2017 (9) TMI 478 - AT - Income Tax

Foreign company's consultancy fees not taxable in India under tax treaty

The Appellate Tribunal held that the consultancy fees received by the non-resident foreign company from a Chinese entity were not Fees for Technical ... Taxability of Fees for Technical Services (FTS)/Royalty - Indian - Netherland DTAA - applicability of Article 12 of the tax treaty - income accrued to the assessee from India - consultancy fees received - services rendered outside India - Held that:- No taxable income was received by the assessee during the year under appeal. It is a fact that services were rendered outside India to a nonresident i. e. ZMPC and that same were utilised in manufacturing the cranes outside India i. e. in China. In the circumstances consultancy fees received by the assessee from the Chinese entity for rendering services outside India cannot be deemed to accrue or arise in India, as per the provisions of section 5 read with section 9 of the Act. Consequently the same would not be taxable in India. India has signed the DD AA with the Netherlands and taxability of consultancy services had to be examined first as per the provisions of the tax treaty. In the case under consideration the AO, without referring to the treaty, had applied the provisions of the Act. In our opinion, the stand of the AO/FAA cannot be endorsed, as the provisions of tax-treaties have to be given preference over the provisions of the Act. The consultancy was rendered outside India and even if same has to be taxed it would be chargeable to tax in that country and not in India. The AO/FAA has failed to prove that services rendered by the assessee to ZMPC were in the nature of Royalty. Nothing has been brought on record to prove that the assessee had made available any technical knowledge, experience, skill to Indian company. We also agree with the argument of the AR that in the case under appeal, consultancy fees were rendered to a person who was nonresident i. e. to ZMPC. As per the provisions of Article 12 of the treaty, FTS arising in India and paid to a tax-resident of the Netherlands can be taxed in India. In the case under appeal the payment was paid to a Chinese company. Considering the above, we are of the opinion that consultancy fees received by the assessee from ZMPC cannot be held to be FTS and that same is not chargeable to tax in India. So, reversing the order of the FAA we decide the effective ground of appeal in favour of the assessee. Issues:Taxability of Fees for Technical Services (FTS)/Royalty under the Indian Netherland tax treaty.Analysis:1. The assessee, a non-resident foreign company, challenged the order of the CIT(A)-55, Mumbai regarding the taxability of Fees for Technical Services (FTS)/Royalty as per the provisions of the Act and the Indian Netherland tax treaty. The Assessing Officer (AO) determined the income of the assessee to be &8377; 4.67 crores, including an amount of &8377; 1.67 crores received from Shanghai Zhenhua Port Machinery Company Ltd. (ZPMC), China, which was not disclosed in the return of income. The AO held that the income accrued to the assessee from India and was chargeable to tax as fees for technical services under Article 12 of the Double Taxation Avoidance Agreement (DTAA) with the Netherlands.2. The First Appellate Authority (FAA) upheld the AO's order, stating that the consultancy fees paid by ZPMC to the assessee were in the nature of FTS and were linked to India, making it taxable in India as royalty income under the tax treaty. The FAA rejected the assessee's arguments and case laws, concluding that the income was rightly held taxable in India.3. During the appeal before the Appellate Tribunal, the Authorised Representative (AR) argued that the consultancy fees received by the assessee from ZPMC for services rendered outside India should not be deemed to accrue or arise in India, as per the provisions of the Act. The AR contended that the disputed amount was not taxable in India under the tax treaty, as there was no privity of contract between the Indian entity and the assessee. The AR further argued that even if the payment was considered FTS, it could not be subject to tax in India under the treaty.4. The Tribunal, after hearing the submissions, found that the disputed amount received by the assessee from ZPMC was taxable in India as per the provisions of the tax treaty. However, upon further analysis, the Tribunal noted that the consultancy fees were rendered outside India and utilized in China, making them not taxable in India. The Tribunal emphasized that the provisions of tax treaties should be given preference over the Act, and as the payment was made to a Chinese entity, the consultancy fees were not chargeable to tax in India. Therefore, the Tribunal decided in favor of the assessee, allowing the appeal and reversing the order of the FAA.5. In conclusion, the Appellate Tribunal held that the consultancy fees received by the assessee from ZPMC were not Fees for Technical Services (FTS) and were not chargeable to tax in India under the Indian Netherland tax treaty. The Tribunal allowed the appeal filed by the assessee, reversing the order of the FAA and deciding the effective ground of appeal in favor of the assessee.