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1995 (9) TMI 376 - AAR - Income TaxWhether the consideration receivable under the agreements entered into between the applicant and X is chargeable to tax under the Income-tax Act 1961? Whether the considerations receivable under the aforesaid agreements are taxable as fees for technical services under article 13 of the Agreement for Avoidance of Double Taxation and Prevention of fiscal evasion with respect to taxes on income and capital gains with the United Kingdom of Great Britain at the rate of twenty per cent. of the gross amount of such fees for technical services for the assessment years 1994-95 and 1995-96?
Issues Involved:
1. Whether the considerations receivable under the agreements are chargeable to tax under the Income-tax Act, 1961. 2. If taxable, what rate of tax would be applicable to the payments made under the agreements. Issue-wise Detailed Analysis: 1. Chargeability to Tax under the Income-tax Act, 1961: The applicant, a UK-based company, entered into three agreements with an Indian oil company ("X") to provide consulting services. The applicant argued that the services were performed outside India and hence should not be taxed in India. However, the agreements stipulated that significant portions of the work, including reviews and meetings, were to be conducted in India. The Commissioner of Income-tax (CIT) contended that the payments made to the applicant were for royalties and fees for technical services under sections 115A and 44D of the Income-tax Act, thus taxable in India. The Authority for Advance Rulings (AAR) concluded that the services provided by the applicant were indeed technical services as defined under section 9(1)(vii) of the Income-tax Act. The AAR rejected the applicant's argument that the income should be assessed under section 44BB, which provides a lower tax rate for services related to the prospecting of mineral oils. The AAR held that the proviso to section 44BB excludes its application when sections 44D and 115A are applicable. Therefore, the considerations receivable under the agreements are chargeable to tax in India. 2. Applicable Rate of Tax: The applicant contended that even if the income was taxable, it should be taxed at a lower rate under the Double Taxation Avoidance Agreement (DTAA) between India and the UK. The applicant argued that the payments should be considered business profits under Article 7 of the DTAA, which would require the existence of a permanent establishment (PE) in India. Since the applicant did not have a PE in India, it claimed that the income should not be taxed. The AAR disagreed, stating that the payments received by the applicant fell under the category of "fees for technical services" as defined in Article 13 of the DTAA. Article 13 provides that such fees may be taxed in India at a rate of 20% of the gross amount. The AAR noted that Article 13 takes precedence over Article 7 in cases involving royalties and fees for technical services. Therefore, the considerations receivable under the agreements are taxable at the rate of 20% for the assessment years 1994-95 to 1998-99. Non-Discrimination Clause: The applicant also invoked the non-discrimination clause under Article 26 of the DTAA, arguing that it should not be subjected to a higher tax burden than an Indian national providing similar services. The AAR rejected this argument, stating that the non-discrimination clause applies to individuals and enterprises with a PE in India. Since the applicant did not have a PE in India, it could not claim the benefits of Article 26. Ruling: 1. The considerations receivable under the agreements entered into between the applicant and "X" are chargeable to tax under the Income-tax Act, 1961. 2. The considerations receivable are taxable as fees for technical services under Article 13 of the DTAA between India and the UK at the rate of 20% of the gross amount for the assessment years 1994-95 and 1995-96. If the considerations are received in subsequent years, they would also be taxable at the rate of 20% up to the assessment year 1998-99.
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