2010 (5) TMI 602 - HC - Income Tax

BEAT agreement income not taxable in India

The court held that the income received under the BEAT agreement did not accrue in India as the services were rendered outside India. Therefore, the ... Whether the amount paid by petitioner No. 1 to petitioner No. 2 outside India as consideration in terms of the basic engineering and training agreement dated October 22,1989 is liable to Indian income-tax as income deemed to have accrued to petitioner No. 2 in India in view of section 9(1)(vii) - No PE - Payment under protest - income received by the non-resident (such person) by way of a payment from a resident Indian for technical services rendered to him would be subject to the Indian income-tax only if it satisfies the twin test namely that the income was received in respect of services (i) rendered in India, and (ii) utilized in India or has such a live link with India that it can be treated as accrued or arisen in India - Examined on this test, the income received by petitioner No. 2 cannot be deemed to have arisen or accrued in India because the services under the BEAT agreement were not rendered within India though the drawings, designs received from petitioner No. 2 may have been utilized by petitioner No. 1 in India - Held that: the income by way of fees for technical services by the petitioner is not liable to the Indian income-tax under the Act - Decided in favor of the assessee Issues Involved:1. Taxability of fees for technical services under the BEAT agreement.2. Interpretation of section 9(1)(vii) of the Income-tax Act, 1961.3. Territorial nexus for tax liability.4. Applicability of the Supreme Court decision in Ishikawajima-Harima Heavy Industries Ltd. v. DIT.Issue-Wise Detailed Analysis:1. Taxability of fees for technical services under the BEAT agreement:The core issue is whether the amount paid by petitioner No. 1 to petitioner No. 2 outside India as consideration under the BEAT agreement dated October 22, 1989, is liable to Indian income-tax as income deemed to have accrued to petitioner No. 2 in India under section 9(1)(vii) of the Income-tax Act, 1961. Petitioner No. 1, an Indian company, engaged petitioner No. 2, a Delaware-based company, for technical assistance in setting up a sponge iron plant. The BEAT agreement involved services rendered entirely outside India, including preparation of engineering drawings and training of personnel. Petitioner No. 1 argued that since no part of the activity for earning the technical fees was carried out in India, the income did not accrue or arise to petitioner No. 2 in India. Respondent No. 3, however, held that the fees were taxable as income deemed to have accrued in India, leading to tax deductions at source on the payments made under the BEAT agreement.2. Interpretation of section 9(1)(vii) of the Income-tax Act, 1961:Section 9(1)(vii) deems certain incomes to accrue or arise in India, including fees for technical services payable by a resident, unless the fees are for services utilized in a business or profession carried on outside India or for earning income from any source outside India. The court clarified that section 9(1) aims to tax the recipient's income and not the payer. Therefore, the expression 'such person' in section 9(1)(vii)(b) refers to the recipient of the income. Applying this interpretation, the court concluded that the fees received by petitioner No. 2 for services rendered outside India fell within the exception provided in section 9(1)(vii)(b) and were not taxable in India.3. Territorial nexus for tax liability:The court emphasized the principle of territorial nexus, stating that Indian Parliament can only tax the income of a non-resident to the extent it arises or accrues in India. This principle was supported by the Supreme Court's observations in Ishikawajima-Harima Heavy Industries Ltd. v. DIT, where it was held that for section 9(1)(vii) to apply, the services must not only be utilized in India but also rendered in India or have a live link with India. The court reiterated that the income of a non-resident can only be taxed in India if there is a territorial nexus, which was not present in the case of the BEAT agreement.4. Applicability of the Supreme Court decision in Ishikawajima-Harima Heavy Industries Ltd. v. DIT:The court considered the applicability of the Supreme Court's decision in Ishikawajima, which involved offshore services and the interpretation of section 9(1)(vii)(c). The Supreme Court had adopted a twin test requiring services to be both rendered and utilized in India for the income to be taxable in India. The court found that this interpretation was relevant to the present case under section 9(1)(vii)(b) as well. The court also referred to similar interpretations by other courts, such as the Karnataka High Court in Jindal Thermal Power Company Ltd. v. Deputy CIT (TDS), which supported the twin criteria of rendering and utilizing services in India for taxability.Conclusion:The court held that the income received by petitioner No. 2 under the BEAT agreement did not satisfy the twin criteria of being rendered and utilized in India. Therefore, it could not be deemed to have accrued or arisen in India and was not liable to Indian income-tax. The assessment orders subjecting the income to Indian income-tax were quashed, and the respondents were directed to exclude the income received under the BEAT agreement from tax assessments. The petition was allowed, and the rule was made absolute to the extent indicated.