Receipts of NRI for contract executed outside India cannot be taxed under the special provisions if the same is not taxable under the general provisions of the Indian Tax Law
This Tax Alert summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT) [2010- TII-41-ITAT-MUM-INTL] in the case of J Ray McDermott Eastern Hemisphere Ltd. (Taxpayer). The ITAT held that receipts pertaining to transportation and installation contract executed by the Taxpayer outside India cannot be taxed under the special provisions, which provide for taxation of certain income of a non-resident on presumptive basis, if the income is not chargeable to tax under the general provisions of the Indian Tax Law (ITL).
Background and facts of the case
- The Taxpayer, a company tax resident of Mauritius, was engaged in the business of designing, fabrication, construction and installation of platforms, docks, pipelines, jackets and other similar activities which are used in the exploration and production of mineral oil.
- The Taxpayer undertook and executed a contract for transportation and installation work under certain well platforms projects to be used in mineral oil exploration viz. N-11 and N12.
- While filing its tax return, the Taxpayer did not offer the receipts pertaining to activities carried on outside India for tax.
- The ITL contains special provisions for taxation of income arising to a non-resident for providing services used in mineral oil exploration. Under this provision, 10% of the gross receipts of the non-resident is deemed to be income chargeable to tax.
- The Tax Authority ruled that as the source of income is related to an agreement for work to be carried on in India, the whole of the receipts would be taxable under the ITL. Further, as income is computed on presumptive basis under the ITL, the distinction between activities carried on in India and those outside India is not relevant and the gross receipts would be taxable.
- The first appellate authority reversed the decision of the Tax Authority.
- Aggrieved, the Tax Authority appealed against the decision of the first appellate authority.
Contentions of the Taxpayer
- Income pertaining to installation and transportation activities carried on outside India is not taxable under the ITL.
- Alternatively, income pertaining to the above activities or work carried on outside India cannot be attributable to a permanent establishment (PE) in India.
Contentions of the Tax Authority
The entire receipt arising on execution of the contract for installation and transportation is attributable to the PE of the Taxpayer in India.
Ruling of the ITAT
- The ITAT upheld the decision of the first appellate authority. The ITAT held that only income which is reasonably attributable to operations carried on in India is taxable in India. Income computed on presumptive basis can be taxed in India only if such income is chargeable to tax under the general provisions of the ITL.
- The ITAT placed reliance on certain rulings (Saipem SPA v. DCIT [88 ITD 213] (Delhi ITAT) and McDermott ETPM Inc. v. DCIT [92 ITD 385] (Mumbai ITAT)) rendered in a similar context wherein it had been held that before computing income on presumptive basis, it needs to be ensured that such income falls within the scope of total income as envisaged under the ITL.
In the case of a non-resident, the ITL provides for computation of income on a deemed basis as a percentage of the amount paid to a taxpayer on account of provision of services and facilities, supply of plant and machinery etc. to be used in prospecting for mineral oil in India. Generally, in such cases, a portion of the income from the execution of contracts could arise outside India and may not be taxable under the general provisions of the ITL.
The basis for taxation of the entire receipts pertaining to portions of the contract executed in and outside India has been a subject matter of litigation. In the case of CIT v. Halliburton Offshore Services Inc., the Uttarakhand High Court (HC) had ruled that the provision of the ITL envisaging computation of income on presumptive basis is a complete code in itself. The HC further ruled that the amount of income computed thereunder would be taxable in India, irrespective of such income falling within the scope of total income as envisaged under the ITL. However, in the present ruling, the Mumbai ITAT has relied on rulings by other benches of the ITAT and has held that the special provisions relating to presumptive basis of taxation do not override the general provisions that determine scope of total income of a non-resident.