2010 (3) TMI 881 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of income received by the assessee from technical services.
2. Applicability of Article 7 of the DTAA between India and Australia.
3. Applicability of sections 44D and 115A of the Income-tax Act.
4. Determination of whether the services rendered fall under "fee for technical services" or business income.

Issue-wise Detailed Analysis:

1. Taxability of income received by the assessee from technical services:
The assessee, a division of Technical Resources (P.) Ltd., Australia, entered into contracts for evaluation of coal and iron ore deposits in India. The Assessing Officer (AO) treated the amounts received from these contracts as "fee for technical services" under section 9(1)(vii) read with section 115A of the Income-tax Act and taxed them at 20% on a gross basis. The assessee contended that the services provided did not constitute "fee for technical services" as they did not make available any technical knowledge, skill, or know-how, and were integral to a mining project, thus falling under the exclusion in Explanation (2) to section 9(1)(vii).

2. Applicability of Article 7 of the DTAA between India and Australia:
The assessee argued that it had a permanent establishment (PE) in India as per Article 5 of the India-Australia DTAA, and thus, Article 7, which deals with business profits, should apply. Article 7(1) states that business profits of an enterprise of Australia can be taxed in India only to the extent attributable to the PE in India. The AO, however, held that Article 7 did not prescribe any tax rate, thus referring to the domestic law provisions of sections 115A and 44D.

3. Applicability of sections 44D and 115A of the Income-tax Act:
The AO applied sections 115A and 44D, which tax "fee for technical services" on a gross basis without allowing any deductions for expenses. The assessee contended that these sections should not apply as the income should be considered business income under Article 7 of the DTAA, allowing deductions for expenses as per sections 28 to 44C of the Act.

4. Determination of whether the services rendered fall under "fee for technical services" or business income:
The Tribunal noted that the services provided by the assessee included geological mapping, drilling, testing, and feasibility studies, which are integral to a mining project. These activities are not merely technical or consultancy services but involve substantial on-site work. Therefore, the income should be considered business profits under Article 7 of the DTAA, not "fee for technical services" under Article 12 or section 9(1)(vii) of the Act.

Conclusion:
The Tribunal held that the assessee's income should be taxed as business profits under Article 7 of the DTAA between India and Australia. Consequently, sections 44D and 115A of the Income-tax Act, which apply to "fee for technical services," do not apply. The assessee's PE in India should be treated as an independent enterprise, and the income should be computed under the regular provisions of the Indian Tax Laws, allowing deductions for expenses. The appeals of the assessee were allowed, reversing the orders of the lower authorities.