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2016 (11) TMI 368 - ITAT BANGALORE

2016 (11) TMI 368 - ITAT BANGALORE - TMI - Taxability in India - whether the Fees for Technical Services is chargeable to tax in India when Indo-UAE Double Taxation Avoidance Agreement (‘DTAA’) does not contain a clause/Article for taxation of Fees for Technical Services - P.E. in India - Held that:- In the absence of the provision in the DTAA to tax Fees for Technical Services the same would be taxed as per the Article 7 of the DTAA applicable for business profit and in the absence of PE in Ind .....

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the assessee is directed against the assessment order 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 provisi .....

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w 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)(c) The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. Relief (a) The appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. (b) The appella .....

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e Taxation Avoidance Agreement ( DTAA ) does not contain a clause/Article for taxation of Fees for Technical Services. The assessee is a foreign company incorporated in UAE. The assessee has entered into a service agreement with ABB India Ltd. for rendering certain services. The assessee has not offered to tax the fees from ABB India Ltd. on the ground that the provisions of DTAA which does not have a clause on Fees for Technical Services are more beneficial than the corresponding provision of I .....

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) in India the receipts are not taxable in India. The Assessing Officer was of the view that when the DTAA is silent then the provisions of the Income Tax Act has to be considered and applied in respect of the income in question. Since the term FTS appears has not been defined in DTAA therefore the expression defined in the Income Tax Act would be attracted. Only in case of conflict between the provisions of DTAA and Income TAx Act the specific provisions made in the DTAA would prevail over the .....

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ed 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 .....

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to tax a particular income then the provisions of domestic law cannot be invoked to tax the said income. The learned Authorised Representative has relied upon the decision dt.24.1.2014 of co-ordinate bench of this Tribunal in the case of IBM India Pvt. Ltd. Vs. DDIT in IT(IT)A Nos.489 to 498/Bang/2013 and submitted that an identical issue was considered by this Tribunal regarding the chargeability to tax of the income in the nature of FTS when there is no such provision of taxing for Fees for Te .....

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diture. The learned Authorised Representative has then relied upon the judgment of Hon'ble Madras High Court in the case of Bangkok Glass Industry Co. Ltd. Vs. ACIT 215 Taxman 116 and submitted that the provisions regarding other income under the DTAA can be applied only when the income does not fall in the category of the income which is taxable under the specific provisions of the DTAA. Thus the Hon'ble High Court has held that the provisions of other income in the DTAA which considere .....

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ng under the provisions of section 4 & 5 of the Income Tax Act which provides for taxation of income of assessee chargeable to tax then the benefit of DTAA is available to the assessee only when 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 agree .....

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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 has relied upon the orders of the authorities below. 5. In a rejoinder the ld. AR has submitted that Secti .....

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s Ltd. (supra). 6. We have considered the rival submissions as well as the relevant material on record. There is no dispute as regards the nature of receipt by the assessee from ABB India Ltd. is Fees for Technical Services. The Assessing Officer has accepted the nature of receipt being Fees for Technical Services. It is also not in dispute that the Indo-UAE Treaty does not contain any provision/Article to tax Fees for Technical Services. Article 3(2) provides that if any term is not defined in .....

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Agreement applies. As it is clear that when a term is used in the agreement (DTAA) but has not been defined therein then the meaning of the said term unless the context otherwise requires shall have the meaning as defined under tax statute of the contracting state. The need of importing the meaning of the term from the tax statute arises only when a term is provided in the agreement but the meaning of the same has not been defined therein. Therefore the question arises is that when a term is not .....

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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 .....

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ices. The absence of the provision in the DTAA is not an omission but is a deliberate mutual agreement between the contracting states not to recognize/classify any income as Fees for Technical Services for taxation. Therefore the intention for not incorporating any provision in the DTAA is not to tax an income under the category of Fees for Technical Services. Once the income chargeable to tax as per the DTAA are categorized by excluding the Fees for Technical Services then the scope of taxing t .....

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he facts of the case and the nature of services provided by IBM-Philippines. The issue for our consideration is whether the payments made by the assessee to IBM-Philippines are chargeable to tax in India as FTS u/s. 9(1)(vii) of the Act in the absence of Article dealing specifically with FTS under the India-Philippines DTAA. The assessee contends that in the absence of an FTS clause in the DTAA, Article 7 thereof would be applicable since IBM-Philippines is providing services in the course of it .....

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, as per Article 24(1) thereof, the taxability of the said payments would be governed by the domestic laws i.e. section 9(1)(vii) of the Act and consequently these payments are chargeable to tax in India and liable for TDs u/s.195 of the Act. 7.3.2 It would be pertinent to first consider the scheme / layout of the India- Philippines DTAA which was entered 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 .....

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; 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, d .....

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h Article 23. 7.3.3 Article 24 of the DTAA deals with the elimination of double taxation. The said Article is extracted and reproduced hereunder : ARTICLE 24 ELIMINATION OF DOUBLE TAXATION 1. The laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention. 2. The amount of Philippine tax payable, under the laws of the Philippines and in accordance with th .....

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ther, where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first instance against income tax payable by the company in India and as to the balance, if any, against surtax payable by it in India. 3. The term 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 Convention and the special incentive laws desi .....

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ed 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 assessm .....

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ion of income in the respective contracting states except where provisions to the contrary are made in the convention. At first sight, it may appear that Articles 23 and 24(1) of the DTAA are in conflict with each other. It may be argued that if Article 23 is an omnibus clause covering all items of income not dealt with in Articles 6 to 22, then Article 24(1) would be rendered redundant for the reason that there would be no income left to be governed by Article 24(1) if all the residuary income .....

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ng the provisions of a law or Treaty. In CIT V Hindustan Bulk Carriers (2003) 259 ITR 449, the Hon'ble Apex Court, referring to its earlier decisions on the approach to be followed in case of conflicting provisions, held as under at para 28 thereof :- The court must ascertain the intention of the Legislature by directing its attention not merely to the clauses to be construed but to the entire statute; it must compare the clause with other parts of the law and the setting in which the clause .....

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ion 90 of the Act, the above principles explained by the Hon'ble Apex Court are applicable in interpreting the provisions of a Treaty to avoid conflict between various Articles therein. Para 5.3 of the written submissions of the learned Departmental Representative refer to Article 31 of the Vienna Convention as per which a Treaty has to be interpreted in good faith. The Central Government by Notification No.173(E) dt.2.4.1996 by which the India-Philippines DTAA was brought into force has dir .....

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e 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 exc .....

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er of the states. Various countries in their agreements based on different models have adopted different method of credit of taxes or deductions or exemptions to eliminate the incidents of double taxation in their domestic laws. Article 25 per se does not provide any rules on the mechanism for computing relief. Hence for this purpose, the domestic laws may have to be referred. Interpretation of Article 25 that it extends to Article 7 for applicability of domestic law will not be correct. If a co .....

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he elimination of double taxation becomes clear if Article 24 is read as a whole. Article 24(2) provides credit for the amount of Philippine tax payable by a resident of India against the Indian tax payable in respect of profits or income arising in the Philippines which has been subjected to tax in both India and the Philippines i.e. doubly taxed income . Article 24(3) deals with the meaning of Philippine tax payable . Article 24(4) of the DTAA provides for credit for the amount of Indian Tax P .....

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e field of computation of doubly taxed 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 .....

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es 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 under the provisions of the Income Tax Act, 1961. Normally, income exigible to tax in the source country but exempt in the country of residence cannot be regarded as doubly taxed income and consequently credit for the same may not be available in the country of residen .....

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ere the exception part of Article 24(1) does not apply, the computation of doubly taxed income and tax there on are governed by the provisions of the laws in force in either contracting state. 7.3.8 In this view of the matter, both Article 24(1) and the exemption contained therein operate in the field of computation of doubly taxed income and tax thereon which is indispensible for the purpose of elimination of double taxation. Para 2 of CBDT Circular NO.333 dt.2.4.1982 exemplifies what is stated .....

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h Article 6 to 23 of the DTAA. Even though the India-Philippines DTAA does not have an Article dealing with FTS , its taxation would be governed by Articles 7 or Article 23 as the case may be, depending on the facts and circumstances of each case. If Article 24(1) of the DTAA is interpreted as dealing with taxation of items of income not dealt within the foregoing Articles 6 to 23 of the India-Philippines DTAA, as per domestic laws, it would render Article 23 thereof redundant. 7.3.9 In view of .....

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he 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 provis .....

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ection with the project with P & G Home Products India Ltd. It is submitted that the services by IBM-Philippines also included services provided to the assessee as part of internal arrangement in connection with Sunrise Project . 8.1.3 As per Article 7(1) of the India-Philippines DTAA, business profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state though a PE situated therein and in that ev .....

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nts made by the assessee to IBM Philippines. Article 23, dealing with Other Income states that items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention / DTAA i.e. Article 6 to Article 22, shall be taxable only in that State. An item of income is said to have been dealt with by other Articles of this DTAA if such income can be classified as taxable or not under any of the Articles 6 to 22. This aspect has been considered .....

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conditions laid down therein are not satisfied cannot be taxed under Article 23 either. Explaining the meaning of the expression not dealt with it was held at para 9 thereof as under : 9. It is also 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 .....

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r 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 scope of residuary article of income under the tax treaties, and in support of the above conclusions, we ma .....

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of income in the foregoing articles, business profits into which the shipping income falls has been dealt with under article 7. Profits from the international operation of ships are only a species of business profits just as the profits from international air transport. The latter is dealt with separately in article 8 for the reason that it does not fall in line with the scheme of taxation of business profits under article 7. Exclusive right is given to the State in which the enterprise resides. .....

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come Tax Act). We are of the considered view that a particular species of Income which is specifically referred to in article 7 and deliberately left out of its genus, namely business profits, cannot be said to be an item of income not dealt with under article 7. The expression deal with is a comprehensive expression having different shades of meaning. In the New Chambers Thesaurus, the meanings of deal with are given thus : 1. deal with a situation, attend to, concern, see to, manage, handle, t .....

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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. .....

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ed. Coming back to the case on hand, it is not disputed that the services provided by IBM-Philippines were in the nature of pay roll related services, data management services, benefits administration, balance sheet reconciliation, generation of reports, stock option administration, etc. in connection with the contract with Proctor & Gamble (P & G). The services by IBM-Philippines also included services provided to the assessee as part of internal arrangement in connection with the Sunri .....

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in the course of its business for providing services to the assessee are charged with a profit percentage mark up of 5%, as is evident from para 2.0 on page 3 of the order passed u/s.201(1) of the Act. Admittedly the learned CIT (Appeals) at para 55 of his order has held that the transactions entered into between the assessee and IBM-Philippines were performed in the course of its business. The learned Departmental Representative while not disputing this fact, contends that the payments to IBM-P .....

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of IBM-Philippines in India, the assessee both in proceedings before the Assessing Officer u/s.201 of the Act and before the learned CIT (Appeals) has submitted that IBM-Philippines does not have a PE in India, which fact has not been controverted by both these worthies. Consequently, as per Article 7(1) of the India-Philippines Treaty, the business profits arising out of payments made by the assessee to IBMPhilippines are not chargeable to tax in India in the absence of a PE of IBMPhilippines i .....

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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 .....

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nd. In the general sense of its meaning, it would be a part of the industrial and commercial profits and, therefore, it cannot be said that there is no specific provision for dealing with such kind of profit in AADT …. In Tekniskil (Sendirian) Berhard V CIT (1996) 222 ITR 551 (AAR), revenue argued that in the absence of an Article dealing with FTS in the India - Malaysia DTAA (as it then existed), the business profits of a non-resident are taxable as FTS u/s.9(1)(vii) of the Act. The Auth .....

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ed by the TSB under the agreement can be described as fees for technical services though that specific expression does not find a place in the contract. But this makes no difference because that description is not sufficient to take it out of the purview of Article 7 which makes the income or profits of an enterprise of a State taxable only in that State, unless the enterprise carries on business in other State through a permanent establishment situated therein. To say that TSB is not carrying o .....

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lt 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 .....

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arly 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 technical fee within the scope of section 9(1)(vii) does not make a difference. Fees of this nature can be earned in business or otherwise. If earned in the course of business, they constitute income from business. There is no incompatibility between recognizing the receipts as royalties or technical fees and also looking upon them as the profits of a .....

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e clear that the provisions of the business clause of the treaty (Article 7 here) will govern where such technical fees are earned in the course of business with a permanent establishment in the State in question. See for e.g., the DTAA s between India and Australia (Article 11(41), Canada [Article XIII (SC)] or USA [Article 12(6)]. These indicate that even where royalties and fees for technical services receive separate treatment under a DTAA, it is the Article relating to computation of busine .....

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icle 22 dealing with Other Income and in the absence of a PE in India, the business profits of the non-resident are not exigible to tax in India. The relevant observations in this decision at para 20 thereof are extracted hereunder : 20. The learned CIT, DR drew our attention to Article 22 of the treaty which deals with Other Income . It says that items of income of a resident of a contracting state, wherever arising, not expressly dealt with in the foregoing articles maybe taxed in that state. .....

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ng 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 .....

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the Treaty and the same is chargeable to tax in India as Other Income. We find it difficult to accept this contention of ld. DR. M/s. SSA to whom the payment in question was made by the assessee is a licnesee of certain satellite owned by Government of Thailand and it is in the business of providing TV Channels facility of broadcasting their programmes through the transponders located in the said satellite. For the said facility, M/s. SSA recovers service charges from TV Channels like the amount .....

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le of the Treaty. In PT Mckinsey Indonesia V DDIT (2013) 7 Tax Corp (AT) 31369 (Mum) (placed at pages 25 to 30 of compilation of case laws), at para 8 thereof it was held as under :- 8. …..As far as taxing the receipts under the head Other Income is concerned, as held by the penal, we are of the opinion that residuary head is analogous to sections 56-57 of the Act. If a certain receipt cannot be taxed under any other head, only then the sections dealing with Income from Other Sources , co .....

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kniskil (Sendirian) Berhard V CIT (1996) 221 ITR 551 (AAR); Channel Guide India Ltd. (supra), the co-ordinate 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 o .....

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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 Madras High Court also held that the income of the Thailand Company was not chargeable to tax under Article 22 of the India - Thailand Treaty. The relevant portions of the Court judgements at paras 19 and 2 .....

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amount cannot be brought under art. 7. In the light of the above, we have no hesitation I confirming the order of the Tribunal. 20. As far as the order in art. 22 is concerned, we do not find any justifiable ground to uphold this portion of the order after the discussion on the extent of income falling for consideration under royalty as defined under art. 12 and the amount paid as towards technical services falling for consideration under art. 7. Since the said income does not fall as miscellane .....

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he Act. 9.1.1 On a perusal of the orders of the authorities below, it is seen that the Assessing Officer and the learned CIT (Appeals) have placed reliance on the following decisions in support of the contention that in the absence of Article dealing with FTS under the DTAA, the income of the non-resident is exigible to tax under the provisions of domestic law : i) PILCOM V ITO - 77 ITD 218 (Cal); ii) BCCI V DIT - 96 ITD 263 (Mum); iii) A.P. Moller, Maersk Agency India (P) Ltd. V DCIT (2004) 89 .....

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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 provisio .....

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with the taxability of FTS in the absence of a similar clause in the DTAA. Further, the Benches did not conclude that the impugned payments are taxable u/s.9(1)(vii) of the Act. Rather, in the above cases, the tax implications were examined form the Treaty perspective and it was concluded that the payments are chargeable to tax under Article 17 of the DTAA which coincide with the tax implications under the I.T. Act, 1961. Therefore, the above two decisions do not further the case of revenue. 9.1 .....

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e it is clear that the above decision is factually different from the case on hand and hence not applicable. In IAC V Diamler Benz AG West Germany (1991) 36 ITD 508 (Bombay), it was held that royalty income is excluded from the purview of Industrial and Commercial Profits under Article III of the India - Germany DTAA (as it then existed) and consequently the said income is chargeable to tax under the provisions of the I.T. Act, 1961. In the case on hand, while, there is no Article dealing with F .....

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in India under any of the provisions of the Income Tax Act, 1961 in view of the India-Malaysia DTAA. In this context, the Hon'ble High Court held that wherever the DTAA provides for a particular mode of computation of income, the 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 fac .....

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le 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 (supra) squarely deals with the issue in appeal in the case on hand and .....

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Mauritius DTAA or the India-UAE DTAA. It was contended that it was necessary for the DTAA negotiation documents, minutes of the meeting in relation to the India-Philippines DTAA to be referred to in order to understand the reasons for not having an Article dealing with FTS in the India-Philippines DTAA. The learned Departmental Representative however except for making this claim, did not submit the above referred documents for our consideration in the course of hearing of the case and hence we a .....

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