2016 (11) TMI 368 - AT - Income Tax

Taxability in India - whether the Fees for Technical Services is chargeable to tax in India when Indo-UAE Double Taxation Avoidance Agreement ( DTAA ) does not contain a clause/Article for taxation of Fees for Technical Services - P.E. in India - Held that - In the absence of the provision in the DTAA to tax Fees for Technical Services the same would be taxed as per the Article 7 of the DTAA applicable for business profit and in the absence of PE in India, the said income is not chargeable to tax in India. Accordingly, we set aside the orders of the authorities below and delete the addition made by the Assessing Officer.- Decided in favour of assessee

Issues Involved:
1. Taxability of Fees for Technical Services (FTS) under the Indo-UAE Double Taxation Avoidance Agreement (DTAA) when there is no specific Article for FTS.
2. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Taxability of Fees for Technical Services (FTS) under the Indo-UAE DTAA:

The primary issue in this case is whether the Fees for Technical Services (FTS) received by the assessee, a UAE-based company, from ABB India Ltd. are chargeable to tax in India when the Indo-UAE DTAA does not contain a specific clause for taxing FTS. The assessee argued that in the absence of such a clause, the FTS should be treated as business income under Article 7 of the DTAA, and since the assessee does not have a Permanent Establishment (PE) in India, the income should not be taxable in India.

The Assessing Officer (AO) did not accept this contention, holding that when the DTAA is silent on a specific type of income, the provisions of the Income Tax Act, 1961, should apply. The AO classified the income as FTS under Section 9(1)(vii) of the Act and taxed it accordingly. This view was confirmed by the Dispute Resolution Panel (DRP).

The Tribunal, however, disagreed with the AO and DRP. It held that the absence of a specific provision in the DTAA for FTS is a deliberate mutual agreement between the contracting states not to tax such income under this category. The Tribunal relied on the decision in IBM India Pvt. Ltd. vs. DDIT, where it was held that in the absence of an FTS clause in the DTAA, the income should be treated as business income. The Tribunal also referred to various judicial precedents, including the Hon'ble Madras High Court's decision in Bangkok Glass Industry Co. Ltd. vs. ACIT, which supported the view that in the absence of a specific provision in the DTAA, the income should be taxed as business income and not under the domestic law provisions.

The Tribunal concluded that since the Indo-UAE DTAA does not contain a provision for taxing FTS and the assessee does not have a PE in India, the income in question is not chargeable to tax in India. Consequently, the Tribunal set aside the orders of the AO and DRP and deleted the addition made by the AO.

2. Initiation of Penalty Proceedings under Section 271(1)(c):

The second issue raised by the assessee concerns the initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961. The Tribunal did not provide a separate analysis for this issue, as the primary issue of taxability of FTS was decided in favor of the assessee. Given that the Tribunal ruled that the FTS income is not chargeable to tax in India, the basis for initiating penalty proceedings under section 271(1)(c) would not stand. Therefore, the initiation of penalty proceedings was implicitly rendered moot by the Tribunal's decision on the primary issue.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the FTS received from ABB India Ltd. is not chargeable to tax in India under the Indo-UAE DTAA, as there is no specific provision for taxing FTS in the treaty, and the assessee does not have a PE in India. Consequently, the addition made by the AO was deleted, and the initiation of penalty proceedings under section 271(1)(c) was rendered moot.

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