2008 (8) TMI 33 - AAR - Income Tax

Indian Tax Case: DTAA ruling denies tax exemption on remuneration from Republic of Korea

Small Business Corporation., In re

Small Business Corporation., In re - [2008] 305 ITR 381 (AAR) Issues involved:1. Exemption of remuneration from tax in India under the Double Taxation Avoidance Agreement between India and Republic of Korea.2. Interpretation of Article 20 of the DTAA regarding remuneration paid by a Contracting State.Analysis:1. The case involved a query on whether the remuneration payable to a Korean national working in a liaison office in India would be exempt from tax in India under Article 20 of the DTAA between India and Republic of Korea. The applicant argued that the remuneration received by the employee should not be taxed in India as per the provisions of the DTAA. However, the ruling authority found that the applicant failed to establish that the remuneration was paid by the Contracting State, i.e., the Republic of Korea. Despite the applicant's claims and submissions, it was concluded that the remuneration was paid by the State-managed Corporation, not directly by the Government, and thus did not meet the criteria for exemption under Article 20(1)(a) of the DTAA.2. The ruling authority examined the contents of an affidavit submitted by the applicant, which highlighted the relationship between the Government of Republic of Korea and the State-managed Corporation. The affidavit indicated that the source of payroll for the employee in India was the SME Fund, which received contributions from the Government budget. However, the ruling authority noted that the applicant did not provide sufficient evidence to prove that the remuneration was exclusively funded by the Government for personnel expenses. Despite the arguments put forth by the applicant, the ruling was made against them due to the lack of clarity and supporting documents regarding the source of funds for the remuneration. The ruling authority emphasized the requirement that the remuneration should be paid by the Contracting State to qualify for tax exemption under Article 20(1)(a) of the DTAA.3. Additionally, the ruling authority addressed the contention raised by the Director of Income-tax regarding the interpretation of Article 20(4) of the DTAA. The Director argued that the benefit of Article 20(1) was limited to specific entities mentioned in Article 20(4), excluding other State-run entities like the applicant. However, the ruling authority disagreed with this interpretation, stating that the specification of certain organizations in Article 20(4) did not automatically exclude other State-run entities falling within the scope of Article 20(1). The ruling authority suggested that the applicant could potentially be considered for inclusion within Article 20(4) based on its characteristics, similar to the Korea Trade Promotion Corporation, and highlighted that the decision to include other entities rested on an agreement between the Contracting States.In conclusion, the ruling was made against the applicant as they failed to prove that the remuneration was directly paid by the Contracting State, leading to the inapplicability of tax exemption under the DTAA. The ruling authority emphasized the importance of providing clear evidence to substantiate claims regarding the source of funds for remuneration to qualify for tax benefits under international agreements.