2015 (4) TMI 503 - HC - Income Tax

Court rules technical services fees taxable in India under Income Tax Act, rejecting DTAA exemption claim

Bangkok Glass Industry Co. Ltd. Versus Assistant Commissioner of Income-tax

Bangkok Glass Industry Co. Ltd. Versus Assistant Commissioner of Income-tax - TMI Issues Involved:1. Taxability of fees for technical services under section 9(1)(vii) and its exemption under DTAA.2. Classification of consideration received as royalty or business profits under DTAA.3. Requirement of a Permanent Establishment (PE) for taxation of business profits.4. Allocation of composite consideration between royalty and technical services.5. Applicability of Article 22 of DTAA for miscellaneous income.Detailed Analysis:1. Taxability of Fees for Technical Services:The core issue was whether the fees for technical services received by the assessee, a non-resident company, were taxable in India under section 9(1)(vii) of the Income Tax Act or exempt under the Double Taxation Avoidance Agreement (DTAA) between India and Thailand. The Tribunal held that the fees for technical services were taxable in India. The assessee contended that the payments should be exempt under Article 12 of the DTAA, which defines 'royalty' and includes payments for the use of or the right to use intellectual property.2. Classification of Consideration as Royalty or Business Profits:The Tribunal needed to determine whether the consideration received by the assessee should be classified as royalty or business profits. The agreement between the assessee and MBDL included transfer of know-how and technical assistance. The Tribunal agreed with the CIT(A) that the payments were for both royalty and technical services. The CIT(A) had split the total consideration into amounts attributable to royalty and technical services, with the royalty portion being taxable under Article 12 of the DTAA.3. Requirement of a Permanent Establishment (PE):For the consideration to be taxed as business profits under Article 7 of the DTAA, the assessee needed to have a PE in India. The CIT(A) remanded the case to the assessing authority to determine if the assessee had a PE. The Jt. CIT found that the assessee did not have a PE in India for the relevant assessment years, as the stay in India did not exceed 183 days.4. Allocation of Composite Consideration:The CIT(A) allocated the composite consideration received by the assessee into amounts attributable to royalty and technical services. The Tribunal upheld this allocation, agreeing that the agreement covered various stages of transferring know-how and technical assistance. The CIT(A) determined that USD 4,79,640 was royalty, while USD 1,12,000 and USD 69,750 were fees for technical services.5. Applicability of Article 22 of DTAA for Miscellaneous Income:The Tribunal initially considered Article 22 of the DTAA, which deals with miscellaneous income not covered under other provisions. However, it later held that since the income fell under Articles 12 and 7, Article 22 was not applicable. The Tribunal concluded that the portion of fees for technical services arising in India was taxable under section 115(1)(b) of the Income Tax Act, independent of business connection.Conclusion:The High Court upheld the Tribunal's findings, confirming that the composite consideration included both royalty and technical services. The royalty portion was taxable under Article 12 of the DTAA, and the technical services portion, in the absence of a PE, could not be taxed as business profits under Article 7. The High Court also rejected the applicability of Article 22, as the income did not qualify as miscellaneous income. The assessee's appeals were allowed, and the Revenue's appeals were rejected, setting aside the Tribunal's consideration of Article 22.