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2014 (3) TMI 291 - AT - Income TaxTaxability of Technical fees – DTAA between India and Japan - Whether the fees for technical services received by the assessee was taxable under Article 12 (2) or Article 12(5) read with Article 7 (3) of Double Taxation Avoidance Agreement between India and Japan – Held that:- The supervision fee in dispute is related to the fee received for installation of equipments supplied to MUL - Article 12 (5) of DTAA between India and Japan is on the line of OECD Model Convention wherein the clause allows the state where the PE is located to tax only those profits which are economically attributable to the PE - The income should arise as a result of activities of PE - The state where the PE is located can tax the income only, if a connection exists, between the income and the PE - Thus, Article 12(5) of Indo Japan DTAA adopts "No Force of Attraction” principle - the term “effectively connected” used in the language of Article 12 (5) of DTAA between Indo Japan is not to be construed as the opposite of "legally connected" but in the sense of something "really connected". Producing activities should be closely connected in terms of relationship besides being connected economically also with the PE - LO was only facilitating the communication of the Head Office with MUL and was nowhere involved in the supervisory activities - Simply existence of the LO cannot be merely a basis that assessee was having supervisory PE in India - LO was not permitted to carry out any trading, commercial or industrial activity - There is no evidence whether the LO has violated the conditions laid down by RBI in this regard - The assessee has established a project office with the approval of RBI for each separate project. Equipments supplied under one purchase order were not complemented to the equipment supplied in another purchase order - The installation of equipments was to be carried out by MUL. The technicians were deputed for supervisions of work from Japan. Separate tenders were floated for each of the purchase orders and the assessee was not the only bidder and there were other enterprises which were awarded purchase orders also. There are finding of ITAT that the period of supervision under each contract was less than the period of 180 days as contemplated in Article 5(4) of the DTAA. There is no dispute remains about the payment received by the assessee the same is fee for technical services - The LO was only facilitating the communication of the Head Office with MUL - There is no evidence on record to establish that LO was involved in the supervisory activities - The LO was not allowed to do any trading, commercial or industrial activity as per RBI guidelines - There is no evidence on record that the LO has violated any of the conditions laid down by Reserve Bank of India in this regard - The personnel of LO present in the meetings with MUL were only accompanying the persons deputed from Japan and they were not having any role in the meeting – thus, the income is taxable as “fee for technical services” as per Article 12(2) of the DTAA between India and Japan - the FTS received by the assessee for Assessment Years 1992-93, 1993-94, 1994- 95 and 1996-97 are covered under Article 12 (2) of the Indo Japan DTAA and liable for the tax @ 20% - Decided against Assessee. For Assessment Year 1995-96 – since the details of contract No.19 to 25 were not available there for question of taxability of F.T.S. – thus, the matter remitted back to the AO – Decided in favour of Assessee.
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