R.C.SHARMA (A.M.) :-This appeal has been filed by assessee against the order of DRP, dated 24-9-2012 for the assessment year 2008-09, in the matter of order passed u/s.144C(5) of the I.T.Act, wherein followings grounds have been taken by the assessee :-
“On the facts and in the circumstances of the case and in law, the learned AO based on directions of Hon'ble DRP:
General
1. erred in assessing the total income at Rs. 15,88,04,441 as against Rs. 26,131,352 computed by the Appellant;
Benefit of Article 7 of India-Japan Double Taxation Avoidance Agreement ('DTAA')
2. erred in holding that the income from offshore services rendered by the Appellant amounting to Rs. 13,26,73,089 is liable to tax in India under the provisions of the Act as well as the India-Japan DTAA;
3. erred in taxing the income from offshore services under Article 12 of the India-Japan DT AA ignoring the provisions of Article 12(5) read with Article 7 of the India-Japan DTAA;
4. without prejudice to the above, erred in taxing the income from offshore services at the rate of 10.5575 percent instead of the beneficial rate of 10 percent as per the India-Japan DTAA;
Jurisdictional High Court order in Appellant's own case
5. should have appreciated that in view of the decision of the Hon'ble Income-tax Appellate Tribunal for AY 2003-04 which has been approved by the jurisdictional High Court (rejecting the appeal of the Income-tax Department and directing to follow the order passed by the Hon'ble Supreme Court), the income of the Appellant from offshore services ought not to be taxed in India;
The assessee vide letter dated 2nd April, 2010, has filed additional ground which is as under :-
“On the facts and in the circumstances of the case and in law, the learned AO:
6. Erred in taxing interest on income tax refund amounting to Rs. 13,12,899 at the rate of 42.224% instead of the beneficial rate of 10% as per the provisions of the India- Japan Double Taxation Avoidance Agreement.
2. We have heard rival contentions and perused the record. Facts in brief are that the assessee (IHI) is a company incorporated in and tax resident of Japan. It is manufacturer of heavy machinery, providing technology oriented products and services to industrial, private and public sectors. IHI conducts research consults, engineers, manufactures and supplies a range of machinery equipment plants structures, ships and facilities. IHI carries on its business activities in India through the Project Office established at Mumbai. The assessee had been awarded the
following Engineering, Procurement, Construction and Commissioning contracts by Petronet LNG Limited in India:
a) LNG storage tank at Dahej. Gujarat called 3rd tank executed over 45 months
b) LNG storage tank at Dahej, Gujarat called 4!htank executed over 51 months
c) LNG storage tank at Kochi executed over 47 months, commencing in February 2008
The scope of work of the assessee under the above contracts is to develop, design, engineer, procure equipment materials and supplies to erect and construct the tank. The contract consideration receivable by IHI is segregated into offshore portion and onshore portion. The onshore portion comprises of onshore supply of equipments and services in India and construction and erection; offshore portion comprises of offshore supply of equipment and services from outside India. For the purpose of execution of the contract, assessee has set up a project office in India. It was claimed that activities carried out by the project office in respect of offshore supply and onshore services for the first and second tank had been completed as on March 31,2006. The assessee before the AO submitted that during A.Y.2008-09, there was no head office expenses. In the return of income filed, the assessee offered the income received from onshore activities to tax in India with the claim of applicability of India Japan tax treaty or Act whichever is beneficial to the assessee. However, the assessee has not offered income from offshore supply and offshore services to tax in India. It had been claimed that income from offshore supply is not received in India, its actual place of business is outside India
and hence it had neither accrued or arisen in India. For this purpose, reliance was placed on the decision of Hon’ble Supreme Court in assessee’s own case, 288 ITR 0408. Thus, the assessee submitted that offshore supply should not be taxable in India as per the following reasons:-
• Only such part of the income, as is attributable to the operations carried out in India can be taxed in India.
• All activities in connection with the offshore supply are undertaken outside India, and therefore cannot be deemed to accrue or arise in the country.
• Since both the transfer of property in goods as well as the payment, have been carried on outside the Indian soil, the transaction is not taxable in India. The contract provides for transfer of property outside India.
3. The AO after relying the retrospective amendment made to Section 9 of the IT Act, 1961 by the Finance Act, 2010, held that the income from offshore services is taxable in India and post the retrospective amendment, the decision of Hon’ble Supreme Court in assessee’s own case is no longer applicable. Thus, the AO brought the income offshore services amounting to USD to tax @10.5575% under the Act.
4. Before the DRP, the assessee reiterated the submissions made before the AO. However, the DRP after relying various legal propositions alongwith the decision of Special Bench of the Delhi Tribunal in case of Clough Engineering Ltd., 130 ITD 137, observed that the FTS in this case neither qualifies the activity test nor the asset test and rejected the objection raised by the assessee. In regard to objection of applying the tax rate of 10.54575% under the I.T.Act, instead of 10% under India-Japan Tax Treaty, the DRP denied to interfere in this objection as the rate of tax is not a subject matter before the DRP. Against which the assessee is in further appeal before us.
5. At the outset, ld. AR submitted that the very issue involved in the instant case is squarely covered by the decision of the Tribunal in assessee’s own case for A.Y.2009-2010. The precise observation of the Tribunal in ITA No.7227/Mum/2012, dated 13-3-2013, is as under :-
“6.4. Having heard the rival submissions and perused the relevant material on record, the first question which arises for our consideration is as to whether the issue of income from offshore services as per the DTAA has been decided or not by the Hon'ble Supreme Court? The learned Departmental Representative vehemently argued that there is no decision by the Hon'ble Supreme Court on this aspect. He put forth that even if some reference was to be found to such issue in the judgment, it would not mean the decision of the Hon'ble Supreme Court because of there being 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 non- resident 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 within India, but also be rendered in India or have such a "live link" with India that the entire income from fees as envisaged in article 12 of the DTAA becomes taxable in India.
(6) The terms "effectively connected" and "attributable to" are to be construed differently even if the offshore services and the permanent establishment were connected.
M/s.IHI Corporation.
(7) Section 9(1)(vii)(c) of the Act in this case would have no application as there is nothing to show that the income derived by a non-resident company irrespective of where rendered, was utilized in India.
(8) Article 7 of the DTAA is applicable in this case, and it limits the tax on business profits to that arising from the operations of the permanent establishment. In this case, the entire services have been rendered outside India, and have nothing to do with the permanent establishment, and can thus not be attributable to the permanent establishment and therefore not taxable in India.
(9) Applying the principle of apportionment to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations.
(10) The location of the source of income within India would not render sufficient nexus to tax the income from that source.
(11) If the test applied by the Authority for Advance Rulings is to be adopted here too, then it would eliminate the difference between the connection between Indian and foreign operations, and the apportionment of income accordingly.
(12) The services are inextricably linked to the supply of goods, and it must be considered in the same manner.”
6.6. From the above judgment it is discernible that the Hon'ble Supreme Court has rendered a positive decision on this aspect by holding in para (8) above that Article 7 of the DTAA is applicable in this case insofar as the income from offshore services is concerned. It has further been held that since the entire services were rendered outside India having nothing to do with the permanent establishment, there can be no taxability of this amount in India. Further in para (12) it has been held that the offshore services are inextricably linked to the supply of goods, so it must be considered in the same manner. In view of the enunciation of law by the Hon'ble Supreme court in assessee's own case, it becomes vivid that the income from identical services rendered 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 held in unequivocal terms in the assessee's own case for the earlier years that the income on account of offshore services is not chargeable to tax as per Article 7 of the DTAA.
7. Section 90(2) of the Act provides that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The Hon'ble Supreme Court in CIT VS. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC) has held that the provisions of sections 4 and 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.
8. We, therefore, overturn 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.”
6. Ld. AR also placed on record the decision of Hon’ble Bombay High Court in the case of M/s Ishikawajima Harima Heavy Industries Co. Ltd., decided in Income Tax Appeal No.239/2011, dated 6-11-2012, wherein the Hon’ble jurisdictional High Court upheld the findings of the Tribunal in regard to amount receivable by the assessee in respect of offshore supply of equipments and offshore services cannot be taxed within the purview of Section 9(1) of the Act. Against which the department preferred an SLP before the Hon’ble Apex Court, which was confirmed by the Hon’ble Supreme Court.
7. We have considered rival contentions, carefully gone through the orders of the authorities below as well as judicial pronouncements cited above by ld. AR. We found that the income from identical services rendered by the assessee in respect of the contract under consideration
cannot be characterized differently. 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 preferred appeal 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 in ITA No.239/2011 dated 6-11-2011, upheld the order of the Tribunal 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. Thus, it is clear that the Hon'ble Supreme court as well as the Hon'ble jurisdictional High Court have held in unequivocal terms in the assessee's own case for the earlier years that the income on account of offshore services is not chargeable to tax as per Article 7 of the DTAA. The provisions of Section 90(2) is very clear that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The Hon'ble Supreme Court in CIT VS. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC) has held that the provisions of sections
4 and 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. Considering the above factual matrix of the case as well as judicious pronouncements rendered by the Hon’ble jurisdictional High Court as well as Hon’ble Supreme Court and the Mumbai Bench of the Tribunal, we are of the view that the income from offshore services, though 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. Accordingly, we allow the appeal of the assessee with regard to income from offshore services and set aside the order of the DRP.
8. In view of our above decision, ground raised by the assessee in regard to rate of taxation, has become infructuous and is accordingly dismissed.
9. In the result, appeal of the assessee is allowed in part.