2015 (4) TMI 503 - HC - Income Tax

Fees for technical services covered under section 9(1)(vii) or covered in DTAA between India and Thailand - transfer of know-how - technical advice in transferring all its present methods of manufacture relating to packing materials and containers - Treatment of consideration received under the DTAA as royalty or as business profits - Taxability of royalty u/s 115(1)(b) - Held that - tribunal hold that art. 22 was concerned about miscellaneous income not covered under any of the provisions of DTAA. Thus holding that royalty and fee for technical services contemplated under the agreement were taxable under art. 12 and art. 7 respectively, the Tribunal held that art. 22 could not be invoked. Having stated so, surprisingly, in para 9 of the order, the Tribunal once again considered art. 22 only to hold that the portion of fee for technical services arising in India was to be taxed in accordance with section 115(1)(b). On going through arts. 2 and 3 of the agreement between the assessee and the Indian company, we agree with the view of the CIT(A) that the entirety of the payment cannot be considered as one falling for consideration under art. 12. Further, taking note of the fact that the assessee company was also involved in training Indian personnel in India and abroad and taking note of the clauses in the agreement as regards the payment and the additional payment depending on the period of training, over and above what was to be paid under the agreement for the duration specified therein, the CIT(A) rightly came to the conclusion that the component of technical services in India included the extra months of training, so too the training abroad. In computing the said amount, rightly the CIT(A) arrived at a finding that a sum of 1,12,500 USD and 69,750 USD would be the amount which would be treated as received for technical services rendered by the assessee and the amount of 4,79,640 USD relates to royalty payment, assessable as per art. 12. As far as the order in art. 22 is concerned, we do not find any justifiable ground to uphold this portion of the order after the discussion on the extent of income falling for consideration under royalty as defined under art. 12 and the amount paid as towards technical services falling for consideration under art. 7. Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22. Even though learned standing counsel made a submission that the fee paid towards technical services cannot be brought towards business income, yet in the absence of any material to show that the same is not related to the business of the assessee, we have no hesitation in rejecting the said contention. Even assuming for a moment that the assessee is an Indian company, given the nature of business of the assessee, if the income earned would qualify for consideration on the normal computation as business income, we do not find that the said character would undergo a change merely on the score that the assessee is not an Indian company. - Decided in favour of asessee.

Summary

Issues Involved:
1. Taxability of fees for technical services under section 9(1)(vii) and its exemption under DTAA.
2. Classification of consideration received as royalty or business profits under DTAA.
3. Requirement of a Permanent Establishment (PE) for taxation of business profits.
4. Allocation of composite consideration between royalty and technical services.
5. Applicability of Article 22 of DTAA for miscellaneous income.

Detailed Analysis:

1. Taxability of Fees for Technical Services:
The core issue was whether the fees for technical services received by the assessee, a non-resident company, were taxable in India under section 9(1)(vii) of the Income Tax Act or exempt under the Double Taxation Avoidance Agreement (DTAA) between India and Thailand. The Tribunal held that the fees for technical services were taxable in India. The assessee contended that the payments should be exempt under Article 12 of the DTAA, which defines "royalty" and includes payments for the use of or the right to use intellectual property.

2. Classification of Consideration as Royalty or Business Profits:
The Tribunal needed to determine whether the consideration received by the assessee should be classified as royalty or business profits. The agreement between the assessee and MBDL included transfer of know-how and technical assistance. The Tribunal agreed with the CIT(A) that the payments were for both royalty and technical services. The CIT(A) had split the total consideration into amounts attributable to royalty and technical services, with the royalty portion being taxable under Article 12 of the DTAA.

3. Requirement of a Permanent Establishment (PE):
For the consideration to be taxed as business profits under Article 7 of the DTAA, the assessee needed to have a PE in India. The CIT(A) remanded the case to the assessing authority to determine if the assessee had a PE. The Jt. CIT found that the assessee did not have a PE in India for the relevant assessment years, as the stay in India did not exceed 183 days.

4. Allocation of Composite Consideration:
The CIT(A) allocated the composite consideration received by the assessee into amounts attributable to royalty and technical services. The Tribunal upheld this allocation, agreeing that the agreement covered various stages of transferring know-how and technical assistance. The CIT(A) determined that USD 4,79,640 was royalty, while USD 1,12,000 and USD 69,750 were fees for technical services.

5. Applicability of Article 22 of DTAA for Miscellaneous Income:
The Tribunal initially considered Article 22 of the DTAA, which deals with miscellaneous income not covered under other provisions. However, it later held that since the income fell under Articles 12 and 7, Article 22 was not applicable. The Tribunal concluded that the portion of fees for technical services arising in India was taxable under section 115(1)(b) of the Income Tax Act, independent of business connection.

Conclusion:
The High Court upheld the Tribunal's findings, confirming that the composite consideration included both royalty and technical services. The royalty portion was taxable under Article 12 of the DTAA, and the technical services portion, in the absence of a PE, could not be taxed as business profits under Article 7. The High Court also rejected the applicability of Article 22, as the income did not qualify as miscellaneous income. The assessee's appeals were allowed, and the Revenue's appeals were rejected, setting aside the Tribunal's consideration of Article 22.