2009 (3) TMI 38 - AAR - Income Tax

Applicant (Foreign Co.) had contract with Indian Company for providing engineering services but were not provided completely because of termination of agreement in mid-way - applicant submission that services provided were performed mostly outside India are in the nature of royalty & he did not have PE in India is acceptable but entire receipts representing royalty income are liable to be taxed in India both under the IT Act 1961 as well as DTAA - splitting up of income not permissible

Summary

Issues Involved:
1. Nature of receipts under the contract with Sterlite.
2. Existence of a Permanent Establishment (PE) in India.
3. Taxability of receipts and applicability of the principle of territorial nexus and apportionment of income.

Detailed Analysis:

Issue 1: Nature of Receipts Under the Contract with Sterlite
The applicant, incorporated in Australia, provided professional services to Sterlite Industries (I) Limited for setting up an Alumina Refinery in Orissa. The services included conceptual and basic engineering, preparation of diagrams, designs, and drawings. The applicant argued that these services, performed mostly outside India, constituted 'royalty' under Article 12 of the DTAA between India and Australia. The Authority agreed, noting that the activities involved transfer of technical plans/designs and rendering of related services, thus falling under clause (g) of Article XII(3) and potentially under clause (c) read with clause (d). The consensus was that the income was 'royalty' as defined in the DTAA.

Issue 2: Existence of a Permanent Establishment (PE) in India
The applicant contended that it did not have a PE in India, as the work was primarily done from Australia, with occasional visits by personnel to India. The Authority accepted this contention, noting that the applicant's personnel spent limited days in India, and there was no fixed place of business operations in India. The occasional visits did not establish a fixed establishment, and the Revenue did not dispute this claim.

Issue 3: Taxability of Receipts and Applicability of Territorial Nexus and Apportionment of Income
The applicant sought to amend the question regarding taxability, arguing that only the portion of services rendered and utilized in India should be taxed, relying on the Supreme Court's decision in Ishikawajima-Harima Heavy Industries vs. DIT. The Authority examined the relevant clauses of the contract, noting that the services included data collection and transfer of deliverables in India, while the core activities were performed in Australia. Despite this, the Authority held that the activities in India were significant and essential, establishing sufficient territorial nexus for taxation under the IT Act and DTAA. The principle of apportionment, as discussed in Ishikawajima, was not applicable here because the services were part of a single, non-severable contract. The Authority concluded that the entire receipts representing royalty income were taxable in India, rejecting the applicant's reliance on the Ishikawajima decision.

Conclusion:
The Authority ruled that:
- The receipts under the contract with Sterlite were 'royalty' income.
- The applicant did not have a PE in India.
- The entire receipts were taxable in India, and the principle of apportionment was not applicable.

Ruling Pronounced:
The ruling was given and pronounced on the 30th day of March, 2009.