Treaty override on technical fees: Mauritius resident's receipts were not taxable in India absent a permanent establishment.

A Mauritius resident's technical collaboration fees were examined under the India-Mauritius treaty for a year when the treaty had no specific article taxing fees for technical services. The tribunal noted that the later inserted treaty provision could not operate retrospectively and that the assessee had no permanent establishment in India. On that basis, the receipts were treated as business profits under the treaty, and business profits of a non-resident are taxable in India only if a permanent establishment exists. The attempt to tax the receipts under section 9(1)(vii) read with section 115A was held unsustainable in view of the treaty position and binding precedents, so the addition did not survive.

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Issues: Whether the fees for technical services received from Indian entities by a Mauritius resident were taxable in India at 10% under the Income-tax Act, or whether, in the absence of a specific fee-for-technical-services article in the treaty for the relevant year and in the absence of a permanent establishment in India, the receipts were taxable only as business profits under the treaty and not in India.

Analysis: The assessee was found to have no permanent establishment in India. The treaty between India and Mauritius did not contain an applicable specific provision taxing fees for technical services for the year under consideration, and the later inserted article could not be applied retrospectively. In the absence of a specific treaty article, the receipts could not be brought to tax under the residuary article and had to be examined as business profits. Since business profits of a non-resident are taxable in India only where a permanent establishment exists, the receipts were not chargeable in India. The attempt to tax the amount separately under section 9(1)(vii) read with section 115A was held to be unsustainable in view of the treaty position and the binding judicial precedents relied upon.

Conclusion: The issue was decided in favour of the assessee, and the technical collaboration fees were held not taxable in India in the absence of a permanent establishment.

Final Conclusion: The addition made by the lower authorities did not survive, and the assessee obtained complete relief.

Ratio Decidendi: Where a tax treaty does not specifically tax fees for technical services for the relevant year, such receipts of a non-resident are taxable only as business profits under the treaty and, in the absence of a permanent establishment in India, cannot be taxed in India by resort to the domestic law provisions.

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