Permanent establishment and force of attraction ruled inapplicable for independent contracts; treaty rate applied and interest disallowed.

A non-resident's receipts from independent engineering contracts were held taxable only in accordance with the applicable treaty provision for fees for technical services where no permanent establishment in India was shown. The force of attraction rule was found inapplicable because the contracts were treated as independent and the Revenue could not establish a sufficient project nexus or common link with an Indian PE. On one contract, the receipts were deleted from assessment for want of PE; on another, the income was taxed at the treaty rate rather than under section 44DA. Interest under sections 234B and 234C was also held not leviable where tax was deductible at source.

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Issues: (i) whether the assessee had a permanent establishment in India in relation to the AP Transco contract and whether the force of attraction rule applied to tax the receipts at 20%; (ii) whether the receipts from the Jaiprakash Industries Ltd. contract were taxable under section 44DA or at the rate applicable to fees for technical services under Article 12 of the India-Germany tax treaty; (iii) whether the force of attraction rule could be applied to the receipts from the AP Transco, Jaiprakash Industries Ltd. and Jaiprakash Power Ventures Ltd. contracts; (iv) whether interest under sections 234B and 234C was leviable.

Issue (i): whether the assessee had a permanent establishment in India in relation to the AP Transco contract and whether the force of attraction rule applied to tax the receipts at 20%?

Analysis: The contract duration was less than six months and the Revenue did not controvert that factual position. The receipts from this contract were held to arise without a permanent establishment in India, and the earlier coordinate-bench view that the force of attraction rule did not extend to such independent contracts was followed.

Conclusion: The issue was decided in favour of the assessee. The addition on this account was directed to be deleted.

Issue (ii): whether the receipts from the Jaiprakash Industries Ltd. contract were taxable under section 44DA or at the rate applicable to fees for technical services under Article 12 of the India-Germany tax treaty?

Analysis: The claim under section 44BBB was not accepted, but the material on record and the earlier tribunal decision showed that the assessee had no permanent establishment in India for this contract. In the absence of a permanent establishment, the receipts retained the character of fees for technical services and were taxable under the treaty rate rather than under section 44DA.

Conclusion: The issue was decided partly in favour of the assessee. The receipts were directed to be taxed at 10% under Article 12.

Issue (iii): whether the force of attraction rule could be applied to the receipts from the AP Transco, Jaiprakash Industries Ltd. and Jaiprakash Power Ventures Ltd. contracts?

Analysis: The contracts were treated as independent, with no common link sufficient to attract the rule. The prior decision for earlier assessment years was followed, and the Revenue failed to show that the relevant project activities were interconnected so as to justify attribution of profits through force of attraction.

Conclusion: The issue was decided in favour of the assessee. The force of attraction rule was held inapplicable.

Issue (iv): whether interest under sections 234B and 234C was leviable?

Analysis: Following the coordinate bench view, interest was held not chargeable where tax was deductible at source on the income in question.

Conclusion: The issue was decided in favour of the assessee. Interest under sections 234B and 234C was not leviable.

Final Conclusion: The appeals were disposed of with relief granted on the core treaty-taxation and interest issues, while the assessee's alternative claim under section 44BBB was not accepted.

Ratio Decidendi: Where a non-resident's receipts from independent contracts are not shown to be connected with an Indian permanent establishment, the force of attraction rule does not apply and the income is taxable only in accordance with the applicable treaty provision for fees for technical services; consequential interest is not leviable where tax is deductible at source.

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