Payment for Feasibility Study Not Taxable in India: Tribunal Rules on DTAA Exemption

Charbonnages De France International SA Versus Deputy Commissioner of Income-tax, Circle 2(1), Mumbai

Charbonnages De France International SA Versus Deputy Commissioner of Income-tax, Circle 2(1), Mumbai - [2008] 19 SOT 509 (MUM.) Issues Involved:
1. Classification of payment for Feasibility Study Report as fees for technical services.
2. Applicability of Section 5(2) and Section 9(1)(vii) of the Income-tax Act, 1961.
3. Application of Double Taxation Avoidance Agreement (DTAA) between India and France.
4. Determination of the rate of tax applicable on fees.

Issue-wise Detailed Analysis:

1. Classification of Payment for Feasibility Study Report as Fees for Technical Services:
The primary issue was whether the payment made for the Feasibility Study Report should be classified as fees for technical services. The assessee argued that the amount was paid for the outright purchase of the Feasibility Study Report and should not be considered as fees for technical services. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, holding that the services provided by the assessee were of a managerial, technical, and consultancy nature, thus falling under the definition of fees for technical services as per Article 13(4) of the DTAA between India and France. The Tribunal, however, found that the services were rendered entirely outside India and did not constitute technical services as defined under the DTAA.

2. Applicability of Section 5(2) and Section 9(1)(vii) of the Income-tax Act, 1961:
The AO argued that as per Section 5(2) of the Income-tax Act, the income of a non-resident includes income from sources within India. The AO concluded that the payment made within India for technical services is taxable under Sections 5 and 9 of the Act. The Tribunal, however, referred to the Supreme Court decision in Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income-tax, which stated that for income to be taxable in India, it must be utilized and rendered in India. Since the services were rendered outside India, the Tribunal held that Section 5(2) and Section 9(1)(vii) were not applicable.

3. Application of Double Taxation Avoidance Agreement (DTAA) between India and France:
The assessee contended that under Article 7 of the DTAA, the profit from the sale of the Feasibility Study Report should be considered business profit and not taxable in India as the assessee did not have a permanent establishment in India. The AO and CIT(A) held that Article 13 of the DTAA, which deals with fees for technical services, was applicable and thus taxable in India. The Tribunal, however, concluded that since the services were rendered outside India and the assessee had no permanent establishment in India, the income could not be taxed in India under the DTAA.

4. Determination of the Rate of Tax Applicable on Fees:
The assessee argued that even if the payment was considered as fees for technical services, the rate of tax should be 15% instead of 20%, as per the provisions of the DTAA. The Tribunal did not delve into this issue extensively as it concluded that the income was not taxable in India under the provisions of the Income-tax Act and the DTAA.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the payment for the Feasibility Study Report did not constitute fees for technical services under the DTAA and was not taxable in India. This decision was based on the fact that the services were rendered entirely outside India and the assessee did not have a permanent establishment in India. The Tribunal relied heavily on the Supreme Court's judgment in Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income-tax to reach its conclusion.