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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.
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