CA RAHUL DHAWAN
Section 9(1)(vii) of Income Tax Act 1961:
Section 9(1) deals with the incomes deemed to accrue or arise in India. Further Section 9(1)(vii), which is relevant for case under consideration, provides that ‘income by way of fees for technical services payable by …..(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India, shall be deemed to accrue or arise in India.
Further finance Act 2010 has substituted Explanation below section 9(2) with retrospective effect from 01.06.1976, which states as under:-
“Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of subsection (1) and shall be included in the total income of the non-resident, whether or not,-
• The non-resident has a residence or place of business or business connection in India; or
• The non-resident has rendered services in India.”
Relevant portion of Article 7 of DTAA in India & Japan:
The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment.
Article 12 of DTAA in between India and Japan:
Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.
However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State.
Grounds of appeal
Facts of the case related to:
– The assessee is a company incorporated in and tax resident of Japan engaged in manufacturing of heavy machinery, providing technology oriented products and services to industrial, private and public sectors.
– The assessee was awarded three engineering, procurement, construction and commissioning contracts by Petronet LNG Limited in India. The contract consideration is under these agreements is segregated into i) offshore portion and ii) onshore portion. The onshore portion comprises of onshore supply of equipments and services in India and offshore portion also comprises of offshore supply of equipment and services from outside India.
– For the execution of this contract the assessee set up a project office in India.
– In the return filed by the assessee it offered income received from onshore activities to tax in India with the claim of applicability of India-Japan Tax Treaty or the domestic law, whichever is beneficial to it. There is no dispute on this segment of the income.
– The assessee did not offer to tax income from offshore supply and offshore services by claiming that it did not accrue or arise in India. In support of its contention, the assessee relied on the judgment rendered by the Hon’ble Supreme Court in its own case viz., Ishikawajima-Harima Heavy Industries Ltd. v. DIT [(2007) 288 ITR 408 (SC)]. On being called upon to explain as to why the income from offshore supply and offshore services be not taxed in India, the assessee stated that all activities in connection with the offshore supplies were undertaken outside India and since both the transfer of property in goods as well as the payment were carried on outside the Indian soil, the income from such transaction was not taxable. The Assessing Officer got convinced with the assessee’s submissions in this regard and held that the income from offshore supply was not taxable.
– Now the controversy arises w.r.t. the income from offshore services. The assessee claimed exemption of this income from tax by stating that its project office in India had no role to play in respect of offshore services rendered and hence income from offshore services was not taxable in India. It was also argued that since such services were rendered outside India, the same should not be charged to tax u/s 9(1)(vii).
Analysis of first ground in light of relevant provisions
– Taxability of income arises from offshore services under Income Tax Act 1961
Since the controversy arises w.r.t. taxability of Income arises from offshore services which the assessee contended that the same shall not be liable to tax as the services are rendered outside India and also before amendment the provisions of section 9(1)(vii) envisaged fulfillment of two conditions for treating the payment as ‘Fees for technical services’, viz., the i). Services which were the source of income must have been utilized in India and, ii). Such services must have been rendered in India;
However, the amendment by the Finance Act, 2010 had diluted these twin conditions. Now the rendering of services even outside India would be a good case for bringing the income of NR from fees for technical services within the purview of section 9(1)(vii), if such services were utilized in India.
As such services were utilized in India, the rendition of such services outside India can now no more be claimed as a relevant criteria to push such income outside the ambit of section 9(1)(vii).
Going by the mandate of this provision, if any person who is resident of India pays an income by way of fees for technical services to a non-resident, such income shall be deemed to accrue or arise to such non-resident subject to the fulfillment of the other requisite conditions as stipulated.
In view of the amendment to the relevant provisions by means of the substitution of Explanation to section 9(2) the tribunal are of the considered opinion that the income from offshore services rendered outside India would fall within the domain of section 9(1)(vii) of the Act.
– Taxability of income arises from offshore services under India-Japan DTAA
As per assessee contention regarding the non taxability of income from Off shore services under India Japan DTAA has been upheld by the ITAT in the light of provisions u/s 90(2) of Income Tax Act 1961, which provides that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) of Section 90 of Income Tax Act 1961 for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The Hon’ble Supreme Court in CIT v. P.V.A.L. Kulandagan Chettiar  267 ITR 654 (SC) has held that the provisions of sections 4 and 5 are subject to the contrary provision, if any, in DTA. The crux of the matter is that the provision of the Act i.e. Section 9(1)(vii) or of the DTA i.e.( Article 7 or Article 12 which is further clarified as per below), whichever is more beneficial to the assessee, shall apply,
The learned Departmental Representative submitted that the case of the assessee cannot be considered under para 5 of Article 12 because the fees for offshore services cannot be considered as “effectively connected” with the permanent establishment.
Whereas the learned Authorized representative stated that the offshore services were rendered because of the composite “contract”, whose remaining parts are effectively connected with the permanent establishment in India. It was submitted that if the effective connection of the fees for technical services and the permanent establishment is established, then the income goes back to Article 7 instead of staying in Article 12. The learned AR argued that the Hon’ble Supreme Court has held that the income from offshore services falls under Article 7, Once income from offshore services comes within the scope of Article 7, the same cannot be taxed because of clause 6 of Protocol as per which the profits of the enterprise can be taxed in the other State only so much of them as are appropriate to the part played by the permanent establishment in these transactions.
Assessee contended that the Hon’ble Supreme court in his own case has said that the Article 7 of the DTAA is applicable in this case, and it limits the tax on business profits to that arising from the operations of the permanent establishment. In this case, the entire services have been rendered outside India, and have nothing to do with the permanent establishment, and can thus not be attributable to the permanent establishment and therefore not taxable in India.
Therefore, the impugned order on this issue by holding that the income from offshore services, albeit chargeable u/s 9(1)(vii) but exempt under the DTAA, cannot be charged to tax in the light of section 90(2) as discussed above. The impugned order is, therefore, set aside to this extent.
Short granting of tax deducted at source to the tune of Rs. 68,74,511:
The Assessing Officer is directed to examine this aspect of the matter and thereafter, decide it as per law after allowing a reasonable opportunity of being heard to the assessee.
The levy of interest u/s 234B and 234C of the Income Tax Act 1961:
Having heard the rival submissions and perused the relevant material on record it has been noted that the issue of charging of interest u/s 234B in the present case is no more valid in view of the judgment of the Hon’ble jurisdictional High Court in the case of Director of Income-tax (International Taxation) v. NGC Network Asia LLC [(2009) 313 ITR 187 (Bom.)] in which it has been held that when the duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be charged from the payee assessee u/s 234B. The same view has been reiterated in DIT (IT) v. Krupp UDHE GmbH [(2010) 38 DTR (Bom.) 251]. As the assessee before us is a non-resident, naturally any amount payable to it which is chargeable to tax under the Act, is otherwise liable for deduction of tax at source. In that view of the matter and respectfully following the above precedents, it has been held that no interest can be charged u/ss 234B and 234C of the Act. This ground is allowed.
Last ground about the initiation of penalty proceedings u/s 271(1)(c) is premature and accordingly dismissed.
Since the assessee being non-resident has provided ‘off shore services’ from place outside India and it has been concluded that the permanent establishment in India had effective role for earning such an off shore service income being composite “contract”, Article 7 of DTA shall applicable which has been decided by the Hon’ble Supreme court in assessee’s own case, further income from offshore services once comes within the scope of Article 7, the same cannot be taxed because of clause 6 of Protocol, although income from offshore services, chargeable u/s 9(1)(vii) but exempt under the DTAA, cannot be charged to tax in the light of section 90(2)of Income Tax Act, 1961.
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Skycell Communications Ltd v DCIT 251 ITR 53 (Mad)