2011 (5) TMI 205 - AAR - Income Tax

DTAA between India and Srilanka - No PEs in India - Royalty or Fees for technical services - OECD convention serves as a guideline to tax the payment under contract for services under Article 7 of the Treaty. In the absence of the breakup of the consideration it cannot be concluded whether the supply of software is incidental to the provision of services or the provision of services was incidental to the supply of software - Once the instructions were given by the applicant to ICHPL the services rendered are controlled and then ICHPL and Mantec constitute dependent agency of the applicant - Since in the Treaty between Sri Lanka and Yugoslavia the period is 275 days, the period in Article 5 should be read as 275 hence it cannot be concluded that these two concerns are independent agencies and do not constitute dependent agent - The employees of ICHPL cannot be considered to be other personnel within the meaning of Article 5(2)(i) of the Treaty. Hence the duration of time spent by such personnel is not to be considered in determining the creation of a PE of the applicant in India - The consideration received is for the use of scientific work, model, plan, and for the use of scientific equipment and scientific experience. The payment falls under the term royalties as per Art 12 of the Treaty - It is true that the treaty does not contain a specific article for the taxation of fees for technical services. In that event reference is to be made to Article 22 of the Tax Treaty - Ruling is given

Issues Involved:
1. Taxability of consideration received under the India-Sri Lanka Tax Treaty.
2. Determination of Permanent Establishment (PE) in India.
3. Classification of income as business profits or royalties.
4. Taxability under other Articles of the Tax Treaty if not under Article 7.

Issue-wise Detailed Analysis:

1. Taxability of Consideration Received under the India-Sri Lanka Tax Treaty:
The applicant, Lanka Hydraulic Institute Limited (LHI), a Sri Lankan tax resident, sought clarification on the taxability of payments received from Water and Power Consultants Ltd. (WAPCOS) under the India-Sri Lanka Tax Treaty. The primary question was whether the payments should be taxed under Article 7 (business profits) of the Treaty, given the absence of a specific Article for Fees for Technical Services (FTS). The Revenue contended that FTS should be taxed under Section 9(1)(vii) of the Income Tax Act, 1961, and not under the Treaty. The applicant argued that the payments should be considered business receipts, not royalties, as the software supply was incidental to the contract's primary purpose of service provision.

2. Determination of Permanent Establishment (PE) in India:
The applicant argued that it did not have a PE in India as it had no fixed place of business or management in India, and its employees' presence in India was less than the stipulated 183 days. The Revenue countered that the applicant had a PE in India due to the presence of its employees and subcontracting work to Indian entities (ICHPL and Mantec), which were considered dependent agents. The applicant maintained that ICHPL and Mantec were independent contractors, and their activities should not be considered in determining the creation of a PE.

3. Classification of Income as Business Profits or Royalties:
The Revenue argued that the payments for software use should be classified as royalties under Section 9(1)(vi) of the Act, as the software was licensed, not sold, and the license granted was for the use of the copyright. The applicant contended that the payments were business receipts under Article 7 of the Treaty, as the software supply was incidental to the service contract's primary purpose. The Authority concluded that the payments were for the use of scientific equipment and experience, falling under the definition of royalties in Article 12 of the Treaty.

4. Taxability under Other Articles of the Tax Treaty:
If the payments were not taxable under Article 7, the applicant sought clarification on their taxability under other Articles of the Treaty. The Authority ruled that the payments should be governed by Article 22 of the Treaty, which covers items of income not expressly mentioned in other Articles. Consequently, the payments were classified as royalties under Article 12 of the Treaty and not as business profits under Article 7.

Conclusion:
The Authority ruled that the payments received by the applicant were taxable as royalties under Article 12 of the India-Sri Lanka Tax Treaty. The classification of the payments as royalties negated the need to determine the existence of a PE in India. The entire consideration received by the applicant under the contract with WAPCOS was to be taxed as royalties under Article 12, and not as business profits under Article 7. The ruling was pronounced on 16th May 2011.

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