ITAT: Misplacing FDs is Not a Valid Ground for Deleting Addition of Interest

ITAT: Misplacing FDs is Not a Valid Ground for Deleting Addition of Interest

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) by its two members bench of Justice Anubhav Sharma (Judicial Member) and N.K. Billaiya (Accountant Member), observed that the bank, in Form No. 26AS, had acknowledged the fixed deposits with it and had credited interest by deducting tax at source. Even if the fixed deposits were misplaced, the assessee can approach the bank and ask for duplicate fixed deposits.

The appellant/assessee- Smiths Detection Asia Pacific Pte Ltd. company is incorporated under the laws of Singapore and is a tax resident of Singapore, within the meaning of Article 4 of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. The assessee is part of the Smiths Group, a UK-based business conglomerate that manufactures and trades security equipment.

The assessee filed its return of income on 30.11.2020 declaring total income of Rs. 3,50,02,980 at special rates and a loss of Rs. 1,11,62,442/- and claimed exempt income of Rs. 1,04,55,60,800 on account of supply of offshore equipment's. During the course of scrutiny assessment proceedings, the assessee itself submitted that it has a Permanent Establishment (PE) in existence in India with respect to contract with Chandigarh International Airport Ltd. (CIAL) and accordingly, the Assessing Officer was of the opinion that once a PE has been established for foreign entity, there is no need to establish the PE again.

The Assessing Officer was further of the view that the taxation of business income of the non-resident is ascertained as per source rules under the domestic provisions read with relevant Article of the DTAA.

Referring to various financial statements furnished by the assessee for the relevant period, the Assessing Officer noticed that the assessee company also carried out similar business in other countries. Therefore, the operating margin shown by the assessee company itself from similar businesses across the world could be taken as the profit similar to the Arm's length profit margin.

Applying the said ratio, the Assessing Officer computed the total profit to be attributed at Rs. 10,73,79,094. Proceeding further, the Assessing Officer noticed that as per Form 26AS, the assessee has received interest income of Rs. 71,51,535/- from Canara Bank. However, interest of Rs. 62,94,461/- has been declared by the assessee. The Assessing Officer, accordingly, made addition of Rs. 8,57,074/- and concluded the assessment proceedings.

The ld. counsel for the assessee vehemently stated that the assessee's branch office has no role to play in the execution of contracts pertaining to Airport Authority of India (AAI) and CIAL. It is the say of the ld. counsel that the role of branch office was limited to maintenance of CIAL. Assessee submitted that the role of branch office was limited to maintenance of CIAL.

The ld. counsel for the assessee further stated that the assessee does not have a PE in India in relation to off shore supply of equipment. The ld. counsel for the assessee pointed out that the transaction involved in the present case is one, akin to export of goods from outside of India where the contract for supply of goods was entered outside of India and the sale was also affected outside of India and title to the property in the equipment passed outside of India.

Per contra, the ld. DR strongly supported the findings of the Assessing Officer. Referring to the remand report submitted by the Assessing Officer, the ld. DR pointed out that via communication letter written by the assessee company to the CIAL dated 22.08.2018 and communication addressed to the AAI, the assessee on its own accord, divided the scope of work awarded to it into two components – comprising of supply of equipment's and the other being installation, testing, commissioning and comprehensive annual maintenance.

The ld. DR vehemently stated that the assessee has assigned the aspect related to supply of equipment to itself and the other component of work i.e., installation, testing, commissioning, AMC has been assigned to the subsidiary of the assessee in India i.e., Smith Detection Systems Pvt Ltd.

Lastly, the ld. DR stated that suo moto bifurcation by the assessee will not change the colour of transaction and the attribution of profit by the Assessing Officer /DRP cannot be faulted with.

The core issue which was required to be addressed at the outset was to what extent the Force of Attraction Rule apply in the case of off shore supply/sales of goods/merchandise.

The bench referred the decision passed by Supreme Court in the case of Ishikawajima Harima Heavy Industries Limited at the outset and remarked, "Turnkey project was split into two parts – as per break-up given at pages 339, 340 and 341 of the Paper Book and payments have also been made by AAI and CIAL separately for off shore supply and installation and commissioning. Therefore, the allegation of ld. DR that the assessee suo moto bifurcated the contract does not hold any water as other parties also concurred at the beginning itself and therefore, made separate payments."

"Considering the facts of the case in totality, we do not find any justification in attribution of profit on off shore sale of equipment and direct the Assessing Officer to delete the impugned addition. This grievance along with all its sub grounds is allowed," opined the bench.

The next grievance was related to the addition of interest on fixed deposits amounting to Rs. 8,57,074.

The ITAT while noting that the contention of the assessee of misplacing the fixed deposits and being capital assets, have written off the same and therefore, there was no question of earning any interest income stood illogical and was also unacceptable.

The bench was of the view that the Canara Bank in Form No. 26AS had acknowledged the Fixed Deposits with it and has credited interest by deducting tax at source. Even if the Fixed Deposits are misplaced, the assessee can approach the Canara Bank and ask for duplicate Fixed Deposits.

The ITAT did not find any error or infirmity in the addition made by the Assessing Officer and the same was upheld.

In the result, the appeal of the assessee was partly allowed.