TMI Blog2016 (11) TMI 368X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dt.30.12.2015 passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short DRP ) dt.1.12.2015 for the Assessment Year 2012-13. 2. The assessee has raised the following grounds : 1. Holding that where there is no specific Article for taxability of particular payment in the Double Taxation Avoidance Agreement ('DTAA'), the provisions of the Income-tax Act, 1961 ('the Act') would be applicable (a) On the facts and in the circumstances of the case, the learned Assessing Officer ('AO') erred in law in holding and the learned Dispute Resolution Panel ('DRP') erred in law in confirming that where there is no specific Article for taxability of a particular payment in the DTAA, the provisions of the Act would be applicable. (b) On the facts and in the circumstances of the case, the learned AO erred in law in holding that the fees received (i.e. fees for technical services ('FTS')) as taxable under the Act, irrespective of there being no Article in the DTAA for taxation of FTS. 2. Penalty proceedings under section 271(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no contrary provision in the DTAA then the receipt in question is FTS as per the provisions of section 9(1)(vii) of the Act. The provisions of Income Tax Act will govern the taxation of the said income. The assessee challenged the proposed action of the Assessing Officer before the DRP however, the DRP has confirmed the view taken by the Assessing Officer. 3.1 Before us, the learned Authorised Representative of the assessee has submitted that there is no dispute that the Indo-UAE DTAA does not contain any provision for taxation of FTS. Therefore the receipt in question will be treated as business income of the assessee and in the absence of PE in India the same is not chargeable to tax in India. He has further submitted even otherwise as per Article 22 of the Indo-UAE DTAA any item of income falling in the category of other income not specifically deal with by the other Article of the Treaty shall be taxable only in the country of recipient or the payee. Hence even if it is assumed that the income received by the assessee in the nature of other income the same should be taxed in UAE and not anywhere. When the DTAA between India and UAE has not classified an income as Fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a beneficial contrary provision is made in the DTAA. When the tax liability is imposed by the Act, the DTAA may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In the case of any conflict between the provisions of DTAA and the Act the provisions of agreement would prevail over the provisions of the Act in view of the provisions of Section 90(2) of the Income Tax Act. Thus the ld. DR has submitted that where there is no conflict between the Act and the DTAA in respect of Fees for Technical Services then in the absence of any such provision in the DTAA the provisions of the Act would be applicable for charging the said income to tax. He has referred to the judgment of Hon'ble Supreme Court in the case of CIT Vs. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC). The ld. DR then relied upon the decision of the Chennai Bench of the Tribunal in the case of DCIT Vs. TVS Electronics Ltd. 52 SOT 287 (Chennai) and submitted that the Tribunal has held that when DTAA between India and Mauritius did not provide for taxing Fees for Technical Services in such situation the provisions of the Act would have been considered and applied. He ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial to the assessee is concerned there is no quarrel on this point that in case of any conflict between the provisions of agreement and the Act, the provisions of the agreement will prevail over the provisions of the Act as mandated by the provisions of section 90(2) of the Act. The income which is classified as royalty or Fees for Technical Services if derived from the regular business activities of the assessee then the said income is inherently regarded as business income for the purpose of taxation under the Act as well as tax treaty. However these two categories of income are separately classified for the purpose of charging to tax. Once the DTAA does not recognize any income as Fees for Technical Services or royalty then classification of the said income has to be as per the other provisions of the DTAA. There is no dispute that in the case of the assessee the income derived by the assessee is from providing services to the Indian counterpart which is a regular business activity and therefore the said receipt has to be recognized under the provisions of the DTAA as business income because the DTAA does not contain any provision to recognize or tax any income in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red into on 21.3.1994. The Protocol to this Treaty was entered into on 12.1.1996. The Govt. of India by virtue of the powers conferred by section 90 of the Act, issued Notification No.GSR 173(E) dt.2.4.1996 directing that all the provisions of the DTAA shall be given effect to in the Union of India. This Treaty is divided into various Articles :- Article 1 - Provides that this convention shall apply to persons who are residents of one or both of the contracting states; Article 2 deals with taxes covered within the scope of the convention for the purposes of avoiding double taxation; Article 3 - deals with the definition of certain taxes; Article 4 deals with the definition of the term resident of a contracting state and Article 5 - deals with the meaning of Permanent Establishment. Article 6 to 22 - deal with the distributive rules dealing with classification of income into various heads and the right to tax such income in India or in the Philippines or by both countries. These Articles deal with the classification of income into different heads like income from immovable property business profits, air transport, shipping, dividends, interest, loyalties, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a resident of the Philippines, in respect of profits or income arising in India, which has been subjected to tax both in India and the Philippines, shall be allowed as a credit against Philippine tax payable in respect of such profits or income provided that such credit shall not exceed the Philippine tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in India. 5. For the purpose of the credit referred to in paragraph 4, the term Indian tax payable shall be deemed to include any amount which would have been payable as Indian tax for any assessment year but for an exemption or reduction of tax granted for that year or any part thereof by the special incentive measures under the provisions of the Income Tax Act,1961 (43 of 1961), which are designed to promote economic development, or which may be introduced hereafter in modification of, or in addition to, the existing provisions for promoting economic development in India. Article 24(1) provides that the laws in force in either of the contracting sates shall continue to govern the taxation of income in the respective contracting states except where provisions to the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s brought into force has directed that all the provisions of the convention shall be given effect to in the Union of India. In this view of the matter, no redundancy can be attributed to either Article 23 or Article 24(1) of the India-Philippines DTAA. 7.3.5 The contrast or clash between Article 23 and Article 24(1) can be avoided if the scope, context and setting of these Articles are understood in their proper perspective. In the case of BNB Paribas SA V DCIT (2013) Tax Corp (AT) 32700, the purpose of Article 25(1) of the India-UAE DTAA which is similar to Article 24(1) of the India-Philippines Treaty was explained by the Mumbai Tribunal. The relevant portion of the said decision is extracted as under : 12. A lot of stress has been given by the department and the learned DR that such an exception already existed by virtue of Article 25(1) which provides that, The laws in force in either of the Contracting States shall continue to govern the taxation of income and capital in the respective Contracting States except where express provisions to the contrary are made in this Agreement. Article 25 which is similar to Article 23 of other treaties, deals with the Elimina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income and tax thereon in accordance with the domestic laws of each contracting state and is not part of Articles 6 to 23 which deal with the classification of income into different heads. 7.3.7 Article 24(1) also contains an exception which provides that where provisions to the contrary are made in the DTAA, the laws in force in either of contracting states would not govern the taxation of income which also operates in field of computation of doubly taxed income and tax thereon as per domestic laws. The reason for the same can be found in paras 3 5 of Article 24 which define the term Philippine tax payable and Indian tax payable respectively. As per para 3 of Article 24, Philippine tax payable shall be deemed to include the amount of Philippine tax which would have been paid if the Philippine tax had not been exempted or reduced in accordance with this DTAA and Special incentive laws designed to promote economic development in the Philippines effective on the date of the DTAA or which may be introduced in future in the Philippine taxation laws in modification of or in addition to, the existing laws. Similarly in para 5 of Article 24 in the case of Indian tax payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle under the India-Philippines Treaty, payments made to IBM-Philippines are taxable in India as per Article 24(1). As explained above, Article 24 of the India-Philippines DTAA deals with the elimination of double taxation and in our view has no applicability regarding taxation of an item of income, FTS in this case, dealt with under the DTAA. Consequently, the findings of the authorities below that the payments made to IBM Philippines are taxable under section 9(1)(vii) of the Act on the basis of Article 24(1) of the India-Philippines DTAA, is incorrect and unsustainable. 8.1.1 Having dealt with the scope and the meaning of Article 24(1) of the India-Philippines DTAA, the next issue for consideration in the nature of payments made by the assessee to IBM-Philippines under the India-Philippines DTAA. It is a settled principle that the assessee can rely on the provisions of the DTAA if they are more beneficial that the Income Tax Act, 1961 and inter alia the decision of the Hon'ble Apex Court in the case UOI V Azadi Bachao Andolan (2003) 263 ITR 706 establish the above principle. 8.1.2 In the case on hand, as per the material on record, the payments to IBMPhilippines wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so important to bear in mind the fact that article 23 begins with the words items of income not expressly covered by provisions of Article 6-22. Therefore, it is not the fact of taxability under article 6-22 which leads to taxability under article 23, but the fact of income of that nature being covered by article 6-22 which can lead to taxability under article 23. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting state for the use of an immovable property in a third state, and damages (other than for loss of income covered by articles 6-22) etc. In our humble understanding, therefore, article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and the income from consultancy charges on is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied. Learned Departmental Representative s argument, emphatic and enthusiastic as it was, lacks legally sustainable merits and is contrary to the scheme of the tax treaty. While dealing with the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Oxford Dictionary (Thumb Index Edn.) one of the meanings given is : be concerned with (a thing) in any way; busy or occupied oneself with, esp. with a view to discuss or refutation. The following meaning given in the New Oxford American Dictionary may also be noted : take measures concerning (someone or something) take or have as a subject; discuss. 9.1 The applicant s counsel submitted that an item of income can be said to have been dealt with in an article of the Treaty only if it defines its scope as well as allocates the right to tax such income between the two Contracting States. Mere exclusion of shipping business profits from article 7 does not amount to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression dealt with does not necessarily mean that there should be a detailed or elaborate treatment of the subject. 10. Clearly, therefore, the income from consultancy services, which cannot be taxed under article 7, 12 or 14 because conditions lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g out of payments made by the assessee to IBMPhilippines are not chargeable to tax in India in the absence of a PE of IBMPhilippines in India. Since the payments made to IBM-Philippines partake the character of business profits and covered and dealt with by Article 7 of the DTAA, Article 23 thereof has no application even though the said business profits are not chargeable to tax in India in the absence of a PE of IBMPhilippines in India. In the absence of a specific Article dealing with FTS under the India-Philippines Treaty, the aforesaid payments to IBM-Philippines for services rendered in the course of its business has to be considered and examined as business income only. 8.1.6 The aforesaid finding rendered by us that in the absence of an Article dealing with FTS , payments made for services rendered in the course of business would be covered by Article 7 of the India-Philippines Treaty dealing with Business Profit , and not by Article 23 Other Income is supported by the following judicial precedents :- The case of Christiani Nielsen Copenhagan V First ITO (1991) 39 ITD 355 (Bom) wherein at page 8 thereof it was held as under : . The fees for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishment; and (b) income or profits which are dealt with separately in other articles of the agreement. That apart, there can be no doubt, whatsoever that the supply of skilled labourers to other companies is in the nature of a business activity. In its application dated April, 4, 1995, under section 197, the applicant has stated that it is engaged in the business of supplying skilled labour for execution of offshore projects for jacket and riser installations. The contract with HHI was entered into in the course of its business. No details of assessment year contracts of similar nature entered into by the applicant with other parties have been furnished. Still, the very nature of the contract is such that it spells out a business. The assessee is to engage skilled labour and supplies the labourers to other companies requiring such labour. It gets paid on the basis of certain rates per unit of labour employed and, by effecting economies in the scale of wages it offers to its employees, earns a margin of profit for itself. This is clearly in the nature of a business and Article 7 will be attracted. 13. The fact that the remuneration paid to the assessee may be in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems of income may also be taxed in the contracting state where the income arises. This article was also referred to in the order of the Assessing Officer and therefore cannot be termed as a new plea. It applies to items of income which have not been expressly dealt with in the other articles of the treaty. However, Article 7 of the treaty applies to the present case as it deals with business profits . The amount received by PBAT for sale of drawings and designs having been held to represent business profits they will fall under Article 7 which rules out the applicability of Article 22. In addition, the basic principle applies, viz., that the double tax avoidance agreement cannot be construed as a taxing enactment. In Golf in Dubai V DIT (2008) 306 ITR 374 (AAR) (placed at pages 47 to 64 of compilation of cases), it was held that in the absence of Article dealing with FTS under the India-UAE DTAA, the management fees would be covered under Article 7 and not under Article 22 dealing with Other Income . In Channel Guide India Ltd. V CIT (2012) 153 TTJ 432 (Mum) (placed at pages 31 to 46 of compilation of cases), at para 23 it was held as under :- 23. At the time of hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench of this Tribunal in Wifi Networks P. Ltd. (supra) and Exotic Fruits P. Ltd. V ITO in ITA Nos.1008 to 1013/Bang/2012 dt.4.10.2013, held that in the absence of the Article dealing with FTS under the India-UAE Treaty, payments made to services rendered by the UAE resident would fall under Article 7 Business Profits and not under Article 22 - Other Income and in the absence of a PE of the UAE resident in India, the said payments are not exigible to tax in India under the India UAE DTAA. 8.1.8 Similar situation, as in the case on hand, was before the Hon'ble Madras High Court in Bangkok Glass Industry Co. Ltd. (supra) wherein in the absence of an Article for FTS in the India - Thailand DTAA, revenue sought to assess the FTS in the hands of the Thailand Company u/s.9(1)(vii) of the Act or in the alternate under Article 22 of the India Thailand Treaty. The Hon'ble Madras High Court, rejecting the contentions of revenue, held that the FTS earned by the Thailand Company in the course of business was covered under Article 7 of the India Thailand DTAA and in the absence of a PE in India, the said income was not chargeable to tax in India. The Hon'ble Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT V TVS Electronics Ltd. in ITA No.811/MDS/2010. 9.1.2 In PILCOM V ITO - (77 ITD 218) (Cal), the contention of the assessee was that payments made to non-residents are covered under Article 22 of the DTAA dealing with Other Income and hence the said payments are taxable only in the other country but not in India. The Calcutta Bench of the ITAT however held that the said payments are covered by Article 17 and not by Article 22. In context, the Hon'ble Bench held that there is no conflict in the provisions of the Act and the DTAA and therefore it was held that the payments made by the assessee are taxable in India under Article 17 of the DTAA. In BCCI V DIT 96 ITD 263 (Mum), the Mumbai Bench of the ITAT considered the question as to whether the CIT can revise the order passed u/s.195 of the Act under the revisionary provisions of section 263 of the Act. Further, the decision in PILCOM case (supra) was followed by the Mumbai Bench in concluding that the guarantee money paid to non-resident cricket associations are chargeable to tax under Article 17(1) of the Treaty. The above two decisions (supra),in our view, have no relevance to the case on hand since the facts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said method alone is required to be followed, irrespective of the provisions of the Income Tax Act and it is only when there is no specific provision in the DTAA to the contrary that the domestic law will get attracted and govern the taxation of such income. The facts, arguments and the questions before the Hon'ble Court were different from that of the present case, and the observation of the Hon'ble Court were with regard to the computation of income and not classification of a particular category of income under the DTAA. Even otherwise, in the case on hand, we have already held that the payments to IBMPhilippines would be covered by Article 7 of the India-Philippines DTAA and the absence of PE of IBM-Philippines, the said payments are not exigible to tax in India. In this view of the matter, the above decision does not help the case of revenue. In DCIT V TVS Electronics Ltd., in ITA No.811/MDS/2010 dt.25.5.2012, the ITAT, Chennai Bench held that in the absence of FTS clause in the India- Mauritius DTAA, the said income is exigible to tax u/s.9(1)(vii) of the Act. The recent decision of the Hon'ble Madras High Court in the case of Bangkok glass Industry Co. Ltd ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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