TaxTMI 
TaxTMI 
2025 (6) TMI 1395
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Jorhat, Assam. For the assessment year 2018-19, assessee did not file any return of income 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....% plus surcharge and cess. 1.2 The Ld.AO and Ld. DRP failed to appreciate that once the income chargeable to tax as per 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 bus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the material on record. On perusal of the assessment order, the submissions of the assessee and facts on record, we find that assessee was in receipt of business income from 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ellant to Castlewick FZE are in the nature of Fees for Technical Services as per Income Tax Act but in absence of any specific clause for 'Fees for Technical Services' as per India UAE DTAA the payments 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 Lia....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... finding of the Bangalore Bench of the Tribunal in the case of ABB FZ-LLC, supra reads as follows:- 6. We have considered the rival submissions as well as the relevant material on record. There is no dispute as regards the 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) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....scope of taxing the said income cannot be expended by importing the said provision from the Income Tax Act when it is excluded under the DTAA. The coordinate bench of this Tribunal in the case of IBM India Pvt. Ltd. Vs. DDIT (I.T) (supra) while dealing 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 with....
X X X X Extracts X X X X
X X X X Extracts X X X X
....states ends with Article 23. 7.3.3 Article 24 of the DTAA deals with the elimination of double taxation. The said Article is extracted and reproduced hereunder : "ARTICLE 24 ELIMINATION OF DOUBLE TAXATION 1. The laws in force in either of the Contracting States shall continue to govern the taxation of income 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 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 contracting state, which is the contention of revenue in the case on hand, then Article 23 would become redundant since it ceases to be a residuary / omnibus clause covering items of income, wherever arising, not dealt 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n different models have adopted different method of credit of taxes or deductions or exemptions to eliminate the incidents of double taxation in their domestic laws. Article 25 per se does not provide any rules on the mechanism for computing relief. Hence for this purpose, the domestic laws may have to be referred. Interpretation of Article 25 that it extends to Article 7 for applicability of 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r 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 to promote economic development of the country. Thus, in cases where the above exception apply, the computation of doubly taxed income and tax thereon would be made in accordance with Article 24(3) / 24(5). In cases where the exception part of Article 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 only in that state unless the enterprise carries on business in the other contracting state though a PE situated therein and in that event the profits may be taxed in the other state only to that extent as are attributable to that PE. Article 7(7) stipulates 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 previous articles of DTAA ? We do not think so. Among the various items of income in the foregoing articles, business profits into which the shipping income falls has been dealt with under article 7. Profits from the international operation of ships are only a species of business 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 s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stration, 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 arrangement in connection with the 'Sunrise Project'. The case of the assessee before the authorities below i.e. in proceedings u/s.201 of the Act and before the CIT(Appeals) was that the above services were provided by IBM-Philippines in the course of its business and the payment made by the assessee to IBM-Philippines was against monthly 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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, it would be a part of the industrial and commercial profits and, therefore, it cannot be said that there is no specific provision for dealing with such kind of profit in AADT ...." In Tekniskil (Sendirian) Berhard V CIT (1996) 222 ITR 551 (AAR), revenue argued that in the absence of an Article dealing with 'FTS' in the India - Malaysia 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 unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 interest. That being so, when technical fees are received in the course of business, one cannot deny them the treatment envisages by Article 7, specifically intended for application to business income.. That apart as pointed out earlier, there are several DTAA's which prescribe different modes of taxation for business and for royalties and fees for technical 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 by the assessee is a licnesee of certain satellite owned by Government of Thailand and it is in the business of providing TV Channels facility of broadcasting their programmes through the transponders located in the said satellite. For the said facility, M/s. SSA recovers service charges from TV Channels like the amount in question recovered form the assessee. Keeping 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der :- "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 would fall for consideration under art. 12 as royalty income and the other to be assessed as by way of technical services. As already pointed out even herein, with the finding of the assessing authority on the remand order that the assessee had no PE, the said amount cannot be brought under art. 7. In the light of the above, we have no hesitation I confirming the order of the Tribunal. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith 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 Treaty perspective and it was concluded that the payments are chargeable to tax under Article 17 of the DTAA which coincide with the tax implications under the I.T. Act, 1961. Therefore, the above two decisions do not further the case of revenue. 9.1.3 In A.P. Moller, Maersk Agency India (P) Ltd. V DCIT (2004) 89 ITD 563 (Mum), it was held that since the India-Denmark DTAA is silent on slot fees and ancillary charges earned by a shipping company 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 wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 the reasons for the absence of Article dealing with 'FTS' in the India-Philippines DTAA may be different from the reasons for the absence of such Article in the India-Mauritius DTAA or the India-UAE DTAA. It was contended that it was necessary for the DTAA negotiation documents, minutes of the meeting in relation to the India-Philippines DTAA to be referred to in order to understand the reasons for not having an Article dealing with 'FTS' in the India- Philippines DTAA. The learned Departmental Representative however except for making this claim, did not submit the above referred documents for our consideration in the course of hearing of the case and hence we are unable to deal with this contention. 9.1.5 Even if it is assumed that payments to IBM-Philippines are not covered by Article 7, the said payments made to it are covered by Article 23 of the India-Philippines DTAA dealing with 'Ot....