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2018 (5) TMI 808 - HC - Income TaxIncome accrued in India - technical service charges payable to the foreign company in Germany constitute - Fees for technical services - whether constitutes business profit of the foreign company and that the same was not taxable in India? - PE in India - Indo German DTAA - Held that - In the facts of the present case in terms of the DTAA payments made to Lufthansa may not be liable to tax in India in terms of Article III of the DTAA yet their taxability in terms of Article VIIIA of the DTAA as there exists a Fee for Technical Services clause in the Agreement was not examined in proper perspective. In the present case the issue of technical fee has to be examined from the point of view of Article VIIIA introduced by the amending protocol which to the extent it is relevant In the absence of the agreements and a fuller discussion by the ITAT which seems to have decided only on the applicability of the AAR s ruling in Tehniskil (Sendirian) 1996 (4) TMI 491 - AUTHORITY FOR ADVANCE RULINGS this Court is of opinion that the appeals need to be reconsidered and specific findings rendered in the context of Section 9 (1) (vii) and provisions of the DTAA. The appeals are allowed to the extent that the impugned orders are set aside; the issue is restored to the file of the ITAT which shall now proceed to hear the cases and render its findings in the light of the provisions of DTAA and the other provisions of the Act in accordance with law. ITAT s final order shall be made within six months. The questions of law are answered accordingly.
Issues Involved:
1. Whether the Tribunal was justified in holding that technical service charges payable to the foreign company in Germany constitute business profit of the foreign company and that the same was not taxable in India. Detailed Analysis: 1. Exemption under Section 10(15A) of the IT Act: The Tribunal held that payments under the technical support and crew lease agreements were not entitled to exemption under Section 10(15A) of the IT Act because these agreements had not been approved by the Central Board of Direct Taxes (CBDT). The only approved agreement was the aircraft lease agreement dated 18.03.1993. Consequently, the payments for technical services and crew lease were not exempt under Section 10(15A) and were liable to tax. 2. Characterization of Payments as Business Profits: The Tribunal found that both the lease rent and the fee for technical services constituted business profits of Lufthansa. The lease of the aircrafts was with operational staff, and thus, the payments were considered business profits. However, the Tribunal also held that these payments were not taxable in India under Article III of the DTAA between India and Germany, as Lufthansa did not have a permanent establishment (PE) in India. 3. Applicability of DTAA Provisions: The Tribunal relied on the Authority for Advance Rulings (AAR) decision in Tekniskil (Sendirian) Berhard v. Commissioner of Income Tax, which dealt with the DTAA between India and Malaysia. The Tribunal concluded that payments for technical personnel were not taxable in India as business profits under Article III of the Indo-German DTAA. However, the Revenue argued that the case of Tekniskil was distinguishable because the DTAA with Malaysia did not contain a clause for 'Fee for Technical Services' (FTS), unlike the Indo-German DTAA. 4. Interpretation of Article VIIIA of the Indo-German DTAA: The Revenue contended that the payments to Lufthansa were in the nature of 'Fee for Technical Services' as defined in Paragraph 4 of Article VIIIA of the DTAA. Such fees are taxable in India at the rate of 20% on a gross basis, as per Paragraph 2 of Article VIIIA. The Tribunal, however, did not adequately address whether the payments under the technical support and crew lease agreements fell within the definition of FTS under the DTAA. 5. Requirement of Permanent Establishment (PE): The Tribunal's decision was influenced by the AAR ruling in Tekniskil, which found that the absence of a PE in India meant that the payments could not be taxed as business profits. The Revenue argued that this interpretation was incorrect for the Indo-German DTAA, which specifically includes a clause for FTS. The Tribunal needed to examine whether the payments were FTS under Article VIIIA, irrespective of the PE status. 6. Grossing Up and Tax Deduction at Source: The Assessing Officer (AO) held that for computing the amount of tax to be deducted under Section 195 of the IT Act, the provisions of grossing up contained in Section 195A would apply. Therefore, the tax borne by the assessee had to be added to the payments made to Lufthansa. The Tribunal did not specifically address this issue in its order. 7. Remand for Reconsideration: The High Court found that the Tribunal had not sufficiently examined whether the payments under the technical support and crew lease agreements constituted FTS under the DTAA. The case was remanded to the Tribunal to reconsider and render specific findings in the context of Section 9(1)(vii) of the IT Act and the provisions of the DTAA. Conclusion: The High Court set aside the Tribunal's orders and remanded the case for reconsideration. The Tribunal was directed to hear the cases afresh and provide specific findings on whether the payments constituted FTS under the DTAA and were taxable in India. The Tribunal was instructed to complete this process within six months. The questions of law were answered accordingly.
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