2023 (2) TMI 120 - AT - Income Tax

Income deemed to accrue or arise in India - Receipts from leasing/hiring of RIGs - Permanent Establishment (PE) in India - Whether taxable as business profits u/s 44BB of the Act on gross basis or they are in the nature of royalty, hence, taxable under section 9(1)(vi) read with section 115A - assessee is a non-resident corporate entity incorporated under the laws of Malaysia and is a tax resident of Malaysia - HELD THAT:- The amounts received in connection with activities enumerated under sub-section (1) to section 44BB, even if in the nature of royalty, has to be treated as business profits in case of a non-resident entity not having any Permanent Establishment (PE) in India. This is so because, section 44BB does not require existence of PE. Interestingly, similar receipts falling within the definition of royalty as defined in explanation 2 to section 9(1)(vi), which also includes equipment royalty, would be taxable under section 44DA of the Act, in a case, where the non-resident entity has a PE in India. Thus, sections 9(1)(vi), 44BB and 44DA apply in different situations. While existence of PE is a pre-condition for applicability of section 44DA, it is not so in case of 44BB of the Act.

DRP has made a fundamental error in ignoring the exceptions provided under clause (iva) to explanation 2 to section 9(1)(vi) of the Act while concluding that the amount received is in the nature of royalty under section 9(1)(vi) read with section 115A of the Act. One more fundament error committed by learned DRP is in holding that section 44BB will be applicable only in a case where non-resident has a PE in India. The aforesaid conclusion of learned DRP is based on complete misinterpretation of the provision and goes against the very essence of the provision, which does not put the condition of existence of PE for applicability of the provision.

Thus, in our view, the conclusion drawn by learned DRP that the amounts received are in the nature of royalty under section 9(1)(vi) read with section 115A of the Act is unacceptable.

On the contrary, we accept the position taken by the assessee in offering the income to tax under section 44BB of the Act, as, it is in accordance with the statutory provision. Accordingly, we direct the AO to compute the income in both the assessment years under dispute under the provisions of section 44BB - Decided in favour of assessee.