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Income Tax Officer (International Taxation) -I, Ahmedabad Versus Susanto Purnamo and Vica-Versa

Nature of services rendered - whether were professional services in nature - what constitutes ‘independent personal services’ for the purpose of article 15 of Indo-US tax treaty and whether the services rendered by the assessee can fall in this category of services? - Held that:- Software development service rendered by an individual, which essentially requires predominantly intellectual skill, dependent on individual characteristics of the person pursuing software development, and based on spec .....

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, as we have noted above, that test is satisfied on the facts of this case. While dealing with the scope of services which are covered by article 15, it is important to bear in mind the fact that there could indeed be overlapping effect of the scope of services covered by the other articles but as long as the services are rendered by an individual or group of individuals, generally rendition of such services is covered by article 15. The exclusion clause set out in article 12(5)(e) typically exe .....

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not arise. As a corollary to our finding that the services in question are in the nature of professional services, and by the virtue of exclusion clause in article 12(5)(e), which provides that the income from professional services rendered by an individual or group of individuals (other than a company) cannot be subjected to tax under article 15, the consideration for these services cannot be taxed under article 12(4) either. Revenue’s case for taxability under article 12(4) is thus clearly un .....

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2014 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2011-12, on the following grounds: i. The learned CIT(A) has erred on facts and in aw that the nature of service rendered by the non-resident was independent personal service, and that Article 15 of the India USA DTAA is applicable. ii. The learned CIT(A) has also erred grossly in concluding that individual professionals can only be consultants and cannot render technica .....

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business in the name of his sole proprietorship concern by the name of Transforme , in the USA. During the relevant previous year, the assessee has provided certain services to Fuse+Media Pvt Ltd (FMPL, in short), a business entity based in India. As to the nature of services rendered by the assessee, these are stated to be as follows: Transforme has been requested to provide a software development service to design, build and maintain a complete video streaming website and all of its administr .....

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vices rendered to FMPL, the assessee has not paid any taxes in India in respect of the same. The claim of the assessee, as noted by the Assessing Officer, was that the provisions of the India US Double Taxation Avoidance Agreement [(1991) 187 ITR (Stat) 102; Indo-US tax treaty, in short] will override the provisions of the Income Tax Act in this case, since the provisions of the treaty are more favourable to the assessee and in view of the specific provision to that effect under section 90(2) of .....

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ught to tax in India, unless the assessee has a fixed base regularly available to him in India. It was also contended that the assessee did not have any fixed base available to him in India for rendition of these services. The assessee further contended that even if income of the assessee is to be construed as fees for included services rendered by him to the Indian entity, the same shall not be taxable under article 12 of Indo US tax treaty, on the facts of this case, since the services so rend .....

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Officer had no issues with the treaty protection available to the assessee, his case was that, on the facts of this case, the assessee was not protected by article 15 inasmuch as the services rendered by the assessee were not in the nature of independent services and that the make available condition was fulfilled on the facts of this case inasmuch as the mere fact that such a service has enabled the user of the service in applying the technology (not owning it) is sufficient to demonstrate tha .....

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that the provisions of article 12(6) specifically state that in case the services provided by an individual which are in the nature as dealt with in article 15, then the provisions of article 15 would prevail over article 12 , that it is also apparent from the facts of this case that the appellant has rendered engineering services to its customer, namely FMPL and that therefore, in my view, the provisions of Article 15 would be applicable . He thus reversed finding of the Assessing Officer in t .....

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ld the same to be infructuous. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 5. There is no dispute that the assessee before has the protection of Indo-US tax treaty. There is also no, nor there can be any, dispute that in the event of the provisions of the applicable tax treaty being mo .....

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ax treaty. While the case of the Assessing Officer is that the assessee is taxable under section 12(4) of the Indo-US tax treaty, learned CIT(A) has granted the impugned relief on the basis that the assessee has rendered professional services which can be taxed, if at all, under article 15, but then since taxability under article 15 fails on the facts of this case, the income in the hands of the assessee cannot be taxed at all. Let us take a look at the relevant treaty provisions, i.e. article 1 .....

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services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article (other than services described in subparagraph (b) of this paragraph ): (i) during the first five taxable years for which this Convention has effect, (A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the .....

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cillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. 3. The term royalties' as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for u .....

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er than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 or Article 8. 4. For purposes of this Article, fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the applicati .....

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ty other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined i .....

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es for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business profits) or Article 15 (Independent personal services), as the case may be, shall apply. 7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for incl .....

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is situated. (b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State. 8. Where, by reason of a special relationship between the payer and the beneficial owne .....

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ome derived by a person who is an individual or firm of individual (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State : (a) if such person has a fixed base regularly available to him in the other Cont .....

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vities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. 6. A careful look at the above treaty provisions would show that in the event of our coming to the conclusion that the services rendered by the assessee are in the nature of independent personal services under article 15, it is wholly academic whether or not these services are covered by article 12 and satisfy the make available clause. It is so for the reason that (a) it is uncontroverted claim of the asse .....

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rvices as defined in Article 15 (Independent personal services) , once an amount is found to be of such a nature as can be covered, in an appropriate case, by article 15, the same shall stand excluded from the ambit of article 12. As we take note of this treaty provision, we may mention that the learned CIT(A) has referred to article 12(6) in support of this proposition, and to that extent he is not right because article 12(6) refers to a situation in which the services are rendered through the .....

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12(5)(e). 7. The crucial question, therefore, is as to what constitutes independent personal services for the purpose of article 15 and whether the services rendered by the assessee can fall in this category of services. This issue, regarding the scope of article 15 of Indo-US tax treaty, came up for consideration, almost one and a half decade ago, before a coordinate bench of this Tribunal in the case of Graphite India Ltd Vs DCIT [(2002) 86 ITD 384 (Kol)]. Speaking through one of us, i.e. the .....

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Law Lexicon edited by Justice Y.V. Chandrachud (1997 Edition) defines 'profession , inter alia, as involving 'the idea of an occupation requiring either purely intellectual skill or if any manual skill, as in painting and sculpture or surgery, skill controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities . This definition, barring the words "as d .....

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e one carried on by an individual by his personal skill, intelligence and dependent on individual characteristics . Black s Law Dictionary (5th Edition) defines profession as 'a vocation or occupation requiring special, usually advanced, education and skill e.g. in law and medicine and observes that 'the labour and skill involved in a profession is predominantly mental or intellectual, rather than physical or manual . The school of thought thus emerging from these deliberations is that, .....

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ent service rendered by an individual, which essentially requires predominantly intellectual skill, dependent on individual characteristics of the person pursuing software development, and based on specialized and advanced education and expertise, is also a professional service. As regards the objection of the Assessing Officer that software development is not specifically covered by article 15(2), as evident from the opening words of this provision to the effect the term professional services&# .....

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as long as the services are rendered by an individual or group of individuals, generally rendition of such services is covered by article 15. The exclusion clause set out in article 12(5)(e) typically exemplifies this approach. We may, in this regard, also refer to the observations made by a coordinate bench of this Tribunal, in the case of Linklaters LLP Vs ITO [(2011) 9 ITR Tri 217 (Mum)], as follows: 105. Learned counsel has also contended that the professional services can only be taxed unde .....

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following observations made in the UN Model Convention Commentary: "The Group discussed the relationship between art. 14 and sub-para 3(b) of art. 5. It was generally agreed that remuneration paid directly to an individual for his performance of activity in an independent capacity was subject to the provisions of art. 14. Payments to an enterprise in respect of the furnishing by that enterprise of the activities of employees or other personnel are subject to arts. 5 and 7. The remuneration .....

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ement with this analysis in the UN Model Convention Commentary. We are thus of the considered view that, in a situation like the one that we are in seisin of, i.e. in which specific provisions for professional services or independent personal services or included services exist under art. 15, when services are rendered by the enterprise, art. 5(2)(k) will come into play, and when services are rendered by an individual, art. 15 will find application……. 9. The applicability of articl .....

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