Treaty prevails over domestic accrual rule for taxing technical fees paid to a non-resident under receipt basis

Fees for technical services paid to a German non-resident were treated as taxable in India only on receipt basis under the applicable tax treaty. Where the treaty specifically governed such income and its scheme conflicted with the domestic rule taxing income accruing or arising to a non-resident, the treaty prevailed and the domestic accrual basis was not applied. The reported result was that the assessee succeeded on the receipt-basis issue, and the treaty-based order was left undisturbed.

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Issues: Whether fees for technical services paid to a German non-resident were taxable in India on accrual basis or only on receipt basis under the treaty, and whether the domestic rule for taxation of non-resident income yielded to the double taxation avoidance agreement.

Analysis: The treaty provisions governing fees for technical services were held to control the taxability of such income. The relevant article permitted taxation in the Contracting State where the income arose and, on its terms, contemplated taxation of payment received by the non-resident. Since there was an apparent conflict between the domestic rule taxing income accruing or arising to a non-resident and the treaty provision, the treaty was treated as prevailing. The domestic provision was therefore not applied to require taxation on accrual basis in this case.

Conclusion: Fees for technical services payable to the German non-resident were taxable in India only on receipt basis, and the assessee succeeded on this issue.

Final Conclusion: The appeal failed and the order directing taxation on receipt basis under the treaty was left undisturbed.

Ratio Decidendi: Where a tax treaty specifically governs the taxation of non-resident technical fees and is in conflict with the domestic charging rule, the treaty prevails and taxability is determined according to the treaty's receipt-based scheme.

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