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IHI Corporation Delphi Building Versus ADIT (International Taxation) -3, Mumbai

2015 (11) TMI 1191 - ITAT MUMBAI

Income from offshore services - taxability - Benefit of Article 7 of India-Japan Double Taxation Avoidance Agreement ('DTAA') - Held that:- As decided in assessee's own case [2007 (1) TMI 91 - SUPREME COURT] & [2013 (1) TMI 214 - BOMBAY HIGH COURT] provision of the Act or of the DTA, whichever is more beneficial to the assessee, shall apply. 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 .....

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SHRI VIVEK VARMA, JM For The Assessee : Shri M.P.Lohia For The Reveneu : Shri Manjunathaswamy ORDER PER 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 asse .....

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noring 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 .....

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nstead 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 eq .....

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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 In .....

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e 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. T .....

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n 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% u .....

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der 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 submi .....

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on'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 .....

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dia. (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 "attributabl .....

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stablishment. 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 no .....

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red 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 c .....

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n'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 .....

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e 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 a .....

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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 rece .....

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e 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 .....

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