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2006 (8) TMI 330 - AT - Income TaxIncome deemed to accrue or arise in India - Non-resident company incorporated under the laws of Finland - execute turnkey work i.e. supply certain equipments and install the same in India - profits attributable to the permanent establishment - Article 7 of DTAA between India and Finland - whether a turnkey project installation or construction PE can be said to attract profits from portion other than on account of work done on site of such a construction or installation PE - HELD THAT - Just because some equipments were locally procured and used in installation and commissioning of the equipment sold by the assessee-company, one cannot come to the conclusion that the assessee was engaged in selling same or similar goods or merchandise through the PE. There is no material whatsoever to even suggest that the equipments sold by the enterprise directly to the customer were same or similar to the equipments sold through the PE. It is also important to appreciate that although India Finland tax treaty provides for force of attraction clause, such clause is restrictive in nature as the words same and similar have been used in clause ( b ) of Article 7(1). Accordingly, not all the profits of the assessee-company from its business connection in India would be taxable in India, but only so much of profits as have economic nexus with PE in India, would be taxable in India. This economic nexus should be in relation to sale of goods or merchandises of same or similar nature as sold or effected through the PE. This condition, in our considered opinion, is not satisfied in the case before us. We are of the considered view that under the provisions of Article 7(1)( b ), on the facts of this case, sale of equipment directly by the head office of the foreign enterprise directly to NSPT does not lead to taxability of profits thereon in India. We now take up the provisions of Article 7(1)( c ). The issue before us is only of taxability of profit on sale of equipment and not, as is the scope of Article 7(1)( c ), profits on any business activities carried on in the source State . Therefore, the provisions of Article 7(1)( c ) has no application in the matter. Revenue thus derives no advantage from the same. Since the profits on sale of equipments are admittedly in the nature of business profits, which can only be taxed under Article 7 these profits cannot be taxed under any other provision of the treaty either. As these profits are not taxable in the hands of the assessee, on the basis of provisions of the India Finland tax treaty, there is no need to refer to the provisions of the Act which would have had application in the present case only if these were, in terms of section 90(2), more favourable to the assessee. When taxability in the hands of the assessee fails in terms of the applicable tax treaty, as is the settled law, there is no need to examine the matter on the touchstone of the legal provisions under the Indian Income-tax Act. We are, therefore, of the considered view that the profits on sale of equipment, on the facts of the present case, are not taxable in India. Learned counsel also contends that even if it is assumed that the profits earned by the assessee-company from sale of equipment are taxable in India, in accordance with the provisions of India Finland tax treaty, such profits should not be taxable in India from the perspective of Indian Income-tax Act. It is contended that as per Explanation to section 9(1)( i ) of the Act, where a non-resident has business connection in India, only so much of profits could be taxed in India which could reasonably be attributed to the operations carried on in India by the non-resident. It is pointed out that provisions of the Act, in the light of the provisions of section 90(2) of the Act, continue to be applicable to the extent these provisions are more beneficial to the assessee vis-a-vis the provisions of the applicable tax treaty. In the light of the conclusions that we have arrived at, earlier in this order, to the effect that the assessee does not have any tax liability in respect of its Finland based head office directly exporting equipment to NSPT in India, we see no reasons to adjudicate on this alternate plea which would have been relevant only in the event of taxability being upheld on the basis of tax treaty provisions. We, therefore, reject this plea as infructuous and not calling for any adjudication at this stage. Thus, we hold that the profits from sale of equipments in question, on the facts of this case, were not taxable in India. We, therefore, see no reasons to interfere in the matter. In the result, the appeal is dismissed.
Issues Involved:
1. Taxability of profits on the sale of equipment supplied by the assessee-company to Nava Sheva Port Trust (NSPT) in India. 2. Interpretation of Article 7 of the Double Taxation Avoidance Agreement (DTAA) between India and Finland. 3. Applicability of the 'force of attraction' rule under the DTAA. 4. Consideration of the provisions of Section 9(1)(i) of the Indian Income-tax Act. Detailed Analysis: 1. Taxability of Profits on the Sale of Equipment: The primary issue is whether the profits from the sale of equipment supplied by the assessee-company, a non-resident entity incorporated in Finland, to NSPT are taxable in India. The assessee-company was part of a consortium assigned to design, manufacture, deliver, erect, test, and commission bulk handling facilities at NSPT. The company filed its income-tax return showing a loss, excluding profits from equipment supplied outside India. The Assessing Officer added Rs. 5,12,25,939 to the income, arguing that the supply of equipment was linked to the installation activities in India and thus taxable. 2. Interpretation of Article 7 of the DTAA: The CIT(A) concluded that the revenue from activities performed outside India is not chargeable to tax in India, directing the Assessing Officer to consider Article 7 of the DTAA between India and Finland. The revenue contended that Article 7's scope is broader, extending to profits from sales and activities similar to those conducted through the permanent establishment (PE) in India. 3. Applicability of the 'Force of Attraction' Rule: The revenue emphasized the 'force of attraction' principle, arguing that once a PE is established, all profits derived from the country, whether through the PE or not, are taxable. However, the Tribunal found that the force of attraction rule, as per the UN Model Convention and incorporated in the India-Finland DTAA, is limited. It applies only to profits attributable to the PE, sales of similar goods, or similar business activities carried out in the source country. The Tribunal noted that the installation or construction PE comes into existence after the transaction for supplies is concluded, and thus, profits from such supplies cannot be attributed to the PE. Furthermore, the arm's length principle ensures that only profits from hypothetical transactions between the PE and the enterprise can be taxed, which was not applicable here as the sales were directly billed to the Indian customer. 4. Consideration of Section 9(1)(i) of the Indian Income-tax Act: The Tribunal also considered the provisions of Section 9(1)(i) of the Income-tax Act, which taxes only the profits attributable to operations carried out in India. Since the profits from the sale of equipment were not attributable to the PE in India, they were not taxable under this section either. Conclusion: The Tribunal concluded that the profits from the sale of equipment by the assessee-company to NSPT were not taxable in India. The appeal by the revenue was dismissed, affirming that the profits from the offshore supply of equipment under a turnkey contract are not attributable to the PE and thus not taxable in India under the DTAA or the Income-tax Act.
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