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 Mc Dermott 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