By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Article 7 of India-Japan DTAA; Section 9(1)(vii) – While pursuant to the retrospective amendment to section 9(1)(vii) of the Act, income from offshore services will be taxable in India, it will not be taxable in terms of Article 7 of India-Japan DTAA.
Facts: The taxpayer was a company incorporated in, and tax resident of Japan. The taxpayer had executed contracts with an Indian company for engineering, procurement, construction and commissioning of certain equipment. The consideration under the contract was segregated into offshore portion and onshore portion. As regards the offshore portion, the taxpayer contended that no income had accrued in India as all activities were undertaken outside India and that the project office in India had no role to play in respect of the offshore services. Further, since the transfer of property in goods and the payments had taken place outside India, no income was taxable in India.
Held: (i) Position under the Act
a) In an earlier case of the taxpayer, the Supreme Court [Ishikawajima-Harima Heavy Industries Ltd vs. DIT (2007) 288 ITR 408 (SC)] had held that section 9(1)(vii) of the Act envisages fulfillment of two conditions, namely, the services must be utilised in India and they must be rendered in India.
b) Pursuant to the retrospective amendment to section 9, even if the services are rendered outside India, the consideration will be taxable in India if services are utilised in India. As there was no dispute that the payment received by the taxpayer was in the nature of fees for technical services and further that though the services were rendered outside India, they were utilised in India, the rendition of such services outside India could not now take the income out of the ambit of section 9(1)(vii). Therefore, income from offshore services rendered outside India will be taxable in India u/s. 9(1)(vii) of the Act.
(ii) Position under India-Japan DTAA
a) In an earlier case of the taxpayer, the Supreme Court [Ishikawajima-Harima Heavy Industries Ltd vs. DIT (2007) 288 ITR 408 (SC)] had held that Article 7 of India-Japan DTAA is applicable and it limits the taxability to profits arising from the operation of the PE. Since the services were rendered outside India and since they had nothing to do with the PE in India, no income can be attributable to PE in India.
b) As there was no change in this position, income arising from offshore services was not taxable in India.
