2015 (2) TMI 683 - AT - Income Tax

Tribunal rules in favor of Assessee on taxability issue under India-Greece Tax Treaty

McKinsey Business Consultants Sole Partner Limited Liability Company MEPE Versus Deputy Director of Income-tax (IT) -4(1) Mumbai

The Tribunal partly allowed the appeal, ruling in favor of the Assessee on the taxability of borrowed service charges under the India-Greece Tax Treaty. ... Borrowed service rendered by the Appellant - taxability in India as FTS or not? - India-Greece Tax Treaty - Held that:- In this case the assessee has earned income by rendering the services in the course of its business and therefore, it is nothing but business profit which is covered under Article 3. Admittedly the assessee does not have PE in India the same cannot be held to be taxed in India as per the express provision of Article 3. Thus we hold that the fees received by the assessee cannot be taxed in India as FTS. - Decided in favour of assessee. Interest u/s 234B - Held that:- As admitted by both the parties that this issue is no longer res-integra in view of the decision of Hon'ble jurisdictional High Court in the case of DIT v. NGC Network Asia LLC [2009 (1) TMI 174 - BOMBAY HIGH COURT].- Decided in favour of assessee. Interest u/s 234D - Held that:- This matter is restored back to the file of the AO, as the assessee has claimed in its ground of appeal that no refund has been granted to the assessee. This fact needs to be verified by the AO and appropriate relief may be given, if admissible in law. - Decided in favour of assessee for statistical purposes. Issues:1. Taxability of borrowed service charges under India-Greece Tax Treaty2. Application of Double Taxation Avoidance Agreement (DTAA) provisions3. Tax treatment of fees for technical services (FTS) vs. business profits4. Charging of interest under sections 234B and 234D5. Initiation of penalty proceedings under Section 271(1)(c) of the ActIssue 1: Taxability of Borrowed Service ChargesThe appeal addressed the taxability of borrowed service charges under the India-Greece Tax Treaty. The Assessee contended that the income from borrowed services should be considered as business profits under Article 3 of the treaty, as they were earned in the course of business and not subject to tax due to the absence of a permanent establishment in India. However, the Assessing Officer (AO) argued that the income should be taxed as fees for technical services (FTS) under section 9(1)(vii) and the treaty provisions. The Dispute Resolution Panel (DRP) upheld the taxability as FTS under the treaty, emphasizing that the absence of a specific clause did not automatically qualify the income as business income.Issue 2: Application of DTAA ProvisionsThe Assessee highlighted the absence of an FTS clause in the India-Greece DTAA, suggesting that the income should be taxed as business income under Article 3, which requires a permanent establishment for taxation. The Tribunal referred to a similar case involving McKinsey Company (Thailand) where income was treated as business profits and not taxable in India due to the lack of a permanent establishment. The Tribunal emphasized that the DTAA overrides regular tax provisions if more beneficial to the assessee.Issue 3: Tax Treatment of FTS vs. Business ProfitsThe core issue revolved around whether the fees for borrowed services constituted FTS or business profits. The Tribunal analyzed the nature of the income earned by the Assessee and concluded that it fell under Article 7 as business profits, not under Article 12 or Article 22 of the DTAA. Citing provisions of Section 90 and relevant case law, the Tribunal determined that the income was not taxable in India as FTS under the DTAA, aligning with the decision in the McKinsey Company (Thailand) case.Issue 4: Charging of Interest and Penalty ProceedingsRegarding the charging of interest under sections 234B and 234D, the Tribunal allowed the Assessee's appeal based on previous judicial decisions. The issue of interest under section 234D was remanded to the AO for verification. The Tribunal dismissed the penalty proceedings initiated under Section 271(1)(c) of the Act.In conclusion, the appeal was partly allowed, with the Tribunal ruling in favor of the Assessee on the taxability of borrowed service charges under the India-Greece Tax Treaty and related interest charges. The decision emphasized the application of DTAA provisions and the distinction between FTS and business profits in determining tax liability.