TaxTMI 
TaxTMI 
2024 (6) TMI 146
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....ices, testing and technical services of automotive components for the Group and during the year under consideration, the Appellant had earned INR 16,60,43,718, which, as per the claim of appellant is in the nature of Fees for Technical Services ('FTS') on account of services provided to its five Indian group companies. The claim of appellant is that the said receipts are non-taxable in absence of FTS clause in the India-Thailand Double Taxation Avoidance Agreement ('DTAA'/'Tax Treaty'). It was submitted by the appellant before AO that in absence of FTS clause, income can be treated as Business income, as the services are in nature of business activities of Appellant. Therefore, the receipts should not be considered as 'Other income' under Article 22 of DTAA. Further, in absence of permanent establishment ('PE') of appellant in India, business income is not liable to be taxed in India. 2.1 AO has accepted that the receipts from the services rendered by the Appellant are in the nature of FTS. Refer page 15 of the final assessment order. However, the AO was of view that in the absence of FTS clause in the tax treaty, income should fall under Ar....
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.... in view of the provisions of the Act read with the India-Thailand DTAA. 6. That on the facts and circumstances of the case and in law, the AO has erred in holding that the receipts earned by the Appellant from the provision of technical services are not in the nature of business income without appreciating the submissions and documents furnished in this regard. The DRP further erred in upholding the action of the AO. 7. Without prejudice to the ground of appeal no. 5, the receipts earned by the Appellant from provision of technical services is in the nature of business income and thus, not taxable in the absence of any Permanent Establishment ("PE") of the Appellant in India in terms of Article 7 of the India-Thailand DTAA. 8. That on the facts and circumstances of the case and in law, the AO has erred in levying interest under sections 234A and 234B of the Act. 9. That on the facts and circumstances of the case and in law, the AO has erred in initiating penalty proceedings under section 270A of the Act." 4. Heard and perused the records. Ld. Counsel has submitted at outset that ground no.8 is consequential while ground no.9 is Premature. 4.1 As with regard to remaining ....
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....t been defined therein. 6. Ld. Counsel has emphasized most on the contention that the absence of the provision for FTS in the DTAA is not an omission but is a deliberate mutual agreement between the contracting states not to recognize/classify any income as FTS for taxation. He submitted that only the income which is not expressly dealt with in any of the Articles of the treaty is required to be taxed under Article 22. He submitted that in case the services are in the nature of business activities, taxability of the same shall be tested first under Article-7 in absence of FTS clause rather directly approaching to Article-22. The services under consideration are in the nature of business activities of the Appellant and in the absence of PE in India, receipts should not be taxed in India. 7. He has relied following judgments for the proposition that in the absence of FTS clause in the treaty, income would fall under Article-7 (in case the services are provided during the course of Business) and not under Article-22. Further, in absence of the PE in India, the said income would not be chargeable to tax in India: * Bangkok Glass Industry Co. Ltd. v. ACIT: [2013] 34 taxmann.com 77 (....
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....activities are out of normal course of business. However, it is evident that FTS is not the primary business of the Assessee company Hon'ble Madras high court has not emphasized that there should be primary business of the Assessee in order to tax the same as business receipts. The court has held that to tax the receipts as business, services should be provided in the normal course of business. In present case, the Appellant has rendered services in the normal course of business. 9. We further find that AO has also observed that the services provided by the Appellant are not in the nature of its primary business activities based on web portal. Mere mentioning activities in memorandum of association, does not entail Appellant to claim said activity is part of its prime business. Appellant's own web-page portal, was relied to conclude that there that Appellant does not showcase itself in the business of providing FTS or any kind of technical services. AO observed that rendering FTS is not of business nature rather it is in the nature of other income for Appellant. Taxability of any income is no-where dependent upon its accounting treatment given by the taxpayer. AO observed that m....
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....icle which is incorporated to make taxable items of income which are not otherwise dealt in the DTAA. At the same time Article 7, lays down taxability of profits of an enterprise. 14. We will like to initiate the discussion keeping in mind the settled proposition of law, that where the business profits of the non-resident include items of income for which specific or separate provisions have been made in other articles of the tax treaty, then those provisions would apply to the items. However, in case it is found that those provisions are not applicable then the items of income would have to be considered in Article taxing business income. Reliance for this can be placed on Paradigm Geophysical Pty. Ltd. [2008] 25 SOT 94. Further, that where there is no FTS clause available in the treaty with a country, then the income in question would be assessable as business income and it can be taxed in India only if there is a permanent establishment in India and the income is attributable to activities or functions performed by such permanent establishment. Reliance for same can be placed on reliance is placed on the Hon'ble Delhi Tribunal ruling in the case of Bharti Airtel Ltd. [2016]....
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....in India. Explanation 2 to Section 9(1)(vii) of the Act gives definition of FTS and which provides that any service falls within the definition of FTS are either be in the nature of managerial services, technical services or consultancy services. Thus FTS is a species of income with specific definition and components. Thus where a DTAA does not make a reference for taxability of FTS, as separate item, then Article 22, which vests residuary powers, cannot be invoked. The intention of having residuary powers of taxing an income vested in any of the contracting state is to deal with those incomes which due to lack of regularity, continuity and frequency do not form part of regular business activity of the entity. The residuary provisions of Article 22 will not apply to items of income, which can be classified under other provisions of the tax treaty, but their taxability is subject to fulfillment of conditions mentioned therein. Thus we conclude the fee paid towards technical services can be brought under the item of business income, if there is no material to show that the same is not related to the business of the assessee. That onus lies on AO. 19. In the case in hand AO without e....