2014 (1) TMI 925 - AT - Income Tax

Treatment of Royalty under Article 12 of DTAA - Income from borrowed services Held that - Once there is an income in the nature of Business profits its taxability can be considered only within the ambit of Article 7 of the DTAA - As the assessee is a tax resident of Thailand the business profits can be taxed in India only if the enterprise carries on business in India through a Permanent Establishment (PE) situated in India - the opinion of the authorities below of including it under Article 12 or under Article 22 is not sustainable - The amount falls under Article 7 as Business profits and is hence not chargeable to tax because of the absence of any PE in India - the amount of Rs. 79.99 lakh falls under Article 7 and not under Article 12 or Article 22 of the DTAA. If a particular item of income is taxable under the Income-tax Act 1961 then it shall cease to be taxable in India if the DTAA provides exemption in respect of such income - The core of the matter is that the DTAA overrides the regular provisions of the Act insofar as it is more beneficial to the assessee - India has entered into a DTAA with Thailand and the nature of receipt is covered under Article 7 but in the present circumstances it is not chargeable to tax in India patently the consideration of the provisions of the Act is ruled out - the amount is not includible in the total income of the assessee Decided in favour of Assessee.

Summary

Issues involved:
Treatment of income from borrowed services as 'Royalties' under DTAA Article 12 instead of 'Business profits'

Detailed Analysis:

1. Treatment of income under DTAA Article 12:
The appellant contested the treatment of income from borrowed services as 'Royalties' under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Thailand, instead of 'Business profits'. The appellant, a foreign company based in Thailand, rendered strategic consultancy services to its Indian counterpart. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) classified the income as 'Fees for technical services' under Article 12 of the DTAA, thereby including it in the total income of the assessee. The appellant argued that since it had no Permanent Establishment (PE) in India, no tax liability arose in India. The Tribunal analyzed the provisions of Article 12 and concluded that 'Fees for technical services' did not fall within its purview, as it specifically referred to 'Royalties'. The Tribunal further examined Article 7, which dealt with 'Business profits', and concluded that the income in question should be classified as 'Business profits' under Article 7, not falling under Article 12 or Article 22 of the DTAA.

2. Application of DTAA and Taxability under Article 7:
The Tribunal highlighted that under Article 7 of the DTAA, the income or profits of an enterprise of a Contracting State should be taxable only in that State unless the enterprise operates through a PE in the other Contracting State. As the appellant had no PE in India, the income should be considered under Article 7 as 'Business profits'. The Tribunal emphasized that the taxability of 'Business profits' could only be assessed within the scope of Article 7. Since the appellant was a tax resident of Thailand and lacked a PE in India, the income was not taxable in India under Article 7.

3. Impact of DTAA on Taxation and Conclusion:
The Tribunal discussed Section 90 of the Income-tax Act, which governs agreements with foreign countries or territories for relief in double taxation cases. It emphasized that the DTAA prevails over the regular provisions of the Act if it is more beneficial to the assessee. In this case, since the income was covered under Article 7 of the DTAA and was not chargeable to tax in India due to the absence of a PE, the provisions of the Act did not apply. The Tribunal overturned the lower authorities' decision to include the income under Article 12 or Article 22, holding that it should be classified as 'Business profits' under Article 7. Consequently, the Tribunal allowed the appeal, ruling in favor of the assessee.

4. Judgment on Charging of Interest:
The Tribunal also addressed the issue of charging interest under Section 234B of the Act, which became consequential following the main decision. The Tribunal allowed this ground, citing a previous judgment in favor of the assessee. As a result of the Tribunal's decision on the main issue, the appeal was allowed, and the income in question was deemed not includible in the total income of the assessee.

This comprehensive analysis of the judgment highlights the key legal arguments, interpretations of relevant DTAA provisions, and the ultimate decision reached by the Tribunal in favor of the appellant.