Effective connection with Indian branch PE supports net taxation, and no section 234B interest applies where tax is withheld.

Consultancy receipts earned through an Indian branch office were treated as effectively connected with the permanent establishment because the contracts were negotiated and signed in India, invoices were raised by the branch, bank accounts were operated through it, and the operational work was carried out in India. On that basis, the receipts were taxable on a net basis under section 44DA rather than on a gross basis under section 115A. The tribunal also noted that where payments to the non-resident were subject to tax deduction at source under section 195, no advance tax liability arose for section 234B purposes, so interest for default in advance tax could not be levied. The revenue's challenge failed.

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Issues: (i) Whether the consultancy receipts from contracts executed through the Indian branch office were effectively connected with the permanent establishment in India so as to be taxable on net basis under section 44DA of the Income-tax Act, 1961, and not on gross basis under section 115A. (ii) Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee when the payments were subject to tax deduction at source.

Issue (i): Whether the consultancy receipts from contracts executed through the Indian branch office were effectively connected with the permanent establishment in India so as to be taxable on net basis under section 44DA of the Income-tax Act, 1961, and not on gross basis under section 115A.

Analysis: The contracts in dispute were negotiated and signed in India through the branch office, invoices were raised by the branch office, bank accounts were maintained and operated by it, and the operational work was carried out in India through the Indian subsidiary. The revenue did not show any material activity from the head office that would displace the conclusion that the contracts were connected with the branch office. The selective treatment adopted in assessment between pre- and post-01.04.2003 contracts was found unsupported by the facts. The tribunal accepted the finding that the branch office constituted a permanent establishment and that the receipts were effectively connected with it.

Conclusion: The receipts were effectively connected with the permanent establishment in India and were taxable on net basis under section 44DA; the revenue's challenge failed.

Issue (ii): Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee when the payments were subject to tax deduction at source.

Analysis: The payments to the non-resident assessee were subject to tax deduction at source under section 195, and therefore no advance tax liability arose in the manner contemplated by sections 208 and 209(1)(d). In such a situation, interest for failure to pay advance tax could not be charged under section 234B. The tribunal followed the jurisdictional High Court view that the withholding obligation rested on the payer.

Conclusion: Interest under section 234B was not leviable and the deletion of interest was upheld.

Final Conclusion: The revenue appeals were unsuccessful in entirety, with both the effective-connection finding and the deletion of section 234B interest being sustained in favour of the assessee.

Ratio Decidendi: Where a non-resident's India-related consultancy receipts are earned through and operationally attributable to an Indian branch permanent establishment, the receipts are effectively connected with that PE and are taxable on net basis; where the receipts are subject to withholding tax, no advance tax liability arises for section 234B purposes.

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