1998 (11) TMI 663 - AAR - Income Tax

Summary

Issues Involved:
1. Taxability of professional fees under Article 14 of the DTAA between India and Germany.
2. Deductibility of income tax at source u/s 195 of the Income-tax Act, 1961.

Summary:

Issue 1: Taxability of Professional Fees under Article 14 of the DTAA

The applicant, a German resident, rendered technical and marketing consultancy services from Germany to Pennwalt India Limited. He argued that under Article 14 of the DTAA between India and Germany, his professional fees should be taxable only in Germany since he neither had a fixed base in India nor stayed in India for more than 120 days in any fiscal year. The Department contended that the applicant's role was more of a marketing executive and that his income should be taxable in India under Article 16 of the DTAA, which pertains to director's fees and similar payments.

The Authority concluded that the services rendered by the applicant fell within the scope of "professional services" under Article 14 of the DTAA. Since the applicant did not have a fixed base in India and his stay did not exceed 120 days, his professional fees were not taxable in India. The Authority also clarified that there was no employer-employee relationship between the applicant and Pennwalt India Ltd., thus section 15 of the Income-tax Act, 1961, was not applicable.

Issue 2: Deductibility of Income Tax at Source u/s 195

The applicant contended that no tax should be deducted at source by Pennwalt India Ltd. on the professional fees paid to him, as these fees were not taxable in India. The Department argued that all remunerations received by the applicant, including consultancy charges, were taxable in India under Article 16 of the DTAA.

The Authority agreed with the applicant that the professional fees were not taxable in India and thus no tax was deductible at source u/s 195. However, it was noted that any fees received for attending board meetings or similar payments would fall under Article 16 of the DTAA and would be taxable in India, requiring tax deduction at source.

Conclusion:

A. The professional fees receivable by the applicant are not taxable in India under Article 14 of the DTAA, given that no services were rendered in India.
B. No income tax is deductible at source u/s 195 for the professional fees. However, fees for attending board meetings or similar payments are taxable under Article 16 of the DTAA, and tax at source is deductible for these payments.