2008 (4) TMI 36 - AAR - Income Tax

The applicant is a company incorporated in Australia entered into a contract with Gas Authority of India Limited to monitor the project known as Dehej - Vijaipur Gas Pipeline Project - held that - The receipts under the contract with GAIL are not in the nature of royalties as defined in Article 12 of the DTAA between India and Australia. - The income from such receipts are liable to be taxed as business profits in India only the profits attributable to the P/E are liable to be taxed.

Summary

Issues:
1. Determination of whether receipts under the contract with GAIL constitute 'royalties' as defined in Article 12 of the DTAA between India and Australia.
2. Assessment of whether the receipts are to be treated as business profits under Article 7 of the DTAA and the extent of taxation.
3. Analysis of whether the applicant has a Permanent Establishment (PE) in India under the contract with GAIL.

Issue 1:
The applicant, a company incorporated in Australia, entered into a contract with Gas Authority of India Limited (GAIL) for project monitoring services. The applicant argued that the payments received are not 'royalties' under Article 12 of the DTAA as the services provided did not involve making technical knowledge available to GAIL. The Authority concurred, stating that mere monitoring and supervision services do not qualify as 'royalties' under the DTAA.

Issue 2:
The Revenue contended that the receipts could be classified as fees for technical services under the Income-tax Act but acknowledged that Article 7 of the DTAA on business profits applied. As the applicant admitted performing most work in India and having a PE, the profits attributable to the PE are taxable in India under Article 7. The Authority agreed that the payments were taxable as business profits only to the extent attributable to the PE in India.

Issue 3:
Regarding the existence of a Permanent Establishment in India, the Authority referred to Article 5.2(k) of the DTAA, which includes supervisory activities for over six months as a PE. The applicant's activities in India satisfied this criterion, establishing a PE. The Authority accepted the applicant's claim of having a PE for fulfilling contractual obligations, leading to the conclusion that profits attributable to the PE are subject to taxation in India.

In conclusion, the Authority ruled that the receipts from the contract with GAIL were not 'royalties' under the DTAA but should be taxed as business profits under Article 7. Only the profits attributable to the Permanent Establishment in India are subject to taxation as per the provisions of the Income Tax Act, 1961.