2017 (4) TMI 758 - AT - Income Tax

Amount received under the offshore supply contracts - Income deemed to accrue or arise in India - applicability of provisions of Section 44BBB - liability to tax in India - Held that - The meanings given to certain expression which were not otherwise defined / clarified in the Treaty could derive their meaning from domestic law. An analysis of the above clauses indicates that the overall contract provided for separate/specific terms & conditions for supply of the equipment and also provided for consequences for default of the terms. The same was not dependent upon the service contracts. Section 44BBB is computational provision and hence, it cannot enlarge the scope of total income which is otherwise provided in Section 4,5, & 9 of the Income Tax Act. Whether the impugned income from OSC are taxable as per the substantive provisions and DTAA - Held that - There were separate contracts for supply as well as services and supply contracts were not dependent upon service contracts. This being the factual position, we find that explanation 1(a) comes into play in the instant case. Hence, the income which is deemed to accrue / arise in India shall be only with respect to those business operations that are carried out in India. After analyzing the various case laws, statutory provisions, DTAA provisions and contractual terms and respectfully following judgment in Ishikawajima-Harima Heavy Industries Limited Vs. DIT (2007 (1) TMI 91 - SUPREME COURT ), we are inclined to hold that Offshore Supply contracts were carried and concluded outside India and hence no income there-from deemed to accrue or arise in India as per Section 9(1) and DTAA provisions and accordingly, not chargeable to tax. The receipts thereof do not form part of receipts for the purpose of computational provisions of Section 44BBB. Explanation 4 could not overcome the limitation imposed by Explanation 1(a) to Section 9(1)(i) and hence, the impugned income do not form part of business receipts for computation of income u/s 44BBB of the Act. We held so. We also observe that impugned payment has been paid by NPCIL to ASE on net basis and NPCIL has borne the burden of tax on behalf of the assessee. DRP rightly observed that Grossing up of the impugned payment was required to be done as per Section 195A before applying 44BBB of the act. But Section 44 BBB has been applied on net payment basis by the assessing officer. Revenue is free to recompute the income of the assessee as per the statutory provisions. With these observations, Ground No.3 of assessee s appeal is allowed. The payment towards offshore supply contracts being accruing outside India, would not form part of business receipts for the purpose of Section 44BBB. Charging of interest u/s 234B - Held that - We find that the assessee has received payment on net basis and tax thereupon was borne by the Indian Entity and. In view of jurisdictional Hon ble Bombay High Court in the case of DIT Vs NGC Asia Network LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT , we are inclined to hold that since the impugned payments were subjected to TDS and the assessee was to receive the income on net payment basis and hence interest u/s 234B is not attracted on the facts and circumstances of the case. The Ground of assessee appeal succeeds.

Summary

Issues involved:
1. Applicability of Section 44BBB to Offshore Supply Contracts (OSC).
2. Taxability of Offshore Supply Contracts under Section 9(1) of the Income Tax Act and relevant DTAA provisions.
3. Levy of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Applicability of Section 44BBB to Offshore Supply Contracts (OSC):

The primary contention was whether the income from OSC should be included in the computation under Section 44BBB. The assessee argued that Section 44BBB, being a computational provision, cannot enlarge the scope of total income, and only income that is otherwise taxable can be included. The revenue argued that since the contract was composite, the entire receipts should be considered under Section 44BBB.

The Tribunal held that Section 44BBB is a computational provision and cannot enlarge the scope of total income. It concluded that OSC were carried and concluded outside India, and thus, no income from these contracts deemed to accrue or arise in India under Section 9(1) and DTAA provisions. Therefore, such receipts do not form part of business receipts for computation under Section 44BBB.

2. Taxability of Offshore Supply Contracts under Section 9(1) of the Income Tax Act and relevant DTAA provisions:

The assessee contended that the OSC receipts were not taxable in India as the transfer of goods occurred outside India, and payments were made in foreign currency. The revenue argued that the contract was composite, and the entire income should be taxed in India.

The Tribunal analyzed the contractual terms and concluded that title in goods passed outside India, deliveries were on FOB basis, and payments were made in foreign currency. It applied the principle of territorial nexus and held that only the income attributable to operations carried out in India is taxable. Citing various judicial precedents, including the Supreme Court's decision in Ishikawajima-Harima Heavy Industries Ltd., the Tribunal concluded that the OSC receipts were not taxable in India as no part of the operations related to these contracts was carried out in India.

3. Levy of interest under Section 234B of the Income Tax Act:

The assessee argued that interest under Section 234B was not leviable as the entire income was subject to tax deductible at source. The revenue levied interest under Section 234B.

The Tribunal, relying on the jurisdictional Bombay High Court decision in DIT Vs NGC Asia Network LLC, held that since the payments were subjected to TDS and the assessee received the income on a net payment basis, interest under Section 234B was not attracted.

Conclusion:

The Tribunal allowed the appeals, holding that:
- Income from OSC is not taxable in India and does not form part of business receipts for computation under Section 44BBB.
- Interest under Section 234B is not leviable as the payments were subjected to TDS and received on a net basis.
- The revenue is free to recompute the income of the assessee as per statutory provisions, considering the grossing up of payments.