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2024 (1) TMI 309 - AT - Income TaxIncome Accrue or arise in India - treatment of the remittances made by HCLT to assessee as FTS - amounts were received outside India by the assessee - HELD THAT - In the instant case, there is no dispute that the amounts were received outside India by the assessee. Hence the provisions of section 5(2)(a) of the Act are not applicable. Since there is no dispute that the services were rendered outside India to the customers outside India, no part of the income accrues or arises or deemed to accrue or arise in India and accordingly the provisions of section 5(2)(b) of the Act are not applicable in the instant case. In the instant case, HCLT is an Indian entity and had paid monies to the assessee (overseas entity). So it falls under the Source Rule in clause (b) of section 9(1)(vii) of the Act supra. But the said provision contain an exception, wherein it provides that FTS payable by an Indian resident shall not be chargeable to tax in India in the hands of the overseas recipient if i) fee is payable in respect of services utilized in a business or profession carried on by such resident outside India , or ii) fee is payable for the purposes of making or earning any income from any source outside India. In the instant case before us, both the aforesaid conditions provided in exception to section 9(1)(vii)(b) of the Act stand fulfilled. Hence it cannot be taxable as FTS under section 9(1)(vii) of the Act. Source of income refers to something from where the income flows. In the present case, the fact that the services rendered by the assessee were utilized in respect of customers of HCLT located outside India ; the ultimate delivery of the software was outside India, i.e., at the customers' location; the contract was effectively concluded outside India; that no part of the services rendered by the assessee are transferred to India; that the source of income of the payer in respect of which payment was made to the assessee was outside India and hence, the said payment in the hands of the assessee did not accrue or arise in India in terms of section 9(1)(vii)(b) of the Act. We hold that the payment made by the HCLT to the assessee cannot be construed as income that accrues or arises in India or deemed to accrue or arise in India and hence cannot be brought to tax as FTS u/s 9(1)(vii)(b) of the Act as it falls under the exceptions thereon. Offshore project lead or project manager of HCLT manages his offshore team in India, whereas the assessee s project lead manages his team independently, which executes work from the overseas locations directly on the customer's server. Both the project managers/ leads only coordinate with each other on need basis; that each team of HCLT and the assessee develops the particular modules as assigned to them; that the delivery team of the assessee reports to the delivery manager who sits in the foreign country and the delivery team of HCLT reports to the delivery manager who sits in India; that both onsite and offsite personnel of the assessee and HCLT respectively are responsible for writing the code; that the offshore teams of HCLT work directly with customer managers or through project managers in India and the onsite team engineers belonging to the assessee company work directly with foreign customer's managers; that in majority of the projects, the entire development environment is owned by foreign customer; that the code and test scripts are worked on from foreign customers' servers and provided directly on the said servers; that the integration is normally done through Customer build machines that integrate the various units of code into a solution. Thus we have no hesitation to conclude that the payments made by HCLT to the assessee could not be construed as Fee for technical services and accordingly the same is not taxable in the hands of the assessee in India as per the domestic law. Accordingly, the Ground Nos. 3,4,7 8 raised by the assessee are disposed off in the aforementioned terms. Since the payments made by HCLT to the assessee is held not be taxable in India as per the domestic law, the other elaborate arguments by the ld. AR and grounds raised by the assessee on the applicability of Double Taxation Avoidance Agreements (DTAA) benefits ; make available clause in DTAA and Most Favoured Nation (MFN) clause in Protocol etc need not be gone into, as adjudication of the same is merely academic in nature in these appeals. Hence no opinion is rendered by us on the same and they are left open. Accordingly, the Ground Nos. 5 9 raised by the assessee are allowed. Taxability of payments received by the assessee for certain categories of Infrastructure Services - We find that the assessee had not rendered any services to HCLT under the Infrastructure Services, which is evident from the submissions of the assessee and discussions made by us hereinabove on the earlier grounds raised by the assessee. We have already held that both the assessee as well as HCLT work independently and render services directly to the end customers and that no service is provided by assessee to HCLT. In any case, from the aforesaid facts explaining the activities carried out by the assessee, it is clear that no technical knowledge, experience, skill, knowhow or process is made available and accordingly the payments received does not qualify as FIS within the ambit of the applicable treaty. It is not in dispute that the assessee does not have any PE in India. At best, the payments received could only be construed as Business Profits in terms of Article 7 of the DTAA and in the absence of PE in India, the same cannot be brought to tax even as per the treaty in the hands of the assessee. Hence the Ground No. 6 raised by the assessee is allowed. Chargeability of interest u/s 234B - We are conscious of the fact that proviso to section 209(1) of the Act has been amended w.e.f. 01.04.2012, wherein, payments made during the said financial year i.e. during the Financial Year 01.04.2012 to 31.03.2013 relevant to AY 2013-14 would be covered by the said amendment in the proviso to section 209(1) of the Act. Since, we are concerned with AY 2012-13 before us, the said amendment also would not be applicable to the assessee. We find that the Hon'ble Supreme Court in the case of DIT Vs. Mitsubishi Corporation 2021 (9) TMI 875 - SUPREME COURT had categorically held that prior to FY 2012-13, the amount of tax deductible at source can be reduced while calculating advance tax and therefore, interest u/s 234B of the Act cannot be levied. As stated earlier, even if the entire payment made by HCLT to the assessee is to be construed as FTS (which we have already held that it is not so) still, the entire sum of FTS would be subjected to tax deductible and hence, there will be absolutely no obligation on the part of the non-resident assessee like the assessee before us to pay any advance tax in terms of section 209 of the Act. Hence, there cannot be any chargeability of interest u/s 234B of the act on the assessee. Interest u/s section 234A of the Act has been incorrectly calculated by the ld AO - This being a mathematical exercise, we direct the ld AO to re-compute the interest u/s 234A of the Act in accordance with law.
Issues Involved:
1. Jurisdiction and validity of reassessment proceedings. 2. Nature of payments and their taxability under section 9(1)(vii) of the Income Tax Act. 3. Application of the India-Singapore Double Taxation Avoidance Agreement (DTAA). 4. Taxability of Infrastructure Services. 5. Levy of interest under sections 234A and 234B of the Income Tax Act. Summary of Judgment: 1. Jurisdiction and Validity of Reassessment Proceedings: The assessee challenged the reassessment proceedings initiated under section 147 of the Income Tax Act, claiming they were without jurisdiction, void ab initio, and bad in law. The assessee argued that there were no valid reasons to believe that income had escaped assessment, and the proceedings were based on arbitrary and erroneous statements recorded during a survey of a third party, HCL Technologies Ltd. The tribunal did not render an opinion on this issue, considering it academic after deciding the case on merits. 2. Nature of Payments and Their Taxability under Section 9(1)(vii): The tribunal examined whether payments received by the assessee from HCL Technologies Ltd. constituted fees for technical services (FTS) under section 9(1)(vii) of the Income Tax Act. The tribunal held that the services were rendered by the assessee directly to customers outside India, and no part of the services was transferred to India. Therefore, the payments did not accrue or arise in India and were not taxable as FTS under section 9(1)(vii)(b) of the Act. 3. Application of the India-Singapore Double Taxation Avoidance Agreement (DTAA): The tribunal did not find it necessary to adjudicate on the applicability of the DTAA, the 'make available' clause, and the 'Most Favoured Nation' (MFN) clause, as the payments were already held not taxable under domestic law. These issues were left open for academic consideration. 4. Taxability of Infrastructure Services: The tribunal examined the nature of infrastructure services provided by the assessee, including Application Management Services, Application Development Services, Problem Management Services, Data Centre Management, and Hosting Services. It concluded that no technical knowledge, skill, or experience was made available by the assessee to HCL Technologies Ltd. or the end customer, and the payments did not qualify as Fees for Included Services (FIS) under the DTAA. The payments were considered 'Business Profits' and, in the absence of a Permanent Establishment (PE) in India, were not taxable in India. 5. Levy of Interest under Sections 234A and 234B: The tribunal held that since the payments were not taxable in India, there was no obligation on the assessee to pay advance tax, and consequently, no interest under section 234B could be levied. The tribunal directed the Assessing Officer to re-compute the interest under section 234A as per law. Conclusion: The appeals were allowed for statistical purposes, with the tribunal holding that the payments received by the assessee from HCL Technologies Ltd. were not taxable in India under domestic law, and the issues regarding the DTAA were left open for academic consideration.
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