2016 (5) TMI 371 - HC - Income Tax

Tax Court: Technical service fees taxable at 20% per DTAA. No PE found in India. Revenue's appeals dismissed.

Commissioner of Income-Tax Versus Sumitomo Corporation

Commissioner of Income-Tax Versus Sumitomo Corporation - [2016] 382 ITR 75 Issues Involved:1. Taxability of fees for technical services (FTS) under Article 12(2) of the Double Taxation Avoidance Agreement (DTAA) between India and Japan.2. Determination of Permanent Establishment (PE) in India under Article 5 of the DTAA.3. Applicability of tax rates under Article 12(2) versus Article 12(5) read with Article 7(3) of the DTAA.4. Role of liaison offices and project offices in constituting a PE.Issue-Wise Detailed Analysis:1. Taxability of Fees for Technical Services (FTS) under Article 12(2) of the DTAA:The primary issue was whether the fees for technical services received by the assessee from Maruti Udyog Limited (MUL) were taxable under Article 12(2) of the DTAA. The assessee, a company incorporated in Japan, contended that the supervision fee received was not taxable in India as it was integral to the provision of supplies. However, the assessee accepted that the supervision fee was taxable in India as FTS under Article 12(5) of the DTAA. The ITAT held that the supervision fee was taxable under Article 12(2) since the assessee did not have a PE in India, and the supervisory activities were not 'effectively connected' to any PE in India.2. Determination of Permanent Establishment (PE) in India under Article 5 of the DTAA:The court examined whether the assessee had a PE in India. The assessee argued that it had no PE in India concerning offshore supplies of equipment. The liaison office in India was only for communicating information regarding global tenders. The ITAT found that the liaison office did not constitute a PE as it was involved in preparatory or auxiliary activities. The court concurred with the ITAT that the supervisory services were not connected through any of its other PEs in India and therefore, the supervision fee was taxable under Article 12(2) at 20%.3. Applicability of Tax Rates under Article 12(2) versus Article 12(5) read with Article 7(3) of the DTAA:The Revenue contended that the supervision fees should be taxed under Article 12(5) read with Article 7(3) of the DTAA at a higher rate of 30.25%, arguing that the assessee had a PE in India. However, the court found that the supervision activities did not exceed 180 days for each contract, and therefore, did not constitute a supervisory PE under Article 5(4) of the DTAA. The court agreed with the ITAT that the fees for technical services were taxable at 20% under Article 12(2).4. Role of Liaison Offices and Project Offices in Constituting a PE:The court examined the role of the liaison offices and project offices. The liaison offices were established for preparatory or auxiliary activities and did not engage in any trading, commercial, or industrial activities. The project offices were established for specific projects with approval from the Reserve Bank of India. The court found that the liaison offices were not involved in the execution of contracts and did not constitute a PE. The project offices were not effectively connected with the supervisory services provided to MUL.Conclusion:The court concluded that the fees for technical services received by the assessee from MUL were taxable at 20% under Article 12(2) of the DTAA. The assessee did not have a PE in India concerning the supervisory services provided. The appeals by the Revenue were dismissed, and the question was answered in favor of the assessee and against the Revenue.