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2009 (6) TMI 675 - AT - Income TaxIncome deemed to accrue or arise in India - PE in India - taxability of receipts from the offshore supply of equipments - assessee is a German Company - DTAA between India and Germany - whether there is any tax liability of the assessee under the regular provisions of the Act - contention of the revenue in this part of the ground is that the provisions of DTAA will be attracted on the assessee as it has PE in India and hence the income will be taxable - HELD THAT - In our considered opinion, this contention of revenue deserves the fate of rejection. Section 90(1) empowers the Central Government to enter into an contract with the Government of any country outside India for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country etc. The logic behind the Agreement for the avoidance of double taxation of income is to allow relief to the assessee If the income is taxable as per the domestic law, then the assessee can opt for the provisions of the DTAA for extincting or marginalizing the liability so created. If the income is not taxable and there does not exist any tax liability of the assessee as per the regular provisions of the Act, it is simple and plain that the DTAA cannot be invoked to create any such tax liability. The object of the DTAA is not to create any fresh tax liability if it is not there as per domestic law but to restrict it, if it exists and is permissible. If there is no tax liability as per domestic law then the DTAA cannot create it. Circular No. 786, dated 7-2-2000 further clarifies the position qua commission and charges payable for services rendered outside India, it has been explained that no tax is deductible u/s 195 on the export commission and other related charges payable to non-resident for services rendered outside India. Therefore, as clearly borne out that a sum of Rs. 74.57 crores represents the consideration for the exclusive supply of offshore equipment, which cannot be considered as leading to any taxable income resulting in the hands of the assessee. As regards the other alleged receipt of Rs. 10 crores considered by the AO we find that the assessee categorically stated before the AO that there was no such other contract from which business income could be said to have been earned by the assessee. The reference to three contracts is in respect of fees for technical services which was separately offered for taxation voluntarily by the assessee. The AO went to estimate the further receipt at Rs. 10 crores without any material, worth the name, in his hands to indicate, even remotely, that the assessee did earn any income from other contracts. The view of the ld. CIT(A) in ignoring Rs. 10 crores is, therefore, upheld. As far as the remaining amount of Rs. 74.57 crores is concerned, we have noted above that no income on this score is received or is deemed to be received or accrues or arises or is deemed to accrue or arise in India to the assessee. Hence there cannot be fastened any tax liability on the assessee as it is outside the scope of total income as per section 5(2). From the contract with BPL, we have seen that there is additional charge for the spare parts to ensure that the work of the customer does not come to halt, in case there arises some technical problem with any of the parts of the equipment. Thus it is seen that the assessee cannot be said to have any P.E. in India through the TAC 2 Bombay. Since the assessee is not liable to tax in the instant case in respect of offshore supply of equipments as per the regular provisions of the Income-tax Act, 1961, in our considered view there is no need to ascertain or fix any taxability as per DTAA. This ground is, therefore, not allowed. Chargeability of interest u/s 234B - AO charged interest - CIT(A) held that the assessee could not be subjected to interest as it was not liable to pay advance tax. The assessee in the instant case is a non-resident and hence any person responsible for paying to it is under obligation for deducting tax at source if income is chargeable to tax under the Act. HELD THAT - We observe that section 195 provides that any person responsible for paying to a non-resident, any sum chargeable under the provisions of this Act, shall at the time of credit of such income to the account of the payee or at the time of payment thereof, deduct income-tax thereon at the rates in force. By virtue of section 195 all the payments made to the assessee are subjected to deduction of tax at source. Under these circumstances, the assessee cannot be said to have committed any default in not paying the advance tax for which the liability to pay interest u/s 234B could be fastened on it. Our view is fortified by the Special Bench order of the Tribunal in Motorola Inc. v. Dy. CIT 2005 (6) TMI 226 - ITAT DELHI-A , which stands impliedly affirmed by the Hon ble jurisdictional High Court in D.I. (International Taxation) v. NGC Network Asia Ltd. 2009 (1) TMI 174 - BOMBAY HIGH COURT . Respectfully following the precedent, we accept the opinion of the learned CIT(A) on this count in ordering to delete the levy of interest u/s 234B. This ground also fails. Bringing to tax the fees for technical services on accrual basis - assessee disclosed the fees for technical services on receipt basis - AO and CIT(A) has recorded that the royalty and fees for technical services was to be recognized on accrual basis - HELD THAT - It is noted that in assessment year 1980-81 the Tribunal decided the issue against the assessee by holding that royalty and fees for technical services should be accounted for on accrual basis. Thereafter the language employed by Article VIIIA of DTAA was considered which implied that the royalty and fees for technical services should be reckoned for taxation only when it is received and not otherwise. Considering this position the Tribunal in assessee s own case for assessment years 1990-91, 1991-92, 1994-95 and 1996-97 decided the issue in assessee s favour by holding that royalty and fees for technical services was to be considered on receipt basis and not accrual basis. Recently the Tribunal in assessee s own case for assessment year 2001-02 has reiterated the same view by following the afore-noted earlier year s order in assessee s favour. The order of the learned CIT(A), being not in conformity with the latter view of the Tribunal, needs to be overturned. We, therefore, direct that the fees for technical services should be taxed only on receipt basis as offered by the assessee and not on accrual basis. This ground is allowed.
Issues Involved:
1. Taxability of business income from offshore supply of equipment. 2. Chargeability of interest under section 234B. 3. Taxation of fees for technical services on accrual basis. Detailed Analysis: 1. Taxability of Business Income from Offshore Supply of Equipment: The primary issue was whether the income from the offshore supply of equipment by the assessee, a German company, to an Indian company (BPL) was taxable in India. The Assessing Officer (AO) had determined that the assessee had a Permanent Establishment (P.E.) in India and thus included Rs. 8,45,70,467 as business income. However, the Commissioner of Income-tax (Appeals) [CIT(A)] overturned this decision, noting that the AO had wrongly relied on the Indo-Australia Treaty instead of the Indo-Germany Treaty. The CIT(A) concluded that the assessee did not have a P.E. in India and thus no part of the income from the offshore supply of equipment was chargeable to tax in India. The Tribunal upheld the CIT(A)'s decision, emphasizing that the offshore supply of equipment was completed outside India, with the property in the goods passing to BPL at the port of shipment in Germany. The Tribunal referenced the Supreme Court's judgment in Ishikawajma Harima Heavy Industries Ltd. v. DIT, which held that offshore supply of equipment and services rendered outside India do not fall within the purview of section 9(1)(vii) of the Income-tax Act. The Tribunal also noted that the assessee received payment outside India and that the local installation services were carried out by Siemens India Limited, which offered the income for taxation in its own hands. Therefore, no income accrued or arose in India from the offshore supply of equipment. 2. Chargeability of Interest under Section 234B: The second issue involved the chargeability of interest under section 234B. The AO charged interest under this section, but the CIT(A) held that the assessee was not liable to pay advance tax and thus could not be subjected to interest under section 234B. The Tribunal upheld the CIT(A)'s decision, referencing section 195, which mandates that any person responsible for paying to a non-resident must deduct income tax at source. Since the assessee was a non-resident and the payments made to it were subject to tax deduction at source, it could not be held liable for not paying advance tax. The Tribunal cited the Special Bench order in Motorola Inc. v. Dy. CIT and the jurisdictional High Court's decision in D.I. (International Taxation) v. NGC Network Asia Ltd. to support its conclusion. 3. Taxation of Fees for Technical Services on Accrual Basis: The third issue was whether fees for technical services should be taxed on an accrual basis or receipt basis. The AO and CIT(A) held that such income should be taxed on an accrual basis, referencing a Special Bench decision in the assessee's own case for the assessment year 1980-81. However, the Tribunal noted that subsequent decisions in the assessee's own case for the assessment years 1990-91, 1991-92, 1994-95, and 1996-97, as well as for the assessment year 2001-02, had held that royalty and fees for technical services should be taxed on a receipt basis as per Article VIIIA of the DTAA with Germany. Therefore, the Tribunal directed that the fees for technical services should be taxed only on a receipt basis, overturning the CIT(A)'s decision. Conclusion: - The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the offshore supply of equipment was not taxable in India and that the assessee was not liable for interest under section 234B. - The Tribunal allowed the assessee's cross-objection, directing that fees for technical services should be taxed on a receipt basis rather than an accrual basis.
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