TMI Blog2020 (2) TMI 1276X X X X Extracts X X X X X X X X Extracts X X X X ..... In the instant case, there is no dispute that the payment made was in the nature of FTS and there is no article in DTAA for taxing the FTS separately. Therefore, the payment made to the non resident required to be taxed under article 7 under the head business profits . There is no PE in India to non resident. The AO has not made out a case of having PE to non resident in India. Therefore, the payment made to non resident are not to be taxed in India as business profits. Though the department has tried to distinguish the case laws, the fact remains that in the case laws referred above, the payment was made in the nature of Fee for Technical Services and the department has also accepted that the payment made to the non resident was in the nature of FTS. We hold that the lower authorities have erred in taxing the FTS separately u/s 9(1)(vii) of the Act. Accordingly orders of the lower authorities are set aside and the appeals of the assessee are allowed. - I.T.A.No.539/Viz/2017 And 540/Viz/2017 - - - Dated:- 26-2-2020 - Shri V. Durga Rao, Judicial Member And Shri D.S. Sunder Singh, Accountant Member For the Appellant : Shri.I.KamaSastry, AR For the Respondent : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and partly through PET in Philippines to the designated bank account of the employee on monthly basis. 80% of salaries of the employees was to be paid in Philippines and the PET raises the bill on TCL it was remitted on monthly basis, along with retainer fee to PET. PET deducts amounts towards social security in Philippines, loans if any due to it from the employees, expenses incurred by PET in Philippines on behalf of the individual employee at the time of recruitment and other statutory dues. The entire amount was remitted to the designated bank account of the individual employee. The taxes if any on the salaries of the individual employees were to be borne by TCL. The Ld.AR submitted that PET does not have any office in India. All the services with respect to identifying the persons suitable for employment by TCL are performed in Philippines. The payments with respect to services rendered are received in Philippines. The persons identified officially are not the employees of PET. They were subject to the supervision and control of TCL and their services can also be terminated by TCL. Their entire salaries were borne by TCL only. Since the work is performed by PET in Philippin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 9(1)(vii) of the Act in the hands of the PET. Accordingly, issued draft assessment order u/s 144C of the Act for which the assessee has not filed objections before the Dispute Resolution Panel(DRP). Hence, the AO viewed that FTS required to be taxed, accordingly made the addition of ₹ 8,55,638/- for the A.Y.2014-15 and taxed the same at 40% at the maximum marginal rate. Similarly for the A.Y.2014-15, the AO made the addition of ₹ 64,76,103/- on identical facts. 3. Against which the assessee filed appeal before the CIT(A) and the Ld.CIT(A) dismissed the appeal of the assessee. The Ld.CIT(A) viewed that the decision of ITAT, Bangalore in the case of IBM India Pvt. Ltd. was distinguished by the AO. The assessee relied on another decision in DCIT Vs. Ford India Ltd. (2017) 49 CCH 0026 (Chennai Trib) and the Ld.CIT(A) viewed that in the case of Ford India Ltd the decision was rendered in the context of India Thailand DTAA which is not applicable to the facts of the assessee s case. In respect of ABB FZ-LLC Vs. ITO (IT) [162 ITD 89], ITAT, Bangalore, the Ld.CIT(A) viewed that the decision was rendered in the context of India-UAE DTAA which is also not applicable to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard both the parties and perused the material placed on record. There is no dispute that the payment made was in the nature of fee for technical services. There exists DTAA with the Philippines Government dated 25.03.1996 and as per the DTAA, fee for technical services was not covered in Articles 6 to 22 which deals with taxing various sources of income, therefore, the same required to be taxed either as business profits or under Article 23. Article 23 deals with incomes not arising or not dealt within the articles of the treaty which shall be taxed in the contracting state of recipient. Therefore, fee for technical services which is not covered under the treaty of DTAA required to be taxed as business profit under Article 7 of DTAA. For the purpose of taxing the business profits, there must be permanent establishment in the contracting state. The AO has not made out a case of PE in the case of the assessee. The AO relied on the decision of TVS Electronics, which was negated by the High Court. 6.1. The Ld.CIT(A) in his order taken support of Clause c of section 9(1)(vii), which is relevant for the payments made by the non resident, but not the resident. In the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the agreement then the meaning of which as per the law of the state concerning the taxes will be taken for the purpose of application of the agreement. For ready reference we reproduce Article 3(2) as under : A R T I C L E 3 General Conditions .. .. (2) As regards the application of the Agreement by a contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the laws of that State concerning the taxes to which the 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. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed under Article 7 and in the absence of permanent establishment, the business receipts are not chargeable to tax in India. For the sake of clarity and convenience, we extract relevant part of the order of the coordinate bench of ITAT from para No.11 to 15 in the case of IBM India Pvt. Ltd. which reads as under : 11. We have heard the rival submissions. There are two common issues which arise for consideration in these appeals by the revenue. The first issue is as to whether the CIT(A) was tight in holding that even if the reimbursement by IBM India to IBM Philippines are regarded as FTS , yet in so far as payments by IBM India to IBM Philippines is concerned, the same would not be chargeable to tax in the hands of IBM Philippines in India, the source country and therefore there would be no obligation to deduct tax at source u/s.195 by IBM India when it makes payment to IBM Philippines in view of the absence of article in DTAA between India and Philippines (DTA) dealing with FTS, can it be taxed in the source country as other income under Article 23(1) of the DTAA or u/s.9(1)(vii) Expln.2 of the Act as FTS has been concluded in several decisions of Tribunal in the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention. The tribunal observed that at first sight, it may appear that Articles 23 and 24(1) of the DTAA are in conflict with each other and that Article 23 is an omnibus clause covering all items of income not dealt with in Articles 6 to 22 but it was not so because Article 24(1) specifically refers only to income which are not covered under any of the clauses in the DTAA and therefore Article 24 would be rendered redundant if Article 23(1) were to be construed as covering all other incomes which are not specifically dealt with any of the clauses of the DTAA. The Tribunal observed that if one were to interpret Article 24(1) as conferring right to tax 'FTS' in accordance with the domestic law of a contracting state, which is the contention of revenue in the case on hand, then Article 23 would become redundant since it ceases to be a residuary / omnibus clause covering items of income, wherever arising, not dealt with in the foregoing Articles of the Treaty. The tribunal held that provisions of law or treaty need to be interpreted in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as the same are to be dealt with in accordance with 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. The Tribunal ultimately held that there is no merit in the contention put forth by revenue that in the absence of 'FTS Article under the India- Philippines Treaty, payments made to IBM-Philippines are taxable in India as per Article 24(1). 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, was held to be incorrect and unsustainable. 14. The Tribunal has also examined whether Article 23(1) would apply at all to the facts of the case. Article 23 begins with the words items of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would apply where such royalties or fees arise in the course of business carried on by the recipient. The Tribunal came to the conclusion that receipts were in the course of business of the Assessee and were therefore business income falling within Article 7 of the DTAA and would therefore not fall within the ambit of Article 23(1) of the DTAA. Since IBM Philippines did not have Permanent Establishment (PE) in India, the receipt was not chargeable to tax in India. 15. The aforesaid decision would squarely apply to the present case asIBM Philippines received the monies in the course of their business and did not have PE in India and therefore the receipt in question cannot be brought to tax under Article 7 of DTAA as well. In view of the above decision of the co-ordinate bench in the case of IBM India Pvt. Ltd. Vs. DDIT (l.T) (supra), we are of the considered opinion 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 India, the said income is not chargeable to tax in India. Consequently, we hold that there is no merit in the app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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