TaxTMI 
TaxTMI 
2025 (6) TMI 1395
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....ncome u/s.139 of the Act. According to the assessee, it did not have any Permanent Establishment (PE) in India and in absence of any income accruing or arising in India, the return of income was not filed. 3. Based on the proceedings u/s.201 of the Act in the case of the payer namely M/s. Gannon Dunkerly and Company Ltd., proceedings u/s.148 of the Act was initiated against the assessee company (notice dated 05.05.2022). In response to notice issued u/s.148 of the Act, the assessee filed its return of income on 02.11.2023 admitting 'nil' income. A notice u/s.143(2) of the Act was issued on 14.12.2023. In response to the notice issued u/s.148 / 143(2) / 142(1) of the Act, assessee submitted that there is no specific clause relating to Fees for Technical Services (FTS) in the India-UAE DTAA. It was submitted once the income chargeable to tax as per the DTAA are characterized by excluding the FTS, then scope of taxing the said income as FTS cannot be expanding by importing the said provision from the Act when it is specifically excluded under the DTAA. The assessee also placed reliance on various judicial precedents wherein it was held that in absence of FTS clause in DTAA and when o....
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....r India UAE DTAA is categorized by excluding the FTS, then the scope of taxing the said income as FTS cannot be expended by importing the said provision from the Income Tax Act when it is specifically excluded under the DTAA. 1.3 The Ld.AO and Ld. DRP failed to appreciate that on a bare perusal of Article 22 of India - UAE DTAA Which deals with residual items of income which is not covered in any of the earlier articles of the treaty provides that, for any item of income, not specifically dealt with by other articles of the DTAA and therefore falling in the category of other income, would be taxable in the recipient country or the payee country. Hence the above income which is in the nature of FTS (as per provisions of the Act), earned by a UAE tax resident would be taxable only in UAE. 1.4 The Ld.AO and Ld. DRP failed to appreciate that the income earned by the appellant, if not in the nature of FTS as per India-UAE DTAA, would only be considered as business income. In the absence of the Permanent Establishment (PE) in India, the said business income would not be subject to tax in India. 1.5 The Ld.AO and Ld. DRP erred in ignoring the principle laid down in Hon'ble Supre....
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.... an Indian customer named M/s. Gannon Dunkerly & Co. Ltd., for reviewing the existing design and drawing for a turnkey project of water supply distribution system at Jorhat, Assam. Copy of the work order issued by M/s. Gannon Dunkerly & Co. Ltd., and the relevant invoices for which the payments were received by the assessee are on record. During the course of assessment proceedings, the assessee company had submitted that it is a non-resident and does not have a Permanent Establishment in India. Further, it was submitted that FTS received are of the nature of business profit under Article 7 of DTAA and in absence of any PE in India, the said income is taxable only in the resident country i.e., UAE. Hence, it was submitted that the receipts are not liable to tax in India as per the express provisions of DTAA. However, the submissions of the assessee company was rejected and AO passed draft assessment order treating the receipts of Rs.90,00,000/- as FTS u/s.9(1)(vii) of the Act. The view taken by AO was affirmed by the DRP. 9. The basis on which the reopening of assessment in the hands of the assessee is the order passed u/s.201(1) of the Act in the case of the payer namely M/s. Gan....
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....ments are classifiable as business Income under Article 7 of the treaty. The A.O; has failed to consider the provisions of the DTAA on the premise that there is no specific Article dealing with FTS as per the treaty. I find that the approach of the A.O. is erroneous in as much as the A.0. ought to have classified the said income as business income in absence of any article dealing with FTS. 8.4. In view of above discussion, in my considered view, even though the remittance in question is in the nature of FTS in the hands of Castlewick FZE, the income embedded in the remittance is not taxable in India in the hands of Castlewick FZE in terms of provisions of India UAE DTAA. The plea of the A.0. for invoking the domestic law provisions in respect of FTS as the India UAE DTAA does not specifically deal with the same, already stand negated by various judicial pronouncement and also by the jurisdictional ITAT in the case of McKinsey Business Consultants Sole Partner Limited Liability Company MEPE vs DDIT (2015] 68 SOT 178 (Mumbai) [13-02-2015] discussed herein supra. Under section 90(2), where the government has entered into a tax treaty with any tax jurisdiction, the provisions of Inc....
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....e nature of receipt by the assessee from ABB India Ltd. is Fees for Technical Services. The Assessing Officer has accepted the nature of receipt being Fees for Technical Services. It is also not in dispute that the Indo-UAE Treaty does not contain any provision/Article to tax Fees for Technical Services. Article 3(2) provides that if any term is not defined in the agreement then the meaning of which as per the law of the state concerning the taxes will be taken for the purpose of application of the agreement. For ready reference we reproduce Article 3(2) as under : A R T I C L E 3 General Conditions ..... ..... (2) As regards the application of the Agreement by a contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the laws of that State concerning the taxes to which the Agreement applies." As it is clear that when a term is used in the agreement (DTAA) but has not been defined therein then the meaning of the said term unless the context otherwise requires shall have the meaning as defined under tax statute of the contracting state. The need of importing the meaning of the term from the tax statute ....
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....ng an identical issue has held in para 7.3.1 to 9.1.5 as under : " 7.3.1 We have heard the rival submissions and perused and carefully considered the material on record. From an appreciation of the material on record it appears that there is no dispute with regard to the facts of the case and the nature of services provided by IBM-Philippines. The issue for our consideration is whether the payments made by the assessee to IBM-Philippines are chargeable to tax in India as 'FTS' u/s. 9(1)(vii) of the Act in the absence of Article dealing specifically with 'FTS' under the India-Philippines DTAA. The assessee contends that in the absence of an 'FTS' clause in the DTAA, Article 7 thereof would be applicable since IBM-Philippines is providing services in the course of its business and consequently since it does not have a PE in India, payments made to IBM-Philippines are not chargeable to tax in India. The assessee contends that without prejudice to the above submission, if Article 7 of the DTAA is not applicable, the payments would be covered by Article 23 of the DTAA which deals with 'Other Income' and therefore payments to IBM Philippines would be taxable in Philippines and not in I....
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....me in the respective Contracting States except where provisions to the contrary are made in this Convention. 2. The amount of Philippine tax payable, under the laws of the Philippines and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of India, in respect of profits or income arising in the Philippines, which have been subjected to tax both in India and in the Philippines, shall be allowed as a credit against the Indian tax payable in respect of such profits or income provided that such credit shall not exceed the Indian tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in the Philippines. Further, where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first instance against income tax payable by the company in India and as to the balance, if any, against surtax payable by it in India. 3. The term '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 Convention and the special ince....
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....lt with in the foregoing Articles of the Treaty. 7.3.4 It is a settled principle that a clash is to be avoided while interpreting the provisions of a law or Treaty. In CIT V Hindustan Bulk Carriers (2003) 259 ITR 449, the Hon'ble Apex Court, referring to its earlier decisions on the approach to be followed in case of conflicting provisions, held as under at para 28 thereof :- "The court must ascertain the intention of the Legislature by directing its attention not merely to the clauses to be construed but to the entire statute; it must compare the clause with other parts of the law and the setting in which the clause to be interpreted occurs. (see R.S.Raghunath V State of Karnataka AIR 1992 SC 81). Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between two different sections or provisions of the same statute. It is the duty of the court to avoid a head on clash between two sections of the same Act. (See Sultana Begum V Prem Chand Jain, AIR 1997 SC 1006)." Even though the DTAA is entered into by the Central Government under the powers conferred by section 90 of the Act, the above principles explained by the Hon'bl....
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....f domestic law will not be correct. If a computation of profit has been provided in a certain manner in Article 7, restrictions cannot imported therein by virtue of Article 25." 7.3.6 From the above decision, it is clear that Article 24(1) of the India- Philippines DTAA, which is similar to Article 25(1) of the India-UAE Treaty, does not confer a right to invoke the provisions of domestic laws for classification or taxability of income which is governed by Article 6 to 23 of the India-Philippines Treaty. That Article 24(1) is limited to the elimination of double taxation becomes clear if Article 24 is read as a whole. Article 24(2) provides credit for the amount of 'Philippine tax payable' by a resident of India against the Indian tax payable in respect of profits or income arising in the Philippines which has been subjected to tax in both India and the Philippines i.e. 'doubly taxed income'. Article 24(3) deals with the meaning of 'Philippine tax payable'. Article 24(4) of the DTAA provides for credit for the amount of 'Indian Tax Payable' by a resident of Philippines in respect of profits or income arising in Philippines which have been subjected to tax both in India and the Ph....
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....24(1) does not apply, the computation of doubly taxed income and tax there on are governed by the provisions of the laws in force in either contracting state. 7.3.8 In this view of the matter, both Article 24(1) and the exemption contained therein operate in the field of computation of doubly taxed income and tax thereon which is indispensible for the purpose of elimination of double taxation. Para 2 of CBDT Circular NO.333 dt.2.4.1982 exemplifies what is stated in Article 24 of the India- Philippines DTAA; providing that the Mode of Computation of income as provided in the DTAA should be followed and where there is no specific provision in the treaty, the Income Tax Act will govern the same. Both Article 24 of the India-Philippine DTAA and CBDT Circular NO.332 dt.2.4.1982 have no role to play in classification of income and allocation of right to tax such income to one or both of the contracting states as the same are to be dealt with in accordance with Article 6 to 23 of the DTAA. Even though the India-Philippines DTAA does not have an Article dealing with 'FTS', its taxation would be governed by Articles 7 or Article 23 as the case may be, depending on the facts and circumstan....
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.... that when the profits include items of income which are dealt with separately in other Articles of this DTAA, then the taxability of those items have to be determined as per those Articles and not as per Article 7. 8.1.4 In the case on hand what is relevant for consideration are Article 7 - 'Business Profits' and Article 23 - 'Other Income', as these govern the nature of payments made by the assessee to IBM Philippines. Article 23, dealing with 'Other Income' states that items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention / DTAA i.e. Article 6 to Article 22, shall be taxable only in that State. An item of income is said to have been dealt with by other Articles of this DTAA if such income can be classified as taxable or not under any of the Articles 6 to 22. This aspect has been considered by the Kolkata Bench of the ITAT in DCIT V Andaman Sea Food P. Ltd., in ITA No.1412/Kol/2011 dt.19.6.2012 (copy at pages 65 to 75 of Compilation of cases). In the said case, revenue contended that 'FTS' even though not taxable under Article 12 of the India-Singapore DTAA, is nevertheless covered under the residuary....
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....ess profits just as the profits from international air transport. The latter is dealt with separately in article 8 for the reason that it does not fall in line with the scheme of taxation of business profits under article 7. Exclusive right is given to the State in which the enterprise resides. Permanent Establishment test is irrelevant under article 8. Hence, a separate article. As far as the profits from international operation of ships are concerned, it is an integral part of business profits; at the same time, they are excluded from the business profits - article for the obvious reason that it is not intended to be covered by the Treaty. That income has been left to the care of domestic law under which the burden of taxation on such income has been minimized (vide section172 of Income Tax Act). We are of the considered view that a particular species of Income which is specifically referred to in article 7 and deliberately left out of its genus, namely business profits, cannot be said to be an item of income not dealt with under article 7. The expression 'deal with' is a comprehensive expression having different shades of meaning. In the New Chambers Thesaurus, the meanings of '....
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....onthly invoices raised for services rendered, details of which are listed out at the Annexures to orders passed u/s.201(1) of the Act for each financial year concerned. The costs incurred by IBM-Philippines in the course of its business for providing services to the assessee are charged with a profit percentage mark up of 5%, as is evident from para 2.0 on page 3 of the order passed u/s.201(1) of the Act. Admittedly the learned CIT (Appeals) at para 55 of his order has held that the transactions entered into between the assessee and IBM-Philippines were performed in the course of its business. The learned Departmental Representative while not disputing this fact, contends that the payments to IBM-Philippines are in the nature of 'FTS' u/s.9(1)(vii) of the Act. 8.1.5 In view of the above discussion of the facts and circumstances of the case at para 8.1.1 to 8.1.4 of this order (supra), we are of the considered view that the services provided by IBM-Philippines were in the course of its business and therefore the payments received by it from the assessee par take the character of 'Business Profit' under Article 7 of the India- Philippines DTAA. On the issue of the existence or othe....
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.... DTAA (as it then existed), the business profits of a non-resident are taxable as 'FTS' u/s.9(1)(vii) of the Act. The Authority for Advance Rulings (AAR) held that in the absence of Article dealing with 'FTS' under the DTAA, the business profits of the non-resident are governed by Article 7 of the Treaty and in the absence of a PE in India, the said business profits are not chargeable to tax in India. The relevant observations at this decision are extracted hereunder :- "12. The authority is of the opinion that neither of these contentions put forward by the Department can be accepted. It is true that the income derived by the TSB under the agreement can be described as fees for technical services though that specific expression does not find a place in the contract. But this makes no difference because that description is not sufficient to take it out of the purview of Article 7 which makes the income or profits of an enterprise of a State taxable only in that State, unless the enterprise carries on business in other State through a permanent establishment situated therein. To say that TSB is not carrying on a business and that income by way of technical services has not been sp....
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....chnical services, but they are clear that the provisions of the "business" clause of the treaty (Article 7 here) will govern where such technical fees are earned in the course of business with a permanent establishment in the State in question. See for e.g., the DTAA's between India and Australia (Article 11(41), Canada [Article XIII (SC)] or USA [Article 12(6)]. These indicate that even where royalties and fees for technical services receive separate treatment under a DTAA, it is the Article relating to computation of business income that would apply where such royalties or fees arise in the course of business carried on by the recipient. For these reasons, the payments received by TSB in the case from HHP have to be taxed under Article 7 of the DTAA." In Parsons Brinckerhoff India (P) Ltd. V ADIT (2008) 118 TTJ 214 (Delhi) (placed at pages 99 to 111 of the compilation of cases), it was held that outright sale of drawings and designs by the Thailand company would fall under Article 7 of the Treaty, and not under Article 22 dealing with 'Other Income' and in the absence of a PE in India, the business profits of the non-resident are not exigible to tax in India. The relevant obser....
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....in view this nature of business of M/s.SSA, the amount paid by the assessee certainly constitutes business income of M/s. SSA and when the same is not in the nature of royalty or fees for technical services, it is covered by article 7 of the Indo-Thailand Treaty dealing with business income. There is thus no need to take a recourse to Article 22 of the treaty which covers only the items of income which are not covered expressly by any other article of the Treaty." In PT Mckinsey Indonesia V DDIT (2013) 7 Tax Corp (AT) 31369 (Mum) (placed at pages 25 to 30 of compilation of case laws), at para 8 thereof it was held as under :- "8. .....As far as taxing the receipts under the head 'Other Income' is concerned, as held by the penal, we are of the opinion that residuary head is analogous to sections 56-57 of the Act. If a certain receipt cannot be taxed under any other head, only then the sections dealing with 'Income from Other Sources', come into play in domestic taxation matters. Likewise, under the DTAAs, if a sum can be taxed under any other Article, provisions of Article 22 will not be applicable. We are of the opinion, in the light of the earlier decisions of the Mumbai Tribu....
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....20. As far as the order in art. 22 is concerned, we do not find any justifiable ground to uphold this portion of the order after the discussion on the extent of income falling for consideration under royalty as defined under art. 12 and the amount paid as towards technical services falling for consideration under art. 7. Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22." 8.1.9 In view of the above, we are of the considered view that payments to IBM-Philippines, in the case on hand, for providing services in the course of its business would be covered by Article 7 of India-Philippines DTAA in the absence of a specific Article dealing with 'FTS' and further in the absence of a PE of IBM-Philippines in India, the said payments would not be chargeable to tax in India and consequently not liable for TDS u/s.195 of the Act. 9.1.1 On a perusal of the orders of the authorities below, it is seen that the Assessing Officer and the learned CIT (Appeals) have placed reliance on the following decisions in support of the contention that in the absence of Article dealing with 'FTS' under the DTAA, the income of the non-resident is exigible ....
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.... which is derived otherwise than from the operation of ships, the profits can be taxed in India as per the provisions of the Income Tax Act, 1961. In the case on hand, however, the payments made to IBM-Philippines were for services rendered by IBM-Philippines in the course of its business and therefore it is clear that the above decision is factually different from the case on hand and hence not applicable. In IAC V Diamler Benz AG West Germany (1991) 36 ITD 508 (Bombay), it was held that royalty income is excluded from the purview of 'Industrial and Commercial Profits' under Article III of the India - Germany DTAA (as it then existed) and consequently the said income is chargeable to tax under the provisions of the I.T. Act, 1961. In the case on hand, while, there is no Article dealing with 'FTS' under the India- Philippines DTAA, the said category of income is not excluded from the purview of Article 7 of the India-Philippines DTAA, since they are payments made to IBM-Philippines for rendering services in the course of its business. In this view of the matter, we find that the above case is distinguishable from the case on hand. In DCIT V Turuoise Investment and Finance Ltd. ....