Treaty business profits override domestic technical-services treatment, preserving expense deduction for PE-linked service receipts.

Receipts from supervisory, commissioning and allied services rendered through a permanent establishment were treated as business profits under Article 7 of the Indo-UK DTAA rather than fees for technical services under domestic law. The note explains that, even if the services could fall within the wider domestic definition in Explanation 2 to section 9(1)(vii), the treaty characterization as business profits governed, so section 44D did not restrict deduction of expenses. It also records the principle that, where two views are possible, the interpretation favourable to the assessee may be adopted. The net basis computation with expense deduction was therefore upheld.

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Issues: Whether receipts from supervisory, commissioning and allied services rendered through a permanent establishment were assessable as fees for technical services so as to attract the restriction on deduction under section 44D, or whether they were taxable as business profits under Article 7 of the Indo-UK DTAA with deduction of expenses.

Analysis: The services were considered in the light of Article 7 of the Indo-UK DTAA and the nature of the contractual activities. The controlling question was whether the income, though possibly falling within the domestic-law scope of fees for technical services under Explanation 2 to section 9(1)(vii), was nevertheless governed by the treaty as business profits attributable to a permanent establishment. The Tribunal followed earlier decisions holding that consultancy and supervisory services of this kind do not become technical services merely because technical input is involved, and that where income is computed under Article 7 as business profits, the limitation in section 44D does not apply. The Tribunal also accepted that, even if two views were possible, the one favourable to the assessee had to be adopted.

Conclusion: The receipts were taxable as business profits under Article 7 of the Indo-UK DTAA and not as fees for technical services for the purpose of section 44D. The restriction on deduction of expenses did not apply, and the assessee's claim for computation on net basis was upheld.

Final Conclusion: The revenue's appeal failed, and the assessee's treatment of the income on business-profit basis with deduction of expenses was sustained.

Ratio Decidendi: Where income attributable to a permanent establishment is chargeable as business profits under the applicable tax treaty, domestic provisions restricting deductions for fees for technical services do not apply merely because the services may fall within the wider domestic definition of technical services.

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