Treaty protection for non-resident receipts: services rendered outside India and no permanent establishment blocked domestic taxation.
A non-resident's receipts for work performed outside India were held outside Indian taxability where it had no business operations or permanent establishment in India under the applicable treaty. The income could not be taxed merely because the contract was connected with India, and treaty protection prevailed over domestic charging provisions, so section 9(1)(i) and the alternative resort to section 44BB failed. Receipts for reserve certification services were also not taxable as fees for technical services because the services were rendered outside India and did not make available technical knowledge, skill, or know-how. In the absence of a permanent establishment, the amounts could not be taxed as business profits, and section 44BB was again inapplicable.
Issues: (i) Whether the receipts paid to the non-resident contractor were taxable in India under section 9(1)(i) of the Income-tax Act, 1961 or under section 44BB despite the absence of any operations or permanent establishment in India under the applicable treaty; (ii) Whether the receipts paid for reserve certification services were taxable as fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961 or under the India-USA DTAA, and whether section 44BB could be invoked in the alternative.
Issue (i): Whether the receipts paid to the non-resident contractor were taxable in India under section 9(1)(i) of the Income-tax Act, 1961 or under section 44BB despite the absence of any operations or permanent establishment in India under the applicable treaty.
Analysis: The non-resident carried out the work outside India and had no business operations or permanent establishment in India. Once the treaty position excluded taxability, the receipts could not be brought to tax as income accruing or arising in India merely on the basis of the contract situs. The alternative plea under section 44BB could not be used against the assessee because there was no estoppel in law, and treaty exemption prevails where applicable.
Conclusion: The receipts were not taxable in India and the addition could not be sustained either under section 9(1)(i) or section 44BB.
Issue (ii): Whether the receipts paid for reserve certification services were taxable as fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961 or under the India-USA DTAA, and whether section 44BB could be invoked in the alternative.
Analysis: The services were rendered outside India and did not make available technical knowledge, skill, know-how or similar expertise. In the absence of a permanent establishment in India, the income could not be taxed as business profits under the treaty. The coordinate bench view in the assessee's own case supported the same conclusion, and the alternative attempt to tax the amount under section 44BB was not sustainable once treaty protection applied.
Conclusion: The receipts were not taxable as fees for technical services and section 44BB was not attracted.
Final Conclusion: Both appeals were allowed because the non-resident receipts fell outside Indian taxability under the applicable treaties and the alternative domestic-law characterisations were rejected.
Ratio Decidendi: Where a non-resident has no permanent establishment in India and the services are rendered outside India without making available technical knowledge or skill, the receipts cannot be taxed under the domestic charging provisions or recharacterised under section 44BB when the applicable treaty grants exemption or restricts taxation.
TaxTMI 
AI Drafter ✕
TaxTMI 
