2012 (9) TMI 624 - HC - Income Tax

DTAA between India and Japan - technical services - the sum payable was Industrial or Commercial Profits within the meaning of the Article III of the DTAA - permanent establishment - Held that - technical services were rendered by Toyo through the medium of the technicians. - It is not the assessee s case that the technicians were not answerable to Toyo. Nor is it the assessee s case that there was a separate agreement between the technicians and itself and that the only role played by Toyo was the provision of technicians and not the rendering of technical services through them. - Where technical services are rendered by an enterprise to another, the same falls within the ambit of the expression technical services and constitute the rendering of technical services even though the same required technicians to be deputed for carrying out the work. - A view to the contrary would render the working of the DTAA difficult - in favour of Revenue.

Summary

Issues Involved:
1. Taxability of the sum paid to Toyo Engineering Corporation.
2. Classification of the sum as "Industrial or Commercial Profits" under the DTAA between India and Japan.
3. Interpretation of "technical services" under the DTAA and domestic law.
4. Applicability of section 9(1)(vii) of the Income Tax Act, 1961.
5. Relevance of the No Objection Certificate issued by the ITO.
6. Consideration of subsequent amendments to domestic law when interpreting the DTAA.

Detailed Analysis:

1. Taxability of the sum paid to Toyo Engineering Corporation:
The Tribunal held that the sum of Japanese Yen 2,973,750 paid to Toyo Engineering Corporation was chargeable to tax in India. The assessee contended that this sum should not be taxed in India as it fell under "Industrial or Commercial Profits" per Article III of the DTAA between India and Japan, and the assessee had no permanent establishment in India. However, the Tribunal and the Revenue authorities maintained that the amount constituted fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961, and was therefore taxable in India.

2. Classification of the sum as "Industrial or Commercial Profits" under the DTAA:
The assessee argued that the sum payable was "Industrial or Commercial Profits" as per Article III of the DTAA and thus not liable to be taxed in India due to the absence of a permanent establishment. However, the Tribunal and the Revenue authorities concluded that the sum was not "Industrial or Commercial Profits" but fees for technical services, which are excluded from the definition of "Industrial or Commercial Profits" under Article III(5) of the DTAA.

3. Interpretation of "technical services" under the DTAA and domestic law:
The DTAA did not define "technical services," leading to reliance on domestic law definitions. Section 9(1)(vii) of the Income Tax Act defines "fees for technical services" to include consideration for managerial, technical, or consultancy services, including the provision of technical personnel. The Tribunal and the Revenue authorities interpreted the services provided by Toyo, which included technical advisory services and repairs conducted by Toyo's technicians, as falling within this definition. The court agreed with this interpretation, emphasizing that the services rendered by Toyo were not merely the provision of personnel but comprehensive technical services.

4. Applicability of section 9(1)(vii) of the Income Tax Act, 1961:
The assessee's senior counsel conceded that the receipts by Toyo fell within section 9(1)(vii) of the Act but argued for the DTAA's benefits. The court held that the services provided by Toyo, which included technical advisory services and repairs, clearly constituted "fees for technical services" under section 9(1)(vii), making them taxable in India.

5. Relevance of the No Objection Certificate issued by the ITO:
The No Objection Certificate issued by the ITO permitted the remittance to Toyo for technical services, provided tax was deducted at source. This certificate, along with the invoice and correspondence between the parties, indicated that the payment was for technical services rendered by Toyo, reinforcing the conclusion that the sum was taxable as fees for technical services.

6. Consideration of subsequent amendments to domestic law when interpreting the DTAA:
The court did not find it necessary to consider whether subsequent amendments to domestic law should influence the interpretation of the DTAA. The court's decision was based on the existing definitions and interpretations of "technical services" under the Income Tax Act and the DTAA.

Conclusion:
The court answered the reference in the negative, in favor of the Revenue, and against the assessee. The sum paid to Toyo Engineering Corporation was deemed taxable in India as fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961, and not exempt under the DTAA. The interpretation of "technical services" included the comprehensive technical work provided by Toyo, beyond merely supplying technical personnel. The reference was disposed of with no order as to costs.