2015 (11) TMI 1191 - AT - Income Tax

Offshore income exempt under India-Japan DTAA, not taxable in India. Tribunal allows appeal on taxability.

The tribunal ruled that income from offshore services, though chargeable under Section 9(1)(vii) of the IT Act, is exempt under the India-Japan Double ... 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 would not be taxable Considering the above factual matrix of the case we are of the view that the income from offshore services, though 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. Accordingly, we allow the appeal of the assessee with regard to income from offshore services and set aside the order of the DRP. - Decided in favour of assessee. Issues Involved:1. Assessment of total income.2. Taxability of income from offshore services under the India-Japan Double Taxation Avoidance Agreement (DTAA).3. Tax rate applicable to offshore services.4. Jurisdictional High Court's prior decision on similar issues.5. Taxing interest on income tax refund.Detailed Analysis:1. Assessment of Total Income:The assessee contested the assessment of total income at Rs. 15,88,04,441 against the Rs. 26,131,352 computed by the appellant. The tribunal noted that the assessee is a Japanese company operating through a project office in India, involved in various contracts for LNG storage tanks. The assessee argued that income from offshore supply and services should not be taxed in India as these activities were conducted outside India, relying on a prior Supreme Court decision in its favor.2. Taxability of Income from Offshore Services:The assessee claimed that income from offshore services should not be taxable in India under the India-Japan DTAA. The Assessing Officer (AO) held that the income from offshore services is taxable in India, citing a retrospective amendment to Section 9 of the IT Act, 1961. However, the tribunal referred to a Supreme Court judgment in the assessee's own case, which held that offshore services rendered outside India are not taxable in India under Article 7 of the DTAA. The tribunal emphasized that the income from offshore services is not chargeable to tax in India as per the DTAA.3. Tax Rate Applicable to Offshore Services:The assessee argued that even if the income from offshore services were taxable, it should be taxed at a beneficial rate of 10% as per the India-Japan DTAA, rather than the 10.5575% applied by the AO. However, since the tribunal decided that the income from offshore services is not taxable in India, this issue became irrelevant and was dismissed as infructuous.4. Jurisdictional High Court's Prior Decision:The assessee referenced a decision by the jurisdictional High Court for the assessment year 2003-04, which was upheld by the Supreme Court, stating that income from offshore services should not be taxed in India. The tribunal agreed, noting that the High Court and Supreme Court had unequivocally held that such income is not chargeable to tax under Article 7 of the DTAA, reinforcing the assessee's position.5. Taxing Interest on Income Tax Refund:The assessee also raised an additional ground regarding the taxation of interest on an income tax refund amounting to Rs. 13,12,899 at a rate of 42.224% instead of the beneficial rate of 10% under the India-Japan DTAA. The tribunal did not specifically address this issue in detail, focusing instead on the primary issue of offshore services.Conclusion:The tribunal concluded that the income from offshore services, though chargeable under Section 9(1)(vii) of the IT Act, is exempt under the DTAA and cannot be taxed in India. Consequently, the tribunal set aside the order of the Dispute Resolution Panel (DRP) and allowed the appeal of the assessee regarding the taxability of offshore services. The issue of the tax rate became irrelevant due to this decision. The appeal was allowed in part, and the order was pronounced on April 17, 2015.