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TMI Blog2013 (6) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 5 are subject to the contrary provision, if any, in DTA. The crux of the matter is that the provision of the Act or of the DTA, whichever is more beneficial to the assessee, shall apply. Thus overturning the impugned order on this issue by holding that the income from offshore services, albeit chargeable u/s 9(1)(vii) but exempt under the DTAA, cannot be charged to tax in the light of section 90(2) as discussed above. The impugned order is, therefore, set aside to this extent. Short granting of tax deducted at source - Held that:- AO is directed to examine this aspect of the matter and thereafter, decide it as per law after allowing a reasonable opportunity of being heard to the assessee. Interest u/s 234B and 234C - Held that:- The issue of charging of interest u/s 234B in the present case is no more res integra in view of the judgment of Director of Income-tax (International Taxation) v. NGC Network Asia LLC [2009 (1) TMI 174 - BOMBAY HIGH COURT] wherein held that when the duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be charged from the payee assessee u/s 234B. Also see DIT (IT) v. Krupp UDHE GmbH [2010 (3) TMI 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court in its own case viz., Ishikawajima-Harima Heavy Industries Ltd. v. DIT [(2007) 288 ITR 408 (SC)]. On being called upon to explain as to why the income from offshore supply and offshore services be not taxed in India, the assessee stated that all activities in connection with the offshore supplies were undertaken outside India and since both the transfer of property in goods as well as the payment were carried on outside the Indian soil, the income from such transaction was not taxable. The Assessing Officer got convinced with the assessee's submissions in this regard and held that the income from offshore supply was not taxable. The entire controversy in this appeal revolves around the income from offshore services. The assessee claimed exemption of this income from tax by stating that its project office in India had no role to play in respect of offshore services rendered and hence income from offshore services was not taxable in India. It was also argued that since such services were rendered outside India, the same should not be charged to tax u/s 9(1)(vii). The Assessing Officer as well as the Dispute Resolution Penal (DRP) did not find any force in the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulated. The Hon'ble Supreme Court has held in assessee's own case that offshore services rendered in connection with the turnkey project did not fall within the purview of section 9(1)(vii) as the entire services were rendered outside India though utilized in India. It further held that section 9(1)(vii) envisages the fulfillment of two conditions viz. the services which are the source of income must be utilized in India and such service must be rendered in India. As the services provided by the assessee were utilized in India but not rendered in India, the Hon'ble Supreme Court held that the amount would go out of the purview of section 9(1)(vii). 5.2. At this juncture, it would be relevant to note that the Finance Act, 2010 has substituted Explanation below section 9(2) with retrospective effect from 01.06.1976, which runs as under:- "Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of subsection (1) and shall be included in the total income of the non-resident, whether or not,- (i) the non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 12(5) 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply." 6.2. The learned Departmental Representative submitted that the case of the assessee cannot be considered under para 5 of Article 12 because the fees for offshore services cannot be considered as "effectively connected" with the permanent establishment. He submitted that the words used here are 'effectively connected' and not casually 'connected'. It was accentuated that unless the income directly results from the permanent establishment, it cannot be const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng no discussion of the issue in the body of the judgment as to whether the fees for technical services was 'effectively connected' with the permanent establishment. 6.5. In order to answer this question, we find it useful to reproduce the judgment of the Hon'ble Supreme Court on this issue, whose relevant part is as under:- "Re : Offshore services : (1) Sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable. (2) The entire contract would not be attributable to the operations in India viz. the place of execution of the contract, assuming the offshore elements form an integral part of the contract. (3) Section 9(1)(vii) of the Act read with the Memo cannot be given a wide meaning so as to hold that the amendment was only to include the income of nonresident taxpayers received by them outside India from Indian concerns for services rendered outside India. (4) The test of residence, as applied in international law also, is that of the taxpayer and not that of the recipient of such services. (5) For section 9(1)(vii) to be applicable, it is necessary that the services not only be utilized w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered by the assessee in respect of the contract under consideration cannot be characterized differently as argued on behalf of the Revenue. It is further relevant to note that the Tribunal in assessee's own case for the assessment year 2003-2004 considered similar issue. Following the above judgment of the Hon'ble Supreme Court, it was held that the income from offshore services cannot be taxed in terms of section 9(1)(vii) of the Act. The Revenue assailed this order before the Hon'ble jurisdictional High Court by contending that Explanation added by the Finance Act, 2010 with retrospective effect from 1st June, 1976 has changed the position. The Hon'ble jurisdictional High Court vide its judgment in ITA No.239 of 2011 dated 6th November, 2012 upheld the Tribunal order by noting that the Apex Court in the assessee's own case has held that apart from non-applicability of section 9(1) in the present case, Article 7 of the DTAA is also applicable and hence the income arising on account of offshore services would not be taxable. 6.7. In view of the foregoing discussion it is abundantly manifest that the Hon'ble Supreme court as well as the Hon'ble jurisdictional High Court have h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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