2025 (7) TMI 437 - AT - Income Tax

Accrual of income in India - Services receipts for rendering services to HMSI - assessee is a non-resident company and is incorporated under the laws of Thailand engaged in the business of sale of cars spare parts etc. - taxable as Other Income in accordance with Article 22 of DTAA OR in absence of FTS clauses in DTAA services receipts falls under Article 7 of DTAA Business Profits OR in the absence of Permanent Establishment of the appellant in India whether chargeable to tax in the hands of appellant? HELD THAT - We are of the considered opinion that the Ld. DRP should revisit the issue upon examining the documents which were not placed before it as it is found to be germane to the issue involved in the matter. We with the aforesaid observation disposing of the appeal by remitting the issue to the file of the DRP for reconsideration of the same afresh upon considering the relevant documents which are said to be missing in the papers/records filed by the assessee before it. The appellant is directed to submit all the details as indicated hereinabove before the Ld. DRP forthwith for consideration of the same afresh. DRP is further directed to finalise the issue within a period of eight months from the date of passing of this order by us are affording an opportunity of being heard to the appellant and upon considering the evidences as indicated hereinabove as further directed to be placed by the appellant before it and any other evidence which the appellant may choose to file at the time of hearing of the matter. DRP is directed to pass the order strictly in accordance with law. In the result the grounds 2 to 2.1 are allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the receipts amounting to Rs. 10,84,21,790/- received by the appellant for rendering certain services to Honda Motorcycle and Scooter India Private Limited (HMSI) are taxable as "Other Income" under Article 22 of the India-Thailand Double Taxation Avoidance Agreement (DTAA) or should be treated as "Business Profits" under Article 7 of the DTAA;

(b) Whether, in the absence of a Fees for Technical Services (FTS) clause in the India-Thailand DTAA, the service receipts fall under business profits and, if so, whether the absence of a Permanent Establishment (PE) in India for the appellant means such income is not chargeable to tax in India;

(c) Whether the services rendered by the appellant are directly connected to its business activities and thus qualify as business profits or are unrelated and hence taxable as "Other Income";

(d) The relevance and impact of non-production of certain annexures and documents defining the nature of services rendered under the agreements between appellant and HMSI;

(e) The validity of penalty proceedings initiated under Section 270A of the Income Tax Act, 1961;

(f) Miscellaneous grounds including the general nature of the appeal and consequential grounds.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Taxability of service receipts under Article 22 "Other Income" or Article 7 "Business Profits" of the DTAA, and relevance of PE

Relevant legal framework and precedents: The Income Tax Act, 1961, Sections 143(3), 144C(1), 144C(5), 144C(13), and 270A are applicable. The India-Thailand DTAA governs the tax treatment of cross-border income. Article 7 of the DTAA relates to business profits, generally taxable only if the non-resident has a PE in the source country. Article 22 covers "Other Income" which can be taxed in the source country. The absence of a Fees for Technical Services (FTS) clause in the DTAA is a critical factor. Precedents generally hold that in absence of an FTS clause, technical service fees may be treated as business profits if connected to business and PE exists; otherwise, not taxable.

Court's interpretation and reasoning: The Assessing Officer (AO) initially held that the services rendered by the appellant to HMSI did not fall under business income and taxed the receipts as "Other Income" under Article 22 of the DTAA. The Dispute Resolution Panel (DRP) upheld this view, noting that the services were not directly connected to the appellant's core business activities. The DRP further observed that certain annexures defining the nature of services were not submitted, which impeded a full understanding of the transactions. The DRP reasoned that since the services related to sponsorship and third-party software were unrelated to the appellant's core business, the receipts were rightly taxable under Article 22.

Key evidence and findings: The appellant is a non-resident company incorporated in Thailand engaged in exporting Honda motorcycles, automobiles, power products, and components globally. The appellant admitted receiving service receipts but contended these should be treated as business profits and not taxable in India due to absence of PE. HMSI confirmed payments of Rs. 10,84,21,790/- as fees for services rendered, supported by a copy of the agreement (addendum). However, the appellant failed to submit annexures detailing the exact nature of services such as infrastructure services and Web EDI system maintenance agreements before the DRP. This non-production was noted by the DRP and the Tribunal.

Application of law to facts: The absence of the FTS clause in the DTAA means that the nature of services and connection to business activities are critical to determine taxability. The appellant's failure to produce key documents prevented a conclusive determination whether the services rendered were integral to its business and whether a PE existed. The DRP and AO treated the receipts as "Other Income" under Article 22, which permits taxation in India. The appellant contended the receipts should be treated as business profits under Article 7 and not taxable without PE.

Treatment of competing arguments: The appellant argued that since the DTAA lacks an FTS clause, and no PE existed in India, the income should not be taxable. The AO and DRP disagreed, relying on the nature of services and incomplete evidence to categorize the income as "Other Income." The Tribunal found merit in the appellant's contention regarding missing documents and directed the DRP to reconsider the issue after examining all relevant annexures and evidence. The Tribunal thus remitted the matter for fresh adjudication.

Conclusions: The Tribunal concluded that the DRP's and AO's findings were premature due to non-production of critical documents. It remitted the issue for reconsideration, directing the appellant to submit all relevant agreements and annexures and for the DRP to pass a fresh order after hearing the parties and considering all evidence within eight months. Thus, the question of taxability under Article 22 or Article 7 remains open for fresh determination.

Issue (c): Whether services rendered are directly connected to appellant's business activities

Relevant legal framework: The distinction between business profits and other income depends on the connection between the services rendered and the taxpayer's business activities. The DTAA and relevant tax principles require that business profits arise from activities integral to the business.

Court's reasoning and findings: The DRP and AO held that services related to sponsorship and third-party software were not directly connected to the appellant's business of exporting vehicles and components. The appellant's failure to submit annexures defining the services prevented a full assessment. The Tribunal noted this and directed that the DRP reconsider after examining the missing documents to determine whether the services are indeed connected to the appellant's business.

Application and conclusion: The Tribunal emphasized the importance of the nature of services to the taxability question and remanded the matter for fresh consideration with full evidence.

Issue (d): Non-production of relevant annexures and documents

Legal framework: The burden of proof lies on the assessee to produce relevant documents to establish the nature of income and taxability.

Court's observations: The DRP and Tribunal noted that certain annexures defining the services rendered were not submitted before the DRP, which was a significant lacuna. The appellant did not file any application for admission of additional evidence before the Tribunal either. The Tribunal held that the DRP should reconsider the matter after the appellant submits all relevant documents.

Conclusion: The non-production of documents was a material factor leading to remand for fresh adjudication.

Issue (e): Penalty proceedings under Section 270A

Legal framework: Section 270A of the Income Tax Act deals with penalty for under-reporting and misreporting of income.

Findings: The DRP rejected the appellant's objections against initiation of penalty proceedings as premature. The Tribunal found no reason to interfere with this view and held the ground to be without relevance for fresh adjudication.

Issue (f): General and consequential grounds

The Tribunal found the general ground to be non-specific and requiring no order. Consequential grounds were also dismissed as they depend on the outcome of the main issues.

3. SIGNIFICANT HOLDINGS

"The Panel considers it appropriate to cover such services under Article 22 of the DTAA between India and Thailand, as the services are not directly connected to the activities in which the assessee operates."

"Certain relevant portions of the agreements specifically the annexures defining the services rendered under the agreements namely, Service Agreement of Infrastructure Services, Web EDI System Maintenance Agreement, etc. were not forming part of the Paper Book submitted by the assessee."

"The Ld. DRP should revisit the issue upon examining the documents which were not placed before it as it is found to be germane to the issue involved in the matter."

"The Learned DRP is directed to finalise the issue within a period of eight months from the date of passing of this order by us after affording an opportunity of being heard to the appellant and upon considering the evidences as indicated hereinabove."

Core principles established include the necessity of complete evidence for determining the nature of income under DTAA provisions, the importance of the connection between services rendered and business activities in classifying income as business profits or other income, and the procedural requirement for reconsideration where material evidence was not previously considered.

Final determinations: The appeal is allowed for statistical purposes by remanding the matter to the DRP for fresh consideration after submission of all relevant documents. The question of taxability under Article 22 or Article 7 of the DTAA remains open pending fresh adjudication. Penalty proceedings objections are premature and dismissed. Other grounds are either dismissed or require no order.