2018 (12) TMI 57 - AT - Income Tax

Permanent establishment in India - income accrued in India - taxability of service as fees for technical services under India-Singapore DTAA in the absence of Service PE - service fee as taxable as fee for technical services - Held that - We find that in this AY 2012-13 since the employees of the assessee had visited India for a period of only 2 days on account of Management fee the pre-condition contained under Article 5(6)(b) of DTA is not satisfied and accordingly the employees of the assessee could not be considered as Service PE in India. Consequently in the absence of a PE in India the Management fee would not be subject to tax in India and the question of determining the profits attributable to PE in India would not arise. Since the Service Fee would be taxable as fees for technical services under Article 12(4)(b) of the DTAA the said services would fall outside the purview of service PE under Article 5(6) of the DTA which provides 6. An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12. Accordingly we are of the view that under the provisions of Article 12(2) of the DTAA the Service Fee would be chargeable to tax at the rate of 10 percent. AO erred in treating the gross receipts of INR 30, 18, 10, 059/- as the profit attributable to the Service PE and ought to have determined the profit clement in the said receipt at 10 percent of the costs or 10 / 110 of the gross receipts of 30, 18, 10, 059/- i.e. INR 2, 74, 37, 278. The assessee filed the Agreement wherein it is specified in Pans 4 and 5 that DDIL shall pay the assessee management fee calculated based on 110% of all direct and indirect costs incurred by the assessee in rendering of the management services and that all direct and indirect costs incurred for the provision of the services shall be allocated to the Company DDIL based on a formula. We are of the view that the above contention of the assessee needs verification of facts by the AO. Hence we direct the AO to decide the issue by considering the following i. The service fee is taxable as fee for technical services in both the years i.e. AY 2012-13 and 2013-14. ii. The management fee for AY 2012-13 being in the nature of business profit under the India-Singapore DTAA is not taxable in India as the assessee does not have a service PE because the condition of article 5(6)(b) of the DTAA is not satisfied for the reason that the no. of days of stay of employees is 2 days only. iii. As regards to AY 20113-14 the management fee earned by assessee the profit attribute to management service PE as per article 7(1) of India Singapore DTAA can be considered. Both the issues in these appeals of assessee are set aside to the file of the AO to decide in term of the above direction after carrying out verification of facts. Charging of interest 234(b) - Held that - We find that the assessee is a non-resident and the liability of payment of advance tax is not on the assessee for the reason that the payer has to deduct tax at source under section 195 of the Act at the time of payment. This issue is covered by the decision in the case of DIT (International Taxation) v. NGC Network Asia LLC (2009 (1) TMI 174 - BOMBAY HIGH COURT). Hence while computing tax on income the AO will not charge interest under section 234 B of the Act. We direct the AO accordingly.

Summary

Issues Involved:

1. Whether the assessee has a Permanent Establishment (PE) in India.
2. Taxability of service fee as Fee for Technical Services (FTS).
3. Taxability of management fee.
4. Charging of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Permanent Establishment (PE) in India:

The primary issue was whether the assessee, a Singapore-based company, constituted a PE in India under Article 5(6) of the India-Singapore Tax Treaty. The assessee argued that its employees' visits to India for management and technical services did not exceed the threshold of 30 days in any fiscal year, thus not constituting a PE. For AY 2012-13, the employees visited for 2 days for management services and 171 days for technical services. For AY 2013-14, the visits were for 64 days for management services and 26 days for technical services. The Tribunal found that for AY 2012-13, the 2-day visit for management services did not meet the threshold, thus no PE was constituted. However, for AY 2013-14, the 64-day visit for management services did meet the threshold, thus constituting a PE.

2. Taxability of Service Fee as Fee for Technical Services (FTS):

The Tribunal examined whether the service fee earned by the assessee for providing technical services should be taxed as FTS under Article 12 of the India-Singapore DTAA. It was determined that the services provided by the assessee made available technical knowledge and skill to the Indian subsidiary, thus qualifying as FTS. Consequently, the service fee was taxable at the rate of 10% under Article 12(2) of the DTAA. This was consistent for both AY 2012-13 and AY 2013-14.

3. Taxability of Management Fee:

For AY 2012-13, the Tribunal concluded that the management fee was not taxable in India as business profits under Article 7 of the DTAA, due to the absence of a PE. However, for AY 2013-14, since the PE was constituted, the management fee was taxable. The Tribunal directed the AO to determine the profits attributable to the PE, emphasizing that only the profit element, not the gross receipts, should be considered. The assessee's management fee was calculated at 110% of all direct and indirect costs incurred for rendering services.

4. Charging of Interest under Section 234B:

The Tribunal addressed the issue of interest under Section 234B, concluding that the assessee, being a non-resident, was not liable for advance tax payment as the payer was obligated to deduct tax at source under Section 195. This position was supported by the Bombay High Court's decision in DIT (International Taxation) v. NGC Network Asia LLC. Consequently, the AO was directed not to charge interest under Section 234B while computing tax on income.

Conclusion:

The Tribunal set aside the issues to the file of the AO for verification of facts and to decide in terms of the directions provided. The appeals were partly allowed for statistical purposes, with specific instructions to the AO regarding the taxability of service and management fees and the non-applicability of interest under Section 234B. The order was pronounced on 12-10-2018.