Treaty override for project management receipts directs PE-based computation under the India-Japan DTAA

The Tribunal notes that project revenue recognition may follow the percentage of completion method where the facts are identical to the assessee's earlier year and the prior view is applied. Offshore supply receipts for equipment supplied and paid for outside India are stated not to accrue or arise in India and are therefore not taxable in India. Project management receipts are treated as fees for technical services under domestic law, but the more beneficial India-Japan DTAA applies, so the receipts are to be computed as business profits attributable to the permanent establishment under the treaty framework after verification of allowable expenses. Interest under sections 234B and 234C is not chargeable where tax was deductible at source from payments to the non-resident.

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Issues: (i) Whether the assessee could be directed to adopt the percentage of completion method for recognition of project revenues. (ii) Whether offshore supply receipts were taxable in India. (iii) Whether revenues from project management contracts were taxable as fees for technical services under the Income-tax Act, 1961 and, alternatively, how they were to be computed under the India-Japan DTAA. (iv) Whether interest under sections 234B and 234C of the Income-tax Act, 1961 could be charged.

Issue (i): Whether the assessee could be directed to adopt the percentage of completion method for recognition of project revenues.

Analysis: The issue was covered by the Tribunal's decision in the assessee's own case for the immediately preceding year. The factual position for the year under appeal was treated as identical, and the earlier view in favour of the assessee was followed.

Conclusion: The direction to adopt the percentage of completion method was upheld against the Revenue.

Issue (ii): Whether offshore supply receipts were taxable in India.

Analysis: The Tribunal followed its earlier order in the assessee's own case, where offshore supply of equipment on CIF basis outside India, with payment also made outside India, was held not to give rise to income accruing or arising in India.

Conclusion: The offshore supply receipts were held not taxable in India.

Issue (iii): Whether revenues from project management contracts were taxable as fees for technical services under the Income-tax Act, 1961 and, alternatively, how they were to be computed under the India-Japan DTAA.

Analysis: The project management services consisted of managerial, technical, consultancy and supervisory functions, including deployment of personnel. These receipts fell within the inclusive part of Explanation 2 to section 9(1)(vii) and were therefore fees for technical services under the Act. Consequently, section 44D applied under the domestic law. However, section 90(2) entitled the assessee to the more beneficial treaty provision. Under Article 7 read with Article 12 and the Protocol, the receipts were treated as business profits attributable to the permanent establishment, and deductions had to be worked out in accordance with the treaty framework. The actual expenses claimed had not been verified under that framework, so the matter required fresh examination by the Assessing Officer.

Conclusion: The receipts were held to be fees for technical services under the Act, but treaty computation was held applicable and the matter was remanded for recomputation.

Issue (iv): Whether interest under sections 234B and 234C of the Income-tax Act, 1961 could be charged.

Analysis: Following binding jurisdictional precedent, where tax was deductible at source from payments to a non-resident, no interest could be charged from the payee for such default on the payer's part.

Conclusion: Interest under sections 234B and 234C was not chargeable.

Final Conclusion: The appeal was disposed of with most grounds rejected, while the project management contract issue was restored for fresh computation under the treaty framework.

Ratio Decidendi: Where the domestic law treats project-management receipts as fees for technical services, the treaty may nevertheless govern if it is more beneficial, and the PE profits must then be computed under the specific treaty article rather than by applying the domestic gross-basis restriction.

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