Treaty override and permanent establishment rules barred Indian tax on cross-border service and supply receipts

An applicable double taxation avoidance agreement prevails over the Income-tax Act under section 90(2) where it is more beneficial to the assessee. On the facts, amounts said to relate to technical services were not taxable in India because no services were found to have been rendered in India; any services were to be performed in Austria. The receipt was also treated as export proceeds carrying industrial or commercial profits, which were taxable in India only if attributable to a permanent establishment there. As no permanent establishment in India was shown, the addition was held unsustainable.

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Issues: Whether the receipt of Rs. 2,75,23,613 from the Indian buyer was taxable in India as fees for technical services or business profits, and whether the Indo-Austrian Double Taxation Avoidance Agreement displaced the charging provisions of the Income-tax Act, 1961.

Analysis: The applicable treaty was in force for the relevant assessment year, and by virtue of section 90(2) of the Income-tax Act, 1961, the treaty provisions apply to the extent they are more beneficial to the assessee. Under Article 7 of the India-Austria Double Taxation Avoidance Agreement dated 5 April 1965, amounts paid for technical services are taxable in the source State only to the extent attributable to services actually performed there, and the record showed no finding that any technical services were rendered in India. The services, if any, were to be performed in Austria, so the amount could not be taxed in India as fees for technical services. The receipt was also in the nature of export proceeds and the embedded profit constituted industrial or commercial profits, which under Article 3(1) were taxable in India only if attributable to a permanent establishment in India. No permanent establishment in India was shown.

Conclusion: The receipt was not taxable in India under the applicable treaty, and the addition was not sustainable.

Ratio Decidendi: Where an applicable double taxation avoidance agreement is more beneficial to the assessee, its provisions prevail over the Income-tax Act, and profits from cross-border supplies or services cannot be taxed in the source State absent treaty-based attribution or a permanent establishment there.

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