Permanent establishment and non-resident taxation: project office treated as auxiliary, contract receipts not taxable in India.

A project office acting only as a communication channel was treated as preparatory or auxiliary activity and did not constitute a permanent establishment in India under the India-UAE DTAA. On those facts, no income from offshore supplies or onshore contract activities could be attributed to India, and the related additions could not be sustained. The Tribunal also noted that interest under section 234B was not leviable in the non-resident tax withholding context and directed credit for tax deducted at source to be allowed in accordance with law. The document emphasises that, absent a PE, contract receipts are not taxable in India and attribution to a PE does not arise.

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Issues: (i) Whether the assessee had a permanent establishment in India and whether the offshore and onshore receipts from the ONGC contract were taxable in India under the Income-tax Act and the India-UAE DTAA; (ii) whether interest under section 234B was leviable and whether credit of tax deducted at source had to be granted.

Issue (i): Whether the assessee had a permanent establishment in India and whether the offshore and onshore receipts from the ONGC contract were taxable in India under the Income-tax Act and the India-UAE DTAA.

Analysis: The Tribunal followed the jurisdictional High Court's decision in the assessee's own case for earlier years. The project office was held to be only a communication channel and to fall within the exclusion for preparatory or auxiliary activity. The construction or installation permanent establishment requirement was also not satisfied on the facts. In the absence of a permanent establishment, no income from the contract could be attributed to India, and the additions relating to offshore supplies and onshore activities could not survive.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether interest under section 234B was leviable and whether credit of tax deducted at source had to be granted.

Analysis: The Tribunal accepted that the levy of interest under section 234B was not sustainable on the facts in view of the applicable law on tax deduction at source and non-resident taxation. It also directed the Assessing Officer to grant credit for tax deducted at source in accordance with law.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The additions made in respect of the contract receipts were deleted, the interest adjustment did not stand, and the assessee's appeal succeeded.

Ratio Decidendi: Where the project office functions only as a communication channel and no permanent establishment exists in India under the treaty, the contract receipts are not taxable in India and no attribution of income to a PE can be made.

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