2022 (6) TMI 440 - AT - Income Tax

Tax Treatment of Fees for Technical Services under India-Thailand Tax Treaty Upheld

DCIT, Circle 2 (2) (1) New Delhi Versus Michelin ROH Co. Ltd. SRBC & Associated LLP

The Tribunal upheld the decision of the ld. CIT(A) that income from Fees for Technical Services (FTS) provided by a Thai company to its Indian subsidiary ... Income accrued in India - Article for taxability of FTS under the India Thailand Treaty - Existence of PE in India - CIT(A) justification in not holding that in absence of any specific article for taxation of Fees for Technical Services, it shall be governed by Article 22 of tax treaty and not as per Article 7 of the tax treaty between India and Thailand - assessee's plea that the entire receipts are clearly in the nature of business income of the assessee and would be taxed in accordance with Article 7 and would not fall under Article 22 - HELD THAT:- The assessee company has no Permanent Establishment (PE) in India. The income which has been earned in this case in absence of F.T.S. clause in DTAA would fall as business income. Their nature would not change to be that of other income. Hence the same cannot be taxed in India in absence of a PE. Revenue appeal dismissed. Issues:Interpretation of tax treaty articles for taxation of Fees for Technical Services (FTS) - Applicability of Article 22 vs. Article 7 under India-Thailand DTAA.Analysis:The case involved a dispute between the Revenue and the assessee regarding the taxation of Fees for Technical Services (FTS) provided by a company incorporated in Thailand to its Indian subsidiary. The Revenue contended that in the absence of a specific article for taxation of FTS in the India-Thailand Tax Treaty, such income should be taxed under Article 22 as other income. However, the assessee argued that the income generated from providing services to the Indian entity should be considered business income and taxed under Article 7 instead of Article 22.The Assessing Officer (AO) initially determined that the income from FTS should be taxed under Article 22 as there was no specific provision in the tax treaty for FTS. Upon appeal, the ld. CIT(A) accepted the assessee's plea that the income should be classified as business income under Article 7 since it was generated from providing general, administrative, and coordination services. The ld. CIT(A) emphasized that Article 7 covers business income for contracting states, and in this case, the absence of a Permanent Establishment (PE) in India further supported the classification of the income under Article 7.The Tribunal, comprising SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER, and MS. ASTHA CHANDRA, JUDICIAL MEMBER, upheld the decision of the ld. CIT(A), stating that the reasoning provided and the reliance on the judgment of the Hon'ble Madras High Court in a similar case supported the assessee's position. The Tribunal highlighted that in cases where specific provisions for income taxation are absent in the tax treaty, the income should be considered under Article 7 as business income, especially when there is no PE in the jurisdiction.The Tribunal referred to various case laws, including the decisions of the Hon'ble Madras High Court, Hon'ble Delhi Tribunal in different cases, to support the proposition that in the absence of a specific FTS clause in the tax treaty, income should be treated as business income under Article 7. The judgments emphasized the importance of a PE for determining taxability and reiterated that income without a specific treaty provision should be considered business income under Article 7.In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the decision of the ld. CIT(A) that the income derived from providing services to the Indian subsidiary should be taxed as business income under Article 7 of the India-Thailand Tax Treaty due to the absence of a PE in India, rendering Article 22 inapplicable.Judgment Date: 27th May, 2022.