TaxTMI 
TaxTMI 
2016 (11) TMI 368
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....cts and in the circumstances of the case, the learned Assessing Officer ('AO') erred in law in holding and the learned Dispute Resolution Panel ('DRP') erred in law in confirming that where there is no specific Article for taxability of a particular payment in the DTAA, the provisions of the Act would be applicable. (b) On the facts and in the circumstances of the case, the learned AO erred in law in holding that the fees received (i.e. fees for technical services ('FTS')) as taxable under the Act, irrespective of there being no Article in the DTAA for taxation of FTS. 2. Penalty proceedings under section 271(1)(c) The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. Relief (a) The appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. (b) The appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. (c) Further, the appellant prays that all the above adjustments/additions/disallowances made b....
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....e the receipt in question will be treated as business income of the assessee and in the absence of PE in India the same is not chargeable to tax in India. He has further submitted even otherwise as per Article 22 of the Indo-UAE DTAA any item of income falling in the category of other income not specifically deal with by the other Article of the Treaty shall be taxable only in the country of recipient or the payee. Hence even if it is assumed that the income received by the assessee in the nature of other income the same should be taxed in UAE and not anywhere. When the DTAA between India and UAE has not classified an income as Fees for Technical Services then the said income would be considered either business income or other income of the assessee depending upon the facts and circumstances. Once the treaty does not confer a right to tax a particular income then the provisions of domestic law cannot be invoked to tax the said income. The learned Authorised Representative has relied upon the decision dt.24.1.2014 of co-ordinate bench of this Tribunal in the case of IBM India Pvt. Ltd. Vs. DDIT in IT(IT)A Nos.489 to 498/Bang/2013 and submitted that an identical issue was considered ....
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....absence of any such provision in the DTAA the provisions of the Act would be applicable for charging the said income to tax. He has referred to the judgment of Hon'ble Supreme Court in the case of CIT Vs. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC). The ld. DR then relied upon the decision of the Chennai Bench of the Tribunal in the case of DCIT Vs. TVS Electronics Ltd. 52 SOT 287 (Chennai) and submitted that the Tribunal has held that when DTAA between India and Mauritius did not provide for taxing Fees for Technical Services in such situation the provisions of the Act would have been considered and applied. He has relied upon the orders of the authorities below. 5. In a rejoinder the ld. AR has submitted that Section 4 & 5 of the Income Tax Act are subjected to the other provisions of the Act and consequently these charging sections are subject to Section 90(2) of Income Tax Act therefore the provisions which are beneficial to the assessee would be applied. The learned Authorised Representative has further pointed out that the Tribunal in the case of IBM India Pvt. Ltd. Vs. DDIT (International Taxation) (supra) has decided the issue after considering the decision ....
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....es of income are separately classified for the purpose of charging to tax. Once the DTAA does not recognize any income as Fees for Technical Services or royalty then classification of the said income has to be as per the other provisions of the DTAA. There is no dispute that in the case of the assessee the income derived by the assessee is from providing services to the Indian counterpart which is a regular business activity and therefore the said receipt has to be recognized under the provisions of the DTAA as business income because the DTAA does not contain any provision to recognize or tax any income in the nature of Fees for Technical Services. The absence of the provision in the DTAA is not an omission but is a deliberate mutual agreement between the contracting states not to recognize/classify any income as Fees for Technical Services for taxation. Therefore the intention for not incorporating any provision in the DTAA is not to tax an income under the category of Fees for Technical Services. Once the income chargeable to tax as per the DTAA are categorized by excluding the Fees for Technical Services then the scope of taxing the said income cannot be expended by importing t....
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....ding double taxation; Article 3 - deals with the definition of certain taxes; Article 4 - deals with the definition of the term 'resident of a contracting state' and Article 5 - deals with the meaning of 'Permanent Establishment.' Article 6 to 22 - deal with the distributive rules dealing with classification of income into various heads and the right to tax such income in India or in the Philippines or by both countries. These Articles deal with the classification of income into different heads like income from immovable property business profits, air transport, shipping, dividends, interest, loyalties, capital gains, etc. There is no specific Article dealing with 'FTS'. Article 23 - deals with the taxability of other income, i.e. items of income not dealt with in the foregoing Articles of the DTAA i.e. 6to 22. As pointed out by the learned Authorised Representative, Article 23 would cover incomes like alimony, income from gambling, lottery etc. The classification of income and the right to tax such income by one or the other or both the contracting states ends with Article 23. 7.3.3 Article 24 of the DTAA deals with the elimination of double taxation. The s....
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....le as Indian tax for any assessment year but for an exemption or reduction of tax granted for that year or any part thereof by the special incentive measures under the provisions of the Income Tax Act,1961 (43 of 1961), which are designed to promote economic development, or which may be introduced hereafter in modification of, or in addition to, the existing provisions for promoting economic development in India." Article 24(1) provides that the laws in force in either of the contracting sates shall continue to govern the taxation of income in the respective contracting states except where provisions to the contrary are made in the convention. At first sight, it may appear that Articles 23 and 24(1) of the DTAA are in conflict with each other. It may be argued that if Article 23 is an omnibus clause covering all items of income not dealt with in Articles 6 to 22, then Article 24(1) would be rendered redundant for the reason that there would be no income left to be governed by Article 24(1) if all the residuary income is absorbed by Article 23. On the other hand, if one were to interpret Article 24(1) as conferring right to tax 'FTS' in accordance with the domestic law of a contr....
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....cle 24(1) of the India-Philippines Treaty was explained by the Mumbai Tribunal. The relevant portion of the said decision is extracted as under : " 12. A lot of stress has been given by the department and the learned DR that such an exception already existed by virtue of Article 25(1) which provides that, "The laws in force in either of the Contracting States shall continue to govern the taxation of income and capital in the respective Contracting States except where express provisions to the contrary are made in this Agreement." Article 25 which is similar to Article 23 of other treaties, deals with the Elimination of double taxation and it is for this purpose, it has been provided that the 'laws in force' in either of the Contracting States shall continue to govern the taxation of the income unless express provision to the contrary are made in this Agreement. Further paragraphs of Article 25 provide for deductions or credit of the taxes paid in either of the states. Various countries in their agreements based on different models have adopted different method of credit of taxes or deductions or exemptions to eliminate the incidents of double taxation in ....
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....s 3 & 5 of Article 24 which define the term 'Philippine tax payable' and 'Indian tax payable' respectively. As per para 3 of Article 24, 'Philippine tax payable' shall be deemed to include the amount of Philippine tax which would have been paid if the Philippine tax had not been exempted or reduced in accordance with this DTAA and Special incentive laws designed to promote economic development in the Philippines effective on the date of the DTAA or which may be introduced in future in the Philippine taxation laws in modification of or in addition to, the existing laws. Similarly in para 5 of Article 24 in the case of 'Indian tax payable' under the provisions of the Income Tax Act, 1961. Normally, income exigible to tax in the source country but exempt in the country of residence cannot be regarded as doubly taxed income and consequently credit for the same may not be available in the country of residence. However, under Article 24(3) and 24(5), 'Philippine tax payable; or 'Indian tax payable', as the case may be, includes, inter alia, the tax which would have been payable but for an exemption or reduction of tax granted by the special incentive provisions which would are designed t....
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....incorrect and unsustainable. 8.1.1 Having dealt with the scope and the meaning of Article 24(1) of the India-Philippines DTAA, the next issue for consideration in the nature of payments made by the assessee to IBM-Philippines under the India-Philippines DTAA. It is a settled principle that the assessee can rely on the provisions of the DTAA if they are more beneficial that the Income Tax Act, 1961 and inter alia the decision of the Hon'ble Apex Court in the case UOI V Azadi Bachao Andolan (2003) 263 ITR 706 establish the above principle. 8.1.2 In the case on hand, as per the material on record, the payments to IBMPhilippines were for services rendered in the field of pay roll, data management, benefits administration, balance sheet reconciliation, generation of reports, stock option administration, etc. in connection with the project with P & G Home Products India Ltd. It is submitted that the services by IBM-Philippines also included services provided to the assessee as part of internal arrangement in connection with 'Sunrise Project'. 8.1.3 As per Article 7(1) of the India-Philippines DTAA, business profits of an enterprise of a contracting state shall be taxable onl....
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....ntracting state for the use of an immovable property in a third state, and damages (other than for loss of income covered by articles 6-22) etc. In our humble understanding, therefore, article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and the income from consultancy charges on is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied. Learned Departmental Representative's argument, emphatic and enthusiastic as it was, lacks legally sustainable merits and is contrary to the scheme of the tax treaty. While dealing with the scope of residuary article of income under the tax treaties, and in support of the above conclusions, we may also refer to certain observation, with which we are in most respectful agreement, made by the Hon'ble Justice P V Reddi, articulating the views of the Authority for Advance Ruling in the case of Gearbulk AG (318 ITR 66), and in his felicitous words as follows : ..... The question is whether the profits form the shipping operations in international traffic can be said to be "an item of income" "not dealt with" in the previo....
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....aty only if it defines its scope as well as allocates the right to tax such income between the two Contracting States. Mere exclusion of shipping business profits from article 7 does not amount to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression 'dealt with' does not necessarily mean that there should be a detailed or elaborate treatment of the subject. 10. Clearly, therefore, the income from consultancy services, which cannot be taxed under article 7, 12 or 14 because conditions laid down therein are not satisfied." Coming back to the case on hand, it is not disputed that the services provided by IBM-Philippines were in the nature of pay roll related services, data management services, benefits administration, balance sheet reconciliation, generation of reports, stock option administration, etc. in connection with the contract with Proctor & Gamble (P & G). The services by IBM-Philippines also included services provided to the assessee as part of internal ar....
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....g with 'FTS' under the India-Philippines Treaty, the aforesaid payments to IBM-Philippines for services rendered in the course of its business has to be considered and examined as business income only. 8.1.6 The aforesaid finding rendered by us that in the absence of an Article dealing with 'FTS', payments made for services rendered in the course of business would be covered by Article 7 of the India-Philippines Treaty dealing with 'Business Profit', and not by Article 23 'Other Income' is supported by the following judicial precedents :- The case of Christiani & Nielsen Copenhagan V First ITO (1991) 39 ITD 355 (Bom) wherein at page 8 thereof it was held as under : " ....... The fees for technical services' in the normal business parlance is a part of the profits earned by an enterprise. It is earned through a systematic series of activities carried on by the assessee, i.e. in preparing the project by conducting preliminary studies, collection and assimilation of data and finally preparing the feasibility report and, in this case, with regard to Trans=Harbour Communication Link between the Island city of Bombay and the Mainland. In the general sense of its meaning, i....
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....act with HHI was entered into in the course of its business. No details of assessment year contracts of similar nature entered into by the applicant with other parties have been furnished. Still, the very nature of the contract is such that it spells out a business. The assessee is to engage skilled labour and supplies the labourers to other companies requiring such labour. It gets paid on the basis of certain rates per unit of labour employed and, by effecting economies in the scale of wages it offers to its employees, earns a margin of profit for itself. This is clearly in the nature of a business and Article 7 will be attracted. 13. The fact that the remuneration paid to the assessee may be in the nature of technical fee within the scope of section 9(1)(vii) does not make a difference. Fees of this nature can be earned in business or otherwise. If earned in the course of business, they constitute income from business. There is no incompatibility between recognizing the receipts as royalties or technical fees and also looking upon them as the profits of a business. Judicial decisions have recognized the principle in regard to other types of receipts such as dividends and....
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....having been held to represent business profits they will fall under Article 7 which rules out the applicability of Article 22. In addition, the basic principle applies, viz., that the double tax avoidance agreement cannot be construed as a taxing enactment." In Golf in Dubai V DIT (2008) 306 ITR 374 (AAR) (placed at pages 47 to 64 of compilation of cases), it was held that in the absence of Article dealing with 'FTS' under the India-UAE DTAA, the management fees would be covered under Article 7 and not under Article 22 dealing with 'Other Income'. In Channel Guide India Ltd. V CIT (2012) 153 TTJ 432 (Mum) (placed at pages 31 to 46 of compilation of cases), at para 23 it was held as under :- " 23. At the time of hearing before us, the learned Departmental Representative has raised an altogether new contention that there being no clause in the Indo-Thailand Treaty dealing with fees for technical services, the amount in question paid by the assessee to SSA is covered by the residuary Article 22 of the Treaty and the same is chargeable to tax in India as Other Income. We find it difficult to accept this contention of ld. DR. M/s. SSA to whom the payment in question was made....
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....xigible to tax in India under the India - UAE DTAA. 8.1.8 Similar situation, as in the case on hand, was before the Hon'ble Madras High Court in Bangkok Glass Industry Co. Ltd. (supra) wherein in the absence of an Article for 'FTS' in the India - Thailand DTAA, revenue sought to assess the FTS in the hands of the Thailand Company u/s.9(1)(vii) of the Act or in the alternate under Article 22 of the India - Thailand Treaty. The Hon'ble Madras High Court, rejecting the contentions of revenue, held that the 'FTS' earned by the Thailand Company in the course of business was covered under Article 7 of the India - Thailand DTAA and in the absence of a PE in India, the said income was not chargeable to tax in India. The Hon'ble Madras High Court also held that the income of the Thailand Company was not chargeable to tax under Article 22 of the India - Thailand Treaty. The relevant portions of the Court judgements at paras 19 and 20 are extracted hereunder :- " 19. Even though the Revenue canvassed this issue before the Tribunal, in the absence of any material to read the clauses otherwise, rightly, the Tribunal came to the conclusion that a sum of 4,79,640 USD alone....
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....e 17 and not by Article 22. In context, the Hon'ble Bench held that there is no conflict in the provisions of the Act and the DTAA and therefore it was held that the payments made by the assessee are taxable in India under Article 17 of the DTAA. In BCCI V DIT - 96 ITD 263 (Mum), the Mumbai Bench of the ITAT considered the question as to whether the CIT can revise the order passed u/s.195 of the Act under the revisionary provisions of section 263 of the Act. Further, the decision in PILCOM case (supra) was followed by the Mumbai Bench in concluding that the guarantee money paid to non-resident cricket associations are chargeable to tax under Article 17(1) of the Treaty. The above two decisions (supra),in our view, have no relevance to the case on hand since the facts, arguments and issues in dispute before the Benches are different from the present case. The Hon'ble Benches in the above two cases were not concerned with the taxability of 'FTS' in the absence of a similar clause in the DTAA. Further, the Benches did not conclude that the impugned payments are taxable u/s.9(1)(vii) of the Act. Rather, in the above cases, the tax implications were examined form the Treat....
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.... Court were with regard to the computation of income and not classification of a particular category of income under the DTAA. Even otherwise, in the case on hand, we have already held that the payments to IBMPhilippines would be covered by Article 7 of the India-Philippines DTAA and the absence of PE of IBM-Philippines, the said payments are not exigible to tax in India. In this view of the matter, the above decision does not help the case of revenue. In DCIT V TVS Electronics Ltd., in ITA No.811/MDS/2010 dt.25.5.2012, the ITAT, Chennai Bench held that in the absence of 'FTS' clause in the India- Mauritius DTAA, the said income is exigible to tax u/s.9(1)(vii) of the Act. The recent decision of the Hon'ble Madras High Court in the case of Bangkok glass Industry Co. Ltd (supra) squarely deals with the issue in appeal in the case on hand and has rendered a contrary verdict in similar circumstances to the decision of the ITAT, Chennai Benches in the above case of TVS Electronics Ltd. (supra). We are, therefore, not inclined to follow the above decision of the ITAT, Chennai (supra). 9.1.4 The written submissions filed by the learned Departmental Representative states that th....