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2012 (1) TMI 5 - HC - Income TaxDTAA with AUSTRALIA Fees for technical services (FTS) or inclusive contracts of technical nature - applicability of Articles 7 or 12 of the DTAA assessee having PE in India whether income to be construed as business income or gross receipts to be taxed without any deduction assessee opted to be taxed as per the provisions of the DTAA - Held that - The payment in the present case is for furnishing of evaluation report. The assessee undertook certain tests, mapping and studies. Drilling for tests as to evaluate is to gain information and knowledge. The payment made is to acquire technical information. Therefore, it is fee for technical services. As per articles of DTAA, once an assessee has a PE in the contracting state of which he is not resident, then paragraphs 1 and 2 of the Article 12 of DTAA would not apply. In such cases Article 7 or 14 would apply. Thus, it is held that Article 12 of the DTAA is not applicable. Article 7 deals with business profits and will apply. Expenses incurred by the assessee can be claimed as a deduction but only in accordance with and subject to limitation stipulated in the Act. Section 44D postulates non-applicability of Sections 28 to 44C in case of foreign company earning income by way of royalty or fees from technical services. Thus, Section 44D is applicable to compute taxable Income. - Decided against the Revenue
Issues Involved:
1. Whether the assessee's activities are classified as Fees for Technical Services (FTS) under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Australia. 2. Whether Article 7 of the Indo-Australia DTAA is applicable, thereby classifying the income as business income. 3. Whether Sections 115A and 44D of the Income Tax Act, 1961, are applicable in the present case. Detailed Analysis: Issue 1: Classification of Activities as FTS under Article 12 of DTAA - The tribunal held that the assessee's activities were not purely technical services but composite activities, including drilling, excavation, and testing. Therefore, Article 12 of the DTAA was deemed inapplicable. - The High Court, however, found that the tribunal's reasoning was flawed. It held that Article 12 was inapplicable not because of the nature of the activities but due to Paragraph 4 of Article 12, which states that if royalties arise through a Permanent Establishment (PE), Article 7 or 14 would apply instead. - Consequently, Article 12 of the DTAA was ruled out, and Article 7 was deemed applicable. Issue 2: Applicability of Article 7 of the DTAA - Article 7 deals with business profits and applies when Article 12 is not applicable. - The tribunal's interpretation was that Article 7(2) of the DTAA treats the PE as an independent enterprise liable to be taxed in India. - The High Court emphasized Paragraph 3 of Article 7, which allows deductions in accordance with and subject to the limitations of the law relating to tax in the contracting state (India). This means that deductions must comply with the Indian Income Tax Act. - The High Court concluded that Article 7 applies, but the provisions of the Indian Income Tax Act must be examined to determine allowable deductions. Issue 3: Applicability of Sections 115A and 44D of the Income Tax Act, 1961 - The tribunal had ruled that Sections 44D and 115A were not applicable once Article 7 of the DTAA was invoked. - The High Court disagreed, stating that Paragraph 3 of Article 7 gives primacy to the provisions of the domestic tax legislation, meaning that the deductions must comply with the Indian Income Tax Act. - Section 44D, which deals with the taxation of foreign companies earning income by way of royalties or fees for technical services, was found applicable. The tribunal's view that the contracts were composite and not purely technical services was overturned. - The High Court held that the income earned by the assessee was indeed "fees for technical services" as defined under Explanation 2 to Section 9(1)(vii) of the Income Tax Act. - The High Court also dismissed the argument that Section 44D should be read down or considered optional, affirming its mandatory nature. Conclusion: - The High Court held that Article 12 of the DTAA is not applicable. - Article 7 of the DTAA applies, but deductions must comply with the Indian Income Tax Act. - Section 44D of the Income Tax Act is applicable as the income earned by the assessee is classified as "fees for technical services." Disposition: - The appeals were disposed of with no costs.
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