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2009 (6) TMI 118 - AT - Income Tax'business connection' in India - Taxability of Income receipt from offshore supplies of equipment - imported supplies on FOB basis - composite contract - consideration for supply of equipments and for rendition of services - Liability to ascertain any taxability as per DTAA between India and Australia - assessee entered into contract with Metro Railways for supply and supervision of installation and testing, commissioning of the integrated optical fibre communication system - HELD THAT - As the component of supply contract and that of the rendition of services is with the same party and for a common purpose, we are unable to find any logic in treating the entire amount as the composite payment attributable commonly both to the supply of equipment and rendering of services, more so when there is a specific identifiable amount relatable to the supply of equipments. There is no qualitative difference between two situations, viz., firstly when one contract is made for two or more items specifying the consideration for each part separately and when two or more separate contracts are made in respect of the same transaction. The mere fact that the assessee effected sale of equipment to an Indian party, that in itself, cannot be construed as resulting into any business connection in India. The Hon'ble Supreme Court considered almost similar circumstances in CIT vs. R.D. Aggarwal Co. 1964 (10) TMI 9 - SUPREME COURT . It was held by their Lordships that there was no business connection. It has been explained that business connection predicates an element of continuity between the business of the non-resident and the activity in the taxable territories. So going by the argument of the ld DR, even if we presume for a moment, with which we do not agree, that there was any business connection of the assessee in India, still in the absence of any operations carried on by the assessee in India, there cannot be any question of bringing the case within the ambit of s. 9(1). We, therefore, hold that no part of the income, to that extent, can be said to have deemed to accrue or arise to the assessee in India within the meaning of s. 9. On going through the CBDTs view in the above instruction, it is abundantly clear that no part of income can be deemed to accrue or arise in India due to sale of equipment on FOB basis. The contract of the assessee with Metro Railways clearly stipulates in cl. 1.1 that the total value of the contract will be on FOB basis for supply and services. There is no reason why the mandate of this instruction rendered in the context of power projects should not be applied to other similar projects. On going through the circulars and the legal position, it is clearly borne out that a sum represents the consideration for the exclusive supply of offshore equipments. The provisions of s. 9(1)(i) do not apply to the instant case. Since no income on this score is received OT is deemed to be received or accrues or arises or is deemed to accrue or arise in India, there cannot be fastened any tax liability on the assessee as it is outside the scope of total income as per s. 5(2). We, therefore, hold that CIT(A) was correct in holding that no addition was sustainable on account of offshore supply to Metro Railways. The contention of the Revenue 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. In our considered opinion, this contention deserves the fate of rejection. Sec. 90(1) empowers the Central Government to enter into an agreement 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. As 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 IT Act, 1961, in our considered view, there is no question of ascertaining or fixing any taxability as per DTAA. This ground is, therefore, not allowed. Computation of income - claim of huge losses - HELD THAT - As counsel for the assessee contended that the books of account and relevant evidences and vouchers were available with the assessee. We observe that the AO has applied profit rate of 10 per cent on the gross receipts as against the assessee's returned loss. CIT(A) has arbitrarily reduced the profit rate to 8 per cent without assigning any basis. The ends of justice will meet adequately if the impugned order of CIT is set aside and the matter is restored to the file of AO. We order accordingly and direct him to compute the income from all projects, other than off shore supplies for metro railway , as per the books of account which the assessee is now claiming to have in its possession. 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 - HELD THAT - 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. Sec. 208 provides that the advance tax shall be payable during a financial year in every case where the amount of such tax payable by the assessee during that year is five thousand rupees or more. Sec. 209(1)(d) states that the income-tax calculated under cls. (a) to (c) shall be reduced by the amount of income-tax which would be deductible at source during the said financial year under any provision of this Act from any income. By virtue of s. 195 all the payments made to the assessee are subjected to TDS. 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. vs. Dy. CIT 2005 (6) TMI 226 - ITAT DELHI-A . Respectfully following the precedent, we accept the opinion of CIT(A) on this count in directing to delete the levy of interest u/s. 234B. This ground, also fails. In the result, the appeal of the assessee in full and that of the Revenue in part, are allowed for statistical purposes.
Issues Involved:
1. Taxability of offshore supply revenues. 2. Applicability of Rule 10 for income determination. 3. Computation of income and profit rate. 4. Chargeability of interest under Section 234A. 5. Chargeability of interest under Section 234B. Detailed Analysis: 1. Taxability of Offshore Supply Revenues: The primary issue was whether revenues earned by the assessee-company on account of offshore supply in respect of the Metro Rail contract are taxable in India. The Revenue argued that the contract was a single composite contract for onshore and offshore supply, invoking Article 7(1)(b) of the DTAA between India and Australia. The assessee countered that the offshore supply was concluded outside India and thus not taxable. The Tribunal analyzed the contract and found that it explicitly divided the contract value into offshore supplies, imported services, and indigenous services. Citing the Supreme Court's judgment in Ishikawajma-Harima Heavy Industries Ltd. vs. Director of IT, the Tribunal concluded that the offshore supply of equipment, which was completed and paid for outside India, did not attract tax under Section 9(1) of the IT Act. The Tribunal also referenced CBDT Circular No. 23, which supports the non-taxability of such transactions conducted on a principal-to-principal basis outside India. 2. Applicability of Rule 10 for Income Determination: The AO applied Rule 10 of the IT Rules, 1962, due to the absence of supporting documents for the assessee's claimed expenses, determining the income at 10% of the total revenue. The CIT(A) reduced this rate to 8%, but the Tribunal found this reduction arbitrary. The Tribunal directed the AO to compute the income from all projects, excluding the offshore supplies, based on the books of account, which the assessee claimed to possess. 3. Computation of Income and Profit Rate: The Tribunal observed that the CIT(A) had arbitrarily reduced the profit rate from 10% to 8% without any basis. It was noted that the assessee had not produced books of account or vouchers during the assessment due to ongoing arbitration proceedings. The Tribunal directed the AO to re-examine the books of account and determine the correct income, excluding the offshore supplies. 4. Chargeability of Interest under Section 234A: The Tribunal found that the assessee had filed its return of income by the due date under Section 139(1). Since there was no mention of charging interest under Section 234A in the assessment order and the return was timely filed, the Tribunal dismissed the Revenue's appeal on this ground. 5. Chargeability of Interest under Section 234B: The Tribunal held that the assessee, being a non-resident, was not liable to pay advance tax as per Section 195, which mandates TDS on payments made to non-residents. The Tribunal cited the Special Bench order in Motorola Inc. vs. Dy. CIT, concluding that the assessee could not be subjected to interest under Section 234B for non-payment of advance tax. Conclusion: The Tribunal allowed the appeals of the assessee and the Revenue in part for statistical purposes. It directed the AO to re-compute the income based on the books of account and upheld the non-taxability of offshore supply revenues. The Tribunal also dismissed the Revenue's grounds regarding the chargeability of interest under Sections 234A and 234B.
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