Treaty override for service receipts limits Indian taxability to permanent establishment attribution and bars section 234B interest
Where a tax treaty covers business profits but contains no separate fees-for-technical-services provision, receipts from services rendered in the course of business are taxable in India only if attributable to a permanent establishment; domestic law cannot enlarge taxability contrary to the treaty. On that basis, the service receipt was treated as business profit and not taxable as fees for technical services because no permanent establishment in India was shown. Interest under section 234B was also held not leviable in the stated circumstances, following binding precedent. The section 234D aspect was left for verification at assessment stage.
Issues: (i) Whether the amount received for borrowed services was taxable in India as fees for technical services, or was business profit taxable only if attributable to a permanent establishment; (ii) Whether interest under section 234B of the Income-tax Act, 1961 was chargeable.
Issue (i): Whether the amount received for borrowed services was taxable in India as fees for technical services, or was business profit taxable only if attributable to a permanent establishment.
Analysis: The treaty was treated as governing the character of the receipt. Since the income arose from services rendered in the course of business and there was no specific fees-for-technical-services clause in the India-Greece treaty, the receipt was held to fall within business profits. Business profits under the treaty could be taxed in India only if attributable to a permanent establishment, and it was not the case that the assessee had a permanent establishment in India. Domestic law was not applied to recharacterise the same receipt as fees for technical services where the treaty covered the nature of income.
Conclusion: The amount was held not taxable in India as fees for technical services, and this issue was decided in favour of the assessee.
Issue (ii): Whether interest under section 234B of the Income-tax Act, 1961 was chargeable.
Analysis: The issue was treated as covered by binding jurisdictional precedent holding that interest under section 234B is not leviable in the stated circumstances.
Conclusion: Interest under section 234B was held not chargeable, and this issue was decided in favour of the assessee.
Final Conclusion: The appeal succeeded on the principal taxability issue and on interest under section 234B, while the interest under section 234D aspect was left for verification at the assessment stage, resulting in a partial allowance of the appeal.
Ratio Decidendi: Where a tax treaty covers business profits but contains no separate fees-for-technical-services provision, receipts from services rendered in the course of business are taxable in India only if attributable to a permanent establishment, and domestic law cannot be used to enlarge taxability contrary to the treaty.
TaxTMI 
AI Drafter ✕
TaxTMI 
