1996 (4) TMI 491 - AAR - Income Tax

Whether based on the stated facts of the case, the amounts received by the applicant outside India are taxable in India ? Whether based on the stated facts of the case, the nature of activities performed by the applicant in India, constitute a permanent establishment (PE) in India as per the provisions of article 7 of the Double Tax Avoidance Agreement (DTAA) between India and Malaysia ?

Issues Involved:
1. Taxability of amounts received by the applicant outside India.
2. Determination of whether the applicant's activities in India constitute a permanent establishment (PE) under the DTAA between India and Malaysia.

Detailed Analysis of the Judgment:

1. Taxability of Amounts Received by the Applicant Outside India:
The applicant, a Malaysian company, entered into a contract with a Korean company (HHI) to supply skilled labor for offshore installation works in India. The Deputy Commissioner of Income-tax, Bombay, directed HHI to deduct income-tax on payments to the applicant. The applicant contested this, seeking a ruling on whether the amounts received outside India are taxable in India.

The relevant legal provisions include Section 44BB and Section 9(1)(vii) of the Income-tax Act, 1961, and Article 7 of the Double Tax Avoidance Agreement (DTAA) between India and Malaysia. Section 44BB pertains to computing profits and gains for non-residents providing services in connection with mineral oils, while Section 9(1)(vii) deals with income by way of fees for technical services.

The Department argued that the entire amount received by the applicant is chargeable under Section 9(1)(vii) as income accruing in India. However, the applicant claimed exemption under Article 7 of the DTAA, which states that business profits are taxable only in the state of residence unless the enterprise has a permanent establishment in the other state.

The authority concluded that the payments received by the applicant are not taxable in India. The income derived from the contract is considered business income under Article 7 of the DTAA, and since the applicant does not have a permanent establishment in India, the income cannot be taxed in India.

2. Determination of Permanent Establishment (PE) in India:
The second issue was whether the applicant's activities in India constitute a permanent establishment under Article 5 of the DTAA. The definition of a permanent establishment includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

The Department contended that the barges where the laborers worked constituted a fixed place of business in India. However, the applicant argued that it did not have any fixed place of business in India and that the laborers were under the control and supervision of HHI.

The authority agreed with the applicant, stating that the applicant's activities did not amount to having a permanent establishment in India. The laborers were recruited abroad and were under HHI's control while working in India. The applicant did not have any recruitment office, training establishment, or other facilities in India that could constitute a permanent establishment.

The authority also examined whether the applicant carried on supervisory activities in connection with the project in India, which could constitute a permanent establishment under Article 5(4)(a) of the DTAA. It was concluded that the applicant did not engage in any supervisory activities, as the entire control and supervision were with HHI.

Ruling:
1. Whether based on the stated facts of the case, the amounts received by the applicant outside India are taxable in India?
- No

2. Whether based on the stated facts of the case, the nature of activities performed by the applicant in India constitute a permanent establishment (PE) in India as per the provision of article 7 of the Double Tax Avoidance Agreement (DTAA) between India and Malaysia?
- No

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