DTAA protection for offshore services: income earned wholly outside India escaped Indian tax absent attribution to the permanent establishment.

Offshore services rendered entirely outside India under a composite contract were treated as not taxable in India because they had no nexus with the permanent establishment in India. Article 7 of the India-Japan DTAA, read with section 90(2), prevailed as the more beneficial provision and limited taxation to profits attributable to operations carried out through the permanent establishment. The income from such offshore services could not be brought to tax under section 9(1)(vii) merely because the contract was composite or because the services related to offshore supply.

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Issues: Whether the income from offshore services rendered under the composite contract was taxable in India under section 9(1)(vii) of the Income-tax Act, 1961, or was exempt under Article 7 of the India-Japan Double Taxation Avoidance Agreement read with section 90(2) of the Income-tax Act, 1961.

Analysis: The offshore services were found to have been rendered entirely outside India and to have no connection with the permanent establishment in India. The earlier decision in the assessee's own case had already held that Article 7 governed such income and limited taxation to profits attributable to operations carried out through the permanent establishment. The treaty, being more beneficial, prevails under section 90(2), and the income from offshore services could not be taxed in India merely because the contract was composite or because the services were connected with offshore supply.

Conclusion: The income from offshore services was not taxable in India and the assessee succeeded on this issue.

Ratio Decidendi: Where offshore services are rendered wholly outside India and are not attributable to the permanent establishment in India, Article 7 of the applicable DTAA prevails under section 90(2) and excludes taxation of that income in India.

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