2008 (10) TMI 584 - AT - Income Tax

Summary

Issues Involved
1. Whether the monies received by the assessee-company from the Indian branch constitute "fees for included services" under Article 12(4) of the India-US treaty.
2. Whether the income arising in India can be taxed under Article 7 as "business profits" in the absence of a permanent establishment in India.

Issue-wise Detailed Analysis

1. Fees for Included Services
Background:
The Revenue contended that the monies received by the assessee-company from the Indian branch of McKinsey and Co. Inc. should be classified as "fees for included services" under Article 12(4) of the India-US treaty. The Assessing Officer (AO) observed that the assessee had been making the same submissions year after year without providing relevant evidence for the assessment year 2003-04. The AO relied on the classification mentioned in the tax deducted at source certificate as "fees for consultancy services" and past treatment of similar income as "fees for included services."

First Appellate Authority:
The Commissioner of Income-tax (Appeals) held that the payments in question could not be treated as "fees for included services" and since the appellant-companies did not have any permanent establishment in India, the incomes arising in India could not be taxed as "business profits" under Article 7.

Tribunal's Analysis:
The Tribunal noted that the assessee had not furnished any evidence relevant to the assessment year 2003-04 before the AO. The Tribunal emphasized that the burden of proof initially lies with the Revenue to show that the income is taxable under the Double Taxation Avoidance Agreement (DTAA). However, when the assessee fails to provide information exclusively in its possession, an adverse inference can be drawn against it.

The Tribunal rejected the argument that the nature of services rendered by McKinsey and Co. Inc. is universally known and should be accepted without specific evidence for the relevant assessment year. The Tribunal highlighted that the assessee's reliance on a model email from 1997 and other correspondence from different years was insufficient to establish the nature of services for the assessment year 2003-04.

The Tribunal concluded that the services in question could be classified as "included services" due to the lack of specific evidence provided by the assessee. The Tribunal set aside the appeals to the AO for fresh adjudication and directed the assessee to furnish relevant documentary evidence.

2. Business Profits and Permanent Establishment
Background:
The Revenue argued that the income arising in India should be taxed as "business profits" under Article 7 of the India-US treaty, even though the assessee did not have a permanent establishment in India.

First Appellate Authority:
The Commissioner of Income-tax (Appeals) ruled that since the appellant-companies did not have any permanent establishment in India, the incomes arising in India could not be taxed as "business profits" under Article 7.

Tribunal's Analysis:
The Tribunal did not specifically address the issue of "business profits" under Article 7, as the primary focus was on whether the fees received constituted "fees for included services." However, the Tribunal implicitly upheld the first appellate authority's view by directing the AO to verify the nature of services and apply the legal propositions laid down in earlier years if the facts were identical.

Conclusion
The Tribunal set aside the appeals to the AO for fresh adjudication, directing the assessee to provide documentary evidence to demonstrate the nature of services rendered. The AO was instructed to verify if the facts of the assessment year 2003-04 were identical to those of earlier years and apply the legal propositions accordingly. The appeals filed by the Revenue were allowed for statistical purposes.