixed place PE. As powers given therein were LO specific and did not grant unfettered powers to its LO employee to do all or any acts for and on behalf of the assessee.

It also rejects Revenue’s submission that assessee filed false declarations with RBI while taking permission for opening LO, holds that “No doubt the AO can investigate, call for evidences and come to a conclusion where any income earning activity has been carried out by the LO but it is beyond the jurisdiction of the AO to adjudicate and conclude that the assessee has filed false declarations before the RBI”

Hence, the ITAT ruled in favour of assessee.

DCIT vs. M/s Dominion Diamond (India) Pvt. Ltd. [TS-42-ITAT-2016 (Mum.)] dated 5th February, 2016

Facts of the Case:

The assessee company is engaged in the business of wholesale trading of rough diamonds. The assessee avails operation and security support services from M/s Dominon Diamond Building Services, Canada to help in loss prevention and safety of customers. The services availed are in the nature of maintenance of common security platform applicable to all Dominion group companies.

Assessee argued that though section 195 casts an obligation on every person to deduct tax at source from payments made to non-residents, which are chargeable to tax in India, in this case it is not chargeable, because it mainly provides security support services and does not grant any right to use design or model, plan or process, hence it cannot be treated as payment of “royalty” either in view of the provisions of the Act or as per the provisions of India-Canada-DTAA.

The AO rejected the assessee’s contention and held that; assessee was liable to deduct TDS as the said amount was taxable under the Act.

The Ld. CIT(A) upheld the contention of the assessee that the payment made to the non-resident company was not taxable in India and hence there was no question of disallowance u/s. 40(a)(ia).

Aggrieved by the order of CIT(A) Revenue filed an appeal to the Mumbai ITAT


Whether the learned CIT(A) was right in directing the Assessing Officer to delete the disallowance made u/s. 40(a)(ia) of the I.T. Act without appreciating the fact that the assessee was under an obligation to deduct tax under section 195(1) in respect of payments made?”


ITAT dismisses Revenue’s appeal, holds that assessee not liable to deduct TDS u/s. 195 on payment made towards security surveillance services paid to a non-resident company, and thus deletes disallowance u/s. 40(a)(ia).

Since payment was towards maintenance of a common security platform applicable to all the Group companies and that as per India-Canada DTAA “fee for included services” would be taxable only if such services “make available” technical knowledge, experience, skill, etc, accepts assessee’s contention that there was no “make available” of any technical services.

ITAT held that, when AO himself has not mentioned as to how such an amount is taxable in India either under the provision of the Act or under the provisions of the DTAA, disallowance made by the AO on the ground that assessee has not deducted TDS cannot be upheld.

Hence it was ruled in favour of assessee.

National Petroleum Construction Company vs. Director of Income Tax (International Taxation) [TS-29-HC-2016(Del)] dated 29th January, 2016

Facts of the Case:

The assessee is a company incorporated in UAE and inter alia is engaged in contracts for installation of petroleum platforms, submarine pipelines and pipeline coating at various sites. One of these contracts is with ONGC for the installation of petroleum platforms and submarine pipelines.

The assessee’s income has been computed on a presumptive basis by taxing the gross receipts pertaining to the activities in India less expenses at the rate of 10% and the receipts pertaining to activities outside India at the rate of 1%. However, the returns filed by the assessee were not accepted by the Assessing Officer.

The AO held that the assessee had a PE in India in the form of a Project Office at Mumbai and the AO estimated the assessee’s profit to be 25% of the consideration received from ONGC.

The assessee did not accept the Draft Assessment Order and filed its objections before the Dispute Resolution Panel. The DRP held that in accordance with the Article 5 of the DTAA, the assessee’s Project Office constituted a PE of the assessee in India.

Aggrieved, the assessee appealed before the ITAT. But the ITAT also rejected the assessee’s contention that it did not have a PE in India. The ITAT observed that the assessee had itself shown the Project Office as its PE. The ITAT also did not accept the assessee’s contention that section 44BB of the Act was applicable. It only accepted the assessee’s contention that the contractual receipts from ONGC were separable and the amount received outside India was not taxable under the Act.

This has led both the assessee and the Revenue to assail the orders passed by the ITAT


Whether the ITAT was correct in holding that the appellant had a fixed place of business or permanent establishment in India as defined in Article 5(2)(c) of the Double Taxation Avoidance Agreement between India and UAE?


HC reverses ITAT order, entire contract revenue received by assessee (a UAE based company) from ONGC not taxable in India due to absence of PE in India.

As assessee’s Project Office (‘PO’) in India was merely used as a communication channel and had no role to play in execution of contract activities.

HC rejects Revenue’s stand that since “duration of the project itself exceeded nine months, installation PE clause was triggered” by clarifying that for triggering Article 5(2)(h), “it is necessary that the ‘site, project or activity continues for a period of more than nine months’”, excludes the period for which assessee did not had access to project site, remarks that “where an enterprise is not granted access to the site for a long duration and carries on no activity at site during that period, the site could hardly be construed as the fixed place of business”

Hence the HC rules in favour of assessee.