2010 (2) TMI 1228 - AT - Income Tax

Summary

Issues Involved: Determination of whether payment made for Value Added Services (VAS) by the assessee to DTC constitutes royalty/fees for technical services and business receipts, and the taxability of such payment under the Double Taxation Agreement between India and the UK.

Facts of the Case: The assessee, a partnership firm engaged in the manufacturing and export of diamonds, applied for a nil deduction certificate u/s. 195 of the Income Tax Act, 1961 for payment to DTC for VAS. The Assessing Officer considered the services provided by DTC, including continuous supply of diamonds and quality assurance, as technical services taxable at 15% under the DTAA.

Contentions: The assessee argued that the services provided by DTC were not technical in nature but rather assurances and market information. It was contended that the payment made did not fall under the definition of fees for technical services under the DTAA between India and the UK. The assessee also highlighted that DTC did not have a Permanent Establishment (PE) in India, and the services were rendered outside India.

Decision: The CIT(A) held that 50% of the VAS payment constituted royalty/fees for technical services, while the remaining 50% was considered business receipts. The CIT(A) found that DTC passed on its commercial experience and expertise to the assessee, making the payment taxable as royalty/fees for technical services. The CIT(A) also noted that certain services provided by DTC were business receipts and not technical services. The Revenue's appeal was dismissed as the CIT(A)'s findings were upheld, considering the absence of a PE in India and the previous issuance of a nil deduction certificate by the ADIT.

Conclusion: The appellate tribunal upheld the CIT(A)'s decision that 50% of the payment for VAS constituted royalty/fees for technical services, while the remaining 50% was classified as business receipts. The tribunal dismissed the Revenue's appeal, affirming the taxability of the payment under the DTAA based on the nature of services provided by DTC and the absence of a PE in India.