2009 (7) TMI 171 - AT - Income Tax

Income taxable in India - DTAA between India and USA - Addition on income from 'project management, engineering support services and factory acceptance test' - fees for included services under art. 12 of DTAA between India and USA - nature of services - determination of taxability or otherwise in respect of Indian Rupees equivalent to 15,000 and 2,51,083 US towards PMES FT services - the assessee entered into agreement with TVCL to provide satellite network communication system and also to provide certain installation and commissioning services associated with the initial installation and communications thereof - assessee offered for taxation consideration from all other items except for supply of equipment and PMES FT. The AO had not raised any question about the taxability of consideration for supply of equipment. AO held that these services were in the nature of fees for included services and hence covered under art. 12 of DTAA and fees for such services was to be taxed @ 15 per cent as per the treaty. Accordingly, the resultant addition was made. CIT(A) deleted the addition on the ground that the assessee did not make available technology, skill or experience, etc. to TVCL. HELD THAT - In the instant case it is noticed that the assessee specifically stated before the AO about the rendering of such services from overseas. Not only that, the detail of such services along with consideration which is part of VSAT agreement was also made available. In such a situation it is too late in the day for the learned Departmental Representative to contend that the matter be restored to the file of AO for a fresh determination of the nature of services and the resultant taxability. We, therefore, hold since the assessee did not make available any technical knowledge, experience or skill to TVCL by way of rendering PMES FT services overseas. Article 12 of DTAA does not apply in the instant case and the consideration cannot be included in fees for included services. Having held that the assessee did not receive fees for included services within the meaning of art. 12 of DTAA, it requires to be examined as to whether the case of the assessee is covered under art. 7 of business profits . This article provides that the business profits of an enterprise of one Contracting State may not be taxed by the other Contracting State unless the enterprise carries on business in that other Contracting State through a PE situated there. There is no dispute on the fact that the assessee did have a PE in India in the previous year relevant to the assessment year under consideration. Whether income from any of the services rendered overseas, having no relation whatsoever with the PE, can be subjected to tax only on the ground that the assessee has a PE in India? - As going by the cl. (a) of art. 7(1), the business profits can be taxed in India only to such extent which are attributable to the PE in India. In other words if there is no PE then the business profits of the non-resident cannot be taxed in India. Even if there is PE but no part of the business profits is attributable to such PE, then also there does not arise the question of taxability under art. 7. Here is a case in which the stated consideration was received for rendering of services outside India. In the present circumstances, the assessee had categorically stated before the AO that such consideration was for rendering of overseas services, which position had not been disturbed by the AO. That being the position even though the assessee has PE in India, no part of such services rendered overseas can be linked with the PE in India for the purposes of determination of income attributable to the PE in India. We, therefore, hold that the learned CIT(A) was justified in coming to the conclusion that no portion of the Revenue could be subjected to tax in India. This ground is, therefore, not allowed. Admission of Additional ground - whether CIT(A) erred in not considering the applicability of art. 7(1)(c) of the Indo-US DTAA after having held that the fees are in the nature of business income and hence art. 12 of the treaty is not applicable? - HELD THAT - There is no finding either of the AO or of the learned CIT(A) about the nature of activities carried on by the PE of the assessee. Thus, if we venture to decide this ground we will first have to examine the activities of the PE, for which no material is available on record and hence would require a totally fresh investigation of altogether new facts. Even the DR has not placed on record any material to show the activities carried on by the PE for enabling us to make any comparison of those activities with the present disputed activities. Under such circumstances we are of the considered opinion that the additional ground does not pass the test laid down by the Hon'ble Supreme Court Jute Corporation of India Ltd. vs. CIT 1990 (9) TMI 6 - SUPREME COURT for its admission. We, therefore, refuse to admit this additional ground. Non-chargeability of interest u/s. 234B - AO charged interest under this section - 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. By virtue of s. 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. vs. Dy. CIT 2005 (6) TMI 226 - ITAT DELHI-A , which stands impliedly affirmed by the Hon'ble jurisdictional High Court in Director of IT (International Taxation) vs. NGC Network Asia LLC 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.In the result, the appeal is dismissed.

Summary

Issues Involved:
1. Taxability of income from 'project management, engineering support services and factory acceptance test' under Article 12 of DTAA between India and USA.
2. Attribution of income to the Permanent Establishment (PE) in India under Article 7 of DTAA.
3. Applicability of interest under Section 234B of the Income Tax Act.

Detailed Analysis:

1. Taxability of Income under Article 12 of DTAA:
The primary issue was whether the income from 'project management, engineering support services and factory acceptance test' (PMES & FT) was taxable as "fees for included services" under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The assessee, a tax resident of the USA, entered into a VSAT agreement with TVCL, providing satellite network communication systems and associated services. The Assessing Officer (AO) opined that the income from PMES & FT was taxable in India as it constituted fees for included services under Article 12 of the DTAA. The CIT(A) disagreed, holding that the services did not "make available" any technical knowledge, experience, or skill to TVCL, and thus, did not qualify as fees for included services under Article 12. The Tribunal upheld the CIT(A)'s decision, emphasizing that for services to be included under Article 12, they must "make available" technical knowledge or skills to the recipient, which was not the case here.

2. Attribution of Income to the PE in India under Article 7 of DTAA:
The second issue was whether the income from PMES & FT services, which were rendered outside India, could be attributed to the PE in India and taxed under Article 7 of the DTAA. The AO argued that since the assessee had a PE in India, the income should be taxed as business profits attributable to the PE. The CIT(A) held that the services were not performed in India and thus not attributable to the PE. The Tribunal agreed, citing the Supreme Court's judgment in Ishikawajma-Harima Heavy Industries Ltd. vs. Director of IT, which stated that only business profits resulting from activities of the PE could be taxed. The Tribunal concluded that since the services were rendered overseas and not related to the PE in India, they could not be taxed under Article 7.

3. Applicability of Interest under Section 234B:
The final issue was whether the assessee was liable to pay interest under Section 234B for failure to pay advance tax. The CIT(A) held that the assessee was not liable for interest as it was not required to pay advance tax. The Tribunal upheld this decision, referencing Section 195 of the Income Tax Act, which mandates the deduction of tax at source for payments to non-residents. Since the assessee's income was subject to tax deduction at source, it was not liable for advance tax, and consequently, not liable for interest under Section 234B. The Tribunal's decision was supported by the Special Bench order in Motorola Inc. vs. Dy. CIT and the Bombay High Court's decision in Director of IT (International Taxation) vs. NGC Network Asia LLC.

Conclusion:
The Tribunal dismissed the Revenue's appeal, holding that the income from PMES & FT services was not taxable under Article 12 of the DTAA, as it did not "make available" technical knowledge or skills. Additionally, the income could not be attributed to the PE in India under Article 7, as the services were rendered overseas. Finally, the assessee was not liable for interest under Section 234B, as it was not required to pay advance tax due to the tax deduction at source provisions.