2024 (6) TMI 146 - AT - Income Tax

Taxability of Fees for Technical Services (FTS) under the India-Thailand DTAA - taxability of profits of an enterprise - Applicability of Article 22 (Other Income) OR Article 7 (Business Income) of the DTAA - as per revenue FTS is not the primary business activity of the assessee and as there is no specific Article to cover FTS - HELD THAT - Once the assessee raises a claim that the source of its revenue is out of profits of an enterprise under Article 7 of DTAA then Article 22 would not be applicable. If at all AO wants to invoke any other provision of the Act or the DTAA then the said activity which gives rise to item of income should be examined to establish that same does not fall in any other Article and then only Article 22 may be invoked. Here in the case in hand AO has invoked Article 22 of DTAA by making an allegation that FTS is not the primary business activity of the assessee and as there is no specific Article to cover FTS residuary Article 22 can be invoked. This conclusion about FTS not being primary business is drawn on the basis of the assessee s web portal information. The first thing is that it is the Memorandum of Association of an assessee which is actually relevant to give a finding about the nature and scope of the business activity which the enterprise can enter into and the web portal in no way is an evidence of the business activities of an assessee. Then in the case in hand apart from several pieces of evidence about services being rendered in normal course of its business as referred above in Para 10 Assessee has come up with a specific plea that it was providing application work services to Indian AEs wherein the assessee as part of its operations. 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. Existence of Permanent Establishment (PE) in India - In the case in hand AO without examining the business activity of the assessee has drawn an interference on the basis of information available on web portal of the assessee. However on a perusal of the documentary evidences filed and taking into consideration the nature of services provided by Assessee we would concluded that the services provided by the assessee to the Indian AEs are in the nature of technical managerial or consultancy which themselves together as FTS do not fall in any Article of the DTAA can very well be part of business income. Thus for the applicability of Article 7 assessee had brought on record the evidence which establish that FTS actually is part of business activity and assessee does not have a PE in India. So benefit of Article 7 is to be extended. AO had all the opportunities to examine the business activity and to give a conclusive finding as to what is primary business activity of assessee and why operations of the assessee in providing FTS is not part of business income. That being not done then by recourse to Article 22 FTS income could not have been brought to tax. Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of Fees for Technical Services (FTS) under the India-Thailand DTAA.
2. Applicability of Article 22 (Other Income) versus Article 7 (Business Income) of the DTAA.
3. Existence and relevance of Permanent Establishment (PE) in India.
4. Levy of interest u/s 234A and 234B.
5. Initiation of penalty proceedings u/s 270A.

Summary:

Issue 1: Taxability of Fees for Technical Services (FTS) under the India-Thailand DTAA
The appellant, a company incorporated in Thailand, claimed that its receipts of INR 16,60,43,718 for services provided to Indian group companies are non-taxable due to the absence of an FTS clause in the India-Thailand DTAA. The Assessing Officer (AO) accepted the receipts as FTS but argued that in the absence of an FTS clause, the income should fall under Article 22 (Other Income) of the DTAA and be taxed at 10% as per section 9(1)(vii) of the Income Tax Act, 1961.

Issue 2: Applicability of Article 22 (Other Income) versus Article 7 (Business Income) of the DTAA
The appellant contended that in the absence of an FTS clause, the income should be treated as business income under Article 7 of the DTAA, and not as other income under Article 22. The Tribunal noted that Article 22 is a residuary article meant for items of income not dealt with in the DTAA. It was emphasized that if the income is part of the business profits, Article 7 should apply, and the income should not be taxed in India in the absence of a PE.

Issue 3: Existence and relevance of Permanent Establishment (PE) in India
The appellant argued that the services provided were part of its normal business activities and, in the absence of a PE in India, the income should not be taxed in India. The Tribunal agreed, noting that the AO did not conclusively establish that the FTS was not part of the appellant's business income. The Tribunal concluded that the FTS should be considered business income under Article 7, and since the appellant did not have a PE in India, the income should not be taxed in India.

Issue 4: Levy of interest u/s 234A and 234B
The appellant's ground regarding the levy of interest u/s 234A and 234B was deemed consequential.

Issue 5: Initiation of penalty proceedings u/s 270A
The appellant's ground regarding the initiation of penalty proceedings u/s 270A was deemed premature.

Conclusion:
The Tribunal allowed the appeal, quashing the impugned addition and concluding that the FTS should be treated as business income under Article 7 of the DTAA, and not taxed in India in the absence of a PE. The order was pronounced on 31.05.2024.