2004 (7) TMI 28 - HC - Income Tax

Foreign service fees from Malaysia not taxable in India under Double Taxation Avoidance Agreement

Commissioner of Income-Tax Versus Kwality Textile Associate Pvt. Ltd.

The High Court held that the technical and engineering service fees earned from Malaysia by the assessee were not taxable in India under the Double ... DTAA - Payment received by the assessee for technical and engineering services rendered outside India – Whether Tribunal was right in holding that it would constitute royalty and is to be assessed in accordance with the provisions of article 7 of the Double Taxation Avoidance Agreement since the assessee had no permanent establishment in India? - whether the technical fee earned by the assessee from sources in Malaysia cannot be taxed in India and the technical fee earned by the assessee can be subjected to deduction u/s 80-O?' –Held that in case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the Act in view of the provisions of section 90(2) - The substantial question of law raised by the appellant is therefore liable to be answered against the Revenue Issues:1. Taxability of technical and engineering fees under Double Taxation Avoidance Agreement.2. Classification of payment for services rendered outside India as royalty.3. Applicability of section 80-O of the Income-tax Act on the entire receipt.Issue 1: Taxability of Technical and Engineering Fees under Double Taxation Avoidance AgreementThe assessee, engaged in the export business, disputed the assessability of technical and engineering service fees received from Malaysia for the assessment year 1988-89. The Assessing Officer considered it taxable income from India subject to a 50% deduction under section 80-O of the Income-tax Act. The assessee argued that the fees were exempt under the Double Taxation Avoidance Agreement between India and Malaysia. The Commissioner of Income-tax (Appeals) ruled in favor of the assessee. The Income-tax Appellate Tribunal, Chennai Bench, relying on a precedent, dismissed the Revenue's appeal. The issue was whether the technical fees earned from Malaysia could be taxed in India and subjected to section 80-O deduction.Issue 2: Classification of Payment for Services Rendered Outside India as RoyaltyThe Income-tax Appellate Tribunal considered whether the payment for technical and engineering services rendered outside India constituted royalty and should be assessed under the Double Taxation Avoidance Agreement's provisions. It was noted that since the assessee had no permanent establishment in India, the Tribunal had to determine the nature of the payment as per Article 7 of the Agreement.Issue 3: Applicability of Section 80-O on the Entire ReceiptThe Income-tax Appellate Tribunal did not consider section 80-O of the Income-tax Act in assessing the entire receipt as taxable income in India. The Tribunal's decision was based on the interpretation of the Double Taxation Avoidance Agreement between India and Malaysia, which had previously favored the assessee in a similar case. The Tribunal's decision was in line with the precedent set by the Madras High Court in CIT v. VR. S.R.M. Firm [1994] 208 ITR 400, which supported the assessee's position regarding the taxability of the technical fees earned from Malaysia.In conclusion, the High Court, following the precedent set in CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 654, emphasized the importance of Double Taxation Avoidance Agreements in determining tax liability for income earned from foreign sources. The Court held that the income earned from Malaysia by the assessee was not taxable in India, as per the provisions of the Agreement. The judgment favored the assessee, dismissing the Revenue's appeal and upholding the decision of the Income-tax Appellate Tribunal.