2018 (1) TMI 944 - AAR - Income Tax

Taxability in India - payments received/to be received by the Applicant for rendering, lighting and searchlight services to the Organizing Committee, Commonwealth Games 2010, Delhi - India-Belgium Tax Treaty - Held that - Taking a restricted view of the term, it cannot be said that the Applicant had made available technical knowledge, experience, skill, know-how or processes, which enable the development and transfer of a technical plan or technical design, and which enable the person acquiring the services to apply the technology contained therein. The services were not made available to Delhi 2010, in a manner that it acquired the knowhow or the ability to use it, or that the service rendered enabled or empowered it to carry out the task in future all by itself. Make available connotes that it should result in transmitting the technical knowledge such that the recipient could derive an enduring benefit and utilise the same in future on his own without the aid and assistance of the provider. In this case Delhi 2010 only utilised the services for its events during the Common Wealth Games, and the consideration was paid for the same. Hence, we have to agree that the consideration received by the Applicant for the technical services rendered could not be considered to be in the nature of fees for technical services as referred to in the India Belgium DTAC and the Protocol thereto, as read with the DTAC between India and the Portuguese Republic, which would have otherwise been taxable under Article 12 and Article 7, as the Applicant has a PE in India. Since it has been held that the Applicant has a PE in India, within the meaning of paragraph 1 of Article 5 of the DTAC between India and Belgium, and further that the same was not in the nature of Royalty or Fees for included services, the consideration received by the Applicant for rendering lighting and searchlight services to Delhi 2010, can only be held to be taxable in India as Business Profits, as per the provisions of Article 7, as also under section 9(1)(i) of the Income tax Act 1961, having accrued and arisen from its business connection and source in India. Question number 1 Yes. The payments received by the Applicant for rendering lighting and searchlight services to OCCG, would be taxable in India, under the provisions of the Income tax Act 1961. Question number 2 Yes. The payments received by the Applicant for rendering lighting and searchlight services to the OCCG, earned through its PE in India, would be taxable as Business Profits under Article 7 of the India Belgium DTAC

Summary

Issues Involved:
1. Taxability of payments received by the Applicant under the Income Tax Act, 1961.
2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Belgium.
3. Existence of a Permanent Establishment (PE) in India.
4. Classification of income as Business Profits or Royalty/Fees for Technical Services (FTS).

Issue-wise Detailed Analysis:

1. Taxability of Payments under the Income Tax Act, 1961:
The Applicant argued that the payments received for rendering lighting and searchlight services should not be taxable in India as they do not fall under "Fees for Technical Services" as per Explanation 2 to section 9(1)(vii) of the Act. The Applicant contended that their services were routine and mechanical, not involving any managerial, technical, or consultancy services. The Revenue opposed this, claiming the services were technical and taxable under the Act.

2. Applicability of the DTAA between India and Belgium:
The Applicant submitted that even if the payments were taxable under the Act, they would not be taxable under the DTAA between India and Belgium, read with the Protocol and the DTAA between India and Portugal. The Applicant argued that the services rendered did not "make available" technical knowledge, skill, or processes to the recipient, a requirement under the DTAA for such payments to be classified as "Fees for Technical Services."

3. Existence of a Permanent Establishment (PE) in India:
The Applicant denied having a PE in India, citing the lack of a fixed place of business and the short duration of their presence. The Revenue contended that the Applicant had a PE based on the comprehensive physical presence and control over the space provided by OCCG, including office space, storage facilities, and ongoing maintenance presence. The ruling concluded that the Applicant had a PE in India, as they had a fixed place of business with exclusive control over the space used for their operations, meeting the criteria for a PE under Article 5 of the DTAA.

4. Classification of Income as Business Profits or Royalty/FTS:
The Applicant argued that the payments were for business profits and not royalty or FTS. The Revenue claimed the payments were royalty due to the intellectual property involved. The ruling determined that the payments did not constitute royalty as the Applicant did not transfer any intellectual property rights or technical know-how to OCCG. The services were technical but did not "make available" technical knowledge to OCCG, thus not qualifying as FTS under the DTAA. Consequently, the income was classified as Business Profits taxable under Article 7 of the DTAA and section 9(1)(i) of the Income Tax Act, 1961.

Conclusion:
The ruling concluded that the payments received by the Applicant for rendering lighting and searchlight services to OCCG were taxable in India as Business Profits under Article 7 of the India-Belgium DTAA and section 9(1)(i) of the Income Tax Act, 1961, due to the existence of a PE in India. The payments were not classified as royalty or FTS.