2018 (9) TMI 1741 - AT - Income Tax

Taxability of an amount as fees for technical services as per section 9(1)(vii) - assessee is a limited liability partnership firm and is a tax resident of United Kingdom (UK) - Held that - For the purpose of being considered as a resident in India a reference has been made to the previous year. Section 4 of the Act, which is the charging section, mandates that a person shall be charged to income tax in respect of the total income of the previous year. The expression previous year has been defined under section 3 of the Act to mean the financial year immediately preceding the assessment year. As per the provisions of domestic law, the 12 month period would mean the previous year or the financial year which is the unit for which the income of a person is taxable. If the provisions of Article 5(2)(k)(i) of the India-UK DTAA is read harmoniously with the provisions of the Act referred to above, it will be fair and reasonable to conclude that the expression any 12 month period mentioned in Article 5(2)(k)(i) of the India-U.K. DTAA has to be construed to mean the previous year or financial year as per section 3 of the Act, since, the income is sought to be taxed in India. Therefore, it has to be seen whether the employees or personnel of the assessee have rendered services in India for a period aggregating to 90 days or more in financial year 2011-12 to constitute a PE. As per the chart submitted by the assessee it is claimed that the employees and personnel of the assessee were situated in India for rendering services for a period aggregating to 77 days. Since, the aforesaid factual aspect has not been verified by the Departmental Authorities as the assessee did not raise this issue before them, we are inclined to restore the issue to the Assessing Officer for adjudication keeping in view of our observations hereinabove and only after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes. The income received by the assessee will not be taxable under Article-15 of India-UK DTAA. This ground is allowed. Reimbursement of expenses as part of the gross receipts - Held that - It is noted from the perusal of orders passed by the lower authorities that AO did not bring anything on record to show that whether any element of mark-up was involved in the expenses, which have been reimbursed to the assessee. However, that is even not the case of the Revenue. Under these circumstances, it cannot just be presumed that income element was involved in the reimbursement of expenses. Therefore, respectfully following the orders of the Tribunal of earlier years, these grounds are allowed and decided in favour of the assessee. AO is directed to delete the disallowance made in this regard. As a result, these grounds are allowed. Interest under sections 234B and 234C of the Act are not chargeable against the assessee. Grounds raised are allowed.

Issues Involved:
1. Taxability of fees for technical services (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961.
2. Entitlement to benefits under the India-UK Double Taxation Avoidance Agreement (DTAA).
3. Existence of a Permanent Establishment (PE) in India.
4. Application of the force of attraction principle under Article 7 of the India-UK DTAA.
5. Taxability of income under Article 15 of the India-UK DTAA.
6. Treatment of reimbursement of expenses as part of gross receipts.
7. Applicability of interest under Sections 234B and 234C of the Income-tax Act, 1961.
8. Applicability of proper rate of tax if income is taxed as FTS.

Detailed Analysis:

1. Taxability of Fees for Technical Services (FTS):
The core issue was whether the amount of ?32,32,05,687 received by the assessee should be taxed as fees for technical services under Section 9(1)(vii) of the Income-tax Act, 1961. The Tribunal noted that the assessee, a UK tax resident, provided legal services partly in India and partly outside India. The Assessing Officer (AO) held that the assessee had a PE in India and thus was not entitled to the benefits of the India-UK DTAA, taxing the income as FTS under the Act. However, the Tribunal, following its decision in the assessee's own case for the assessment year 2011-12, held that the income was not taxable as FTS under Article 13 of the India-UK DTAA, and thus, the provisions of Section 9(1)(vii) could not be applied.

2. Entitlement to Benefits Under India-UK DTAA:
The Tribunal held that the assessee was entitled to the benefits under the India-UK DTAA. The AO's contention that the assessee was not liable to tax in the UK and thus not entitled to DTAA benefits was rejected. The Tribunal followed its earlier order, which stated that the assessee could claim DTAA benefits as long as the profits were taxed in the UK, either in the hands of the firm or its partners.

3. Existence of a Permanent Establishment (PE) in India:
The AO concluded that the assessee had a PE in India as its employees rendered services in India for more than 90 days within any 12-month period. The Tribunal admitted this as an additional ground and interpreted "any 12-month period" to mean the financial year as per Section 3 of the Act. The Tribunal directed the AO to verify the factual aspect of whether the employees rendered services for more than 90 days in the financial year 2011-12. The assessee claimed that the total days aggregated to 77, thus not constituting a PE.

4. Application of the Force of Attraction Principle:
The Tribunal held that only the income related to services rendered in India was liable to tax in India. This followed the Tribunal's earlier decision and subsequent modification in the assessee's case for the assessment year 2011-12, directing the AO to delete the addition made towards income received from services rendered outside India.

5. Taxability Under Article 15 of the India-UK DTAA:
The Tribunal held that Article 15, which deals with independent personal services, applies only to individuals and not to entities like the assessee. This decision was based on the Tribunal's earlier ruling that Article 15 could not be applied to the assessee, thus the income was not taxable under this Article.

6. Treatment of Reimbursement of Expenses:
The Tribunal held that reimbursements of expenses, being specific and actual without any mark-up, should not be treated as income. This followed the Tribunal's earlier decisions in the assessee's case, which noted that the AO did not provide evidence of any income element in the reimbursements.

7. Applicability of Interest Under Sections 234B and 234C:
The Tribunal held that interest under Sections 234B and 234C was not chargeable against the assessee, following the Bombay High Court judgment in NGC Network and the Tribunal's earlier decisions in the assessee's case.

8. Applicability of Proper Rate of Tax:
Considering the Tribunal's decision that the income was not to be treated as FTS under Article 13 of the India-UK DTAA, this ground became redundant and was not required to be adjudicated.

Conclusion:
The Tribunal's decision was partly in favor of the assessee, holding that the income was not taxable as FTS under the DTAA, the assessee was entitled to DTAA benefits, and reimbursements should not be treated as income. The issue of PE was remanded to the AO for verification, and the applicability of interest under Sections 234B and 234C was decided in favor of the assessee.

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