2005 (2) TMI 771 - AT - Income Tax

Applicability of limitation on deduction of expenses set out u/s 44D - nature of services - expenditure incurred in earning the professional receipts - profit attributable - liability to tax - PE in India - DTAA between India and Singapore - business in India through a branch office - binding precedent - HELD THAT - In our considered view the scope of fees for technical services under article 12(4)(b) does not cover consultancy services unless these services are technical in nature. That admittedly is not the case here. Accordingly we are of the considered view that the nature of services rendered by the assessee do not fit into the description of fees for technical service under the provisions of the India-Singapore tax treaty. As we have already held in case the receipts in respect of which profits are computed under article 7(3) do not fit the description of royalties and fees for technical services the limitation on deduction of expenses u/s 44D does not come to the play. In the case before us the receipts in question are such in nature that the provisions of article 12 are not attracted. Accordingly in our considered view the limitation u/s 44D is not to be applied for the purpose of deduction of expenses in computing taxable profits under article 7(3) of the India-Singapore tax treaty. We have already taken note of the position that section 44D read with section 115A of the Indian Income-tax Act and article 12 of the India-Singapore tax treaty are similar in nature and offer alternative but similar models of taxation of income from royalties and fees from technical services that these are two independent mutually exclusive and competing sets of provisions and that once it is clear that these are competing modes of taxation of royalties and fees for technical services on gross basis in the Income-tax Act and in the India-Singapore tax treaty it has to follow that the provisions of the Income-tax Act cannot come to play unless these are more beneficial to the assessee which certainly is not the case here. We have held that in case a receipt is held to be outside the very scope of royalties and fees for technical services under the provisions of article 12 the same cannot be taxed under section 44D read with section 115A either. For this reason also section 44D and section 115A cannot have any application in the case before us. We are of the considered view that the limitation on deduction of expenses for the purpose of computing profits attributable to the permanent establishment in India and in terms of the provisions of section 44D of the Act is not applicable on the facts of this case. Our reasoning for arriving at this conclusion is different than that of the CIT (A) but then we agree with his conclusions. Accordingly we approve the conclusions arrived at by the CIT (A) and decline to interfere in the matter. In any event it is certainly not the case that there is a binding precedent in favour of the Revenue. Therefore even if there is a reasonably possible view in favour of the Revenue this possibility per se does not clinch the issue. The view that we have accepted and elaborated earlier in this order is an equally if not more reasonable and possible view of the matter. It is well settled in law that when two views are possible and one of these views is in favour of the assessee the ambiguity is to be resolved in favour of the assessee. The authority for this proposition is contained in the hon ble Supreme Court s judgment in the case of CIT v. Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME COURT held that if two reasonable constructions of a taxing provision are possible that construction which favours the assessee must be adopted . In the light of these reasons as also for the detailed reasons set out above we see no reasons to deviate from conclusions arrived at to the effect that the limitation on deduction of expenses for the purpose of computing profits attributable to the permanent establishment in India and in terms of the provisions of section 44D of the Act is not applicable on the facts of this case. We also hold that in case the receipts in respect of which profits are computed under article 7(3) do not fit the description of royalties and fees for technical services under the applicable tax treaty the limitation on deduction of expenses u/s 44D does not come to the play. In the result the Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Taxability of income from Indian clients under the DTAA between India and Singapore.
2. Applicability of section 44D limitations on deductions for expenses in computing income.

Summary:

Issue 1: Taxability of income from Indian clients under the DTAA between India and Singapore

The Revenue contended that the income of the assessee amounting to Rs. 40,50,000 representing gross receipts from Indian clients is liable to be taxed in India under the DTAA between India and Singapore. The Commissioner of Income-tax (Appeals) held that the receipts in question cannot be treated as "fees for technical services" for the purpose of article 12 of the DTAA and that the same, being attributable to the assessee's PE in India, are to be taxed in India in terms of the provisions of the DTAA. The Commissioner of Income-tax (Appeals) concluded that since the income is to be computed on a net basis and since there is a net loss, "there is no income liable to be taxed in the hands of the appellant company in terms of the DTAA with Singapore".

Issue 2: Applicability of section 44D limitations on deductions for expenses in computing income

The core issue was whether the limitation on deduction for expenses, as set out in section 44D of the Income-tax Act, will apply in a case where the related income is not in the nature of "fees for technical services" under the applicable bilateral tax treaty but could be treated as 'fees for technical services' under Explanation 2 to section 9(1)(vii) of the Act. The Tribunal held that section 44D, read with section 115A of the Indian Income-tax Act and article 12 of the India-Singapore tax treaty, are similar in nature and offer alternative but similar models of taxation. It was concluded that the provisions of section 44D cannot be applied if the receipts do not fit the description of "royalties and fees for technical services" under the provisions of the India-Singapore tax treaty. The Tribunal noted that the nature of the assessee's activities being "strategy consulting" does not fit into the description of "fees for technical services" under the provisions of the India-Singapore tax treaty.

Conclusion:

The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, concluding that the limitation on deduction of expenses under section 44D is not applicable on the facts of this case. The Revenue's appeal was dismissed.