2023 (2) TMI 1013 - AT - Income Tax

Income deemed to accrue or arise in India - Taxability of offshore supply of equipment - India-Singapore Double Taxation Avoidance Agreement DTAA - to what extent the Force of Attraction Rule apply in the case of off shore supply/sales of goods/merchandise? - assessee company is incorporated under the laws of Singapore and is a tax resident of Singapore within the meaning of Article 4 of the DTAA between India and Singapore - HELD THAT - Turnkey project or composite contract having different severable parts are concerned the Hon ble Supreme Court addressed the issue in the case of Ishikawajima Harima Heavy Industries Limited 2007 (1) TMI 91 - SUPREME COURT Turnkey project was split into two parts as per break-up given and payments have also been made by AAI and CIAL separately for off shore supply and installation and commissioning. Therefore the allegation of ht ld. DR that the assessee suo moto bifurcated the contract does not hold any water as other parties also concurred at the beginning itself and therefore made separate payments. Considering all we do not find any justification in attribution of profit on off shore sale of equipment and direct the Assessing Officer to delete the impugned addition. This grievance alongwith with all its sub grounds is allowed. Addition of interest on fixed deposits - Assessee vehemently stated that the assessee misplaced the fixed deposits and being capital assets have written off the same therefore there is no question of earning any interest income - HELD THAT - We are of the considered view that this contention of assessee is not only illogical but also unacceptable. The Canara Bank in Form No. 26AS has acknowledged the Fixed Deposits with it and has credited interest by deducting tax at source. Even if the Fixed Deposits are misplaced the assessee can approach the Canara Bank and ask for duplicate Fixed Deposits. We do not find any error or infirmity in the addition made by the Assessing Officer and the same is upheld. Appeal of the assessee is partly allowed.

Summary

Issues:
Taxability of offshore supply of equipment under the Income-tax Act and India-Singapore Double Taxation Avoidance Agreement (DTAA).

Analysis:
1. The appeal pertains to the taxability of offshore supply of equipment under the Income-tax Act and the India-Singapore DTAA for Assessment Year 2019-20.
2. The assessee, a Singapore-based company part of a UK conglomerate, declared income and claimed exempt income on offshore equipment supply.
3. Assessing Officer found Permanent Establishment (PE) in India for the assessee, attributing profit based on global business margins.
4. Addition made for undeclared interest income from Canara Bank was contested by the assessee.
5. The core issue addressed was the application of the Force of Attraction Rule in offshore supply transactions.
6. Citing Supreme Court judgments, it was argued that only income attributable to operations in India can be taxed, and transactions outside India are not taxable in India.
7. The Tribunal found the facts similar to the Supreme Court cases, directing deletion of the profit attribution on offshore equipment sale.
8. The addition of interest income on fixed deposits was upheld, rejecting the assessee's claim of misplacement of deposits.
9. The appeal was partly allowed, with the order pronounced on 22.02.2023.