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2018 (1) TMI 946

Head Note:
Income taxability in India - income from the off shore supply of equipment - Income deemed to accrue or arise in India - Permanent Establishment in India - India - France DTAA - Withholding of tax u/s 195 - Held that:- Since all parts of the transaction in question i.e. the transfer of property in goods as well as the payment, were carried out outside the Indian soil, the transaction could not be taxed in India. Also, there exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. Thus, in the present case, even if for the sake of argument, it is assumed that MFPM has a business connection in India, it cannot be said that the income is deemed to accrue or arise in India as per Section 9(1)(i) of the Act, as no part of the income earned by MFPM from sale of equipment in India is attributable to the operations carried out in India.

The Protocol to the India-France DTAA further supports the position that no portion of the income relating to off-shore supply of equipment is taxable in India even if MFPM establishes any kind of PE in India.

With regard to Revenue’s contention that it was an agreement between two closely associated companies, it is submitted that merely for this reason it cannot be concluded that it is for the purpose of avoidance of taxes on the basis of conjectures and surmises without any documentary evidences. Further, the Revenue has erroneously opined that the clarification received from MFPM, dated 14 December 2012, should be rejected on the grounds that the same was issued by two closely associated companies for the purpose of avoidance of taxes. This is not warranted. As payment made by the Applicant to MFPM for the offshore supply of equipment, there shall be no liability to withhold tax under section 195 of the Act, from such payment.

Income derived from the discharging of its obligations by MFPM as provision of services of supervision in India at the factory site where the plant has been set up - Held that:- While examining provisions of section 9, we gave reasons why the income from off shore supply could not be brought to tax in India. By the same reasoning under this provision, we have to hold that income derived from the discharging of its obligations by MFPM, namely provision of services of supervision in India at the factory site where the plant has been set up, is chargeable to tax in India as the income arising therefrom can be said to have arisen or accrued in India.

There is a direct and real nexus between the terms of the contract, the activities of supervision undertaken at the site, and hence the income earned in India through the provision of the services and would be covered by section 9, as a business connection clearly exists between these supervisory services and the business of MFPM of assisting in setting up of manufacturing units in the field of bus and truck tyres. A service PE is also formed since the MFPM is carrying on its supervisory activities through its personnel at the fixed place,that is the factory premises, and this income can be fastened to this PE. Hence, the payments made by the applicant to MFPM’s 33 supervisory staff and engineers, amounting to ₹ 9.95 crore, would be chargeable to tax in India, and would also attract the provisions of section 195 of the Act.

In respect of payment made by the Applicant to MFPM for the offshore supply of equipment, there shall be no liability to withhold tax under section 195 of the Act, from such payment.

 


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