2020 (2) TMI 1276 - AT - Income Tax

Receipt of Fees for Technical Services (FTS) under the provisions of section 9(1)(vii) - Assessee is a foreign company having expertise in the mining activity - HELD THAT - As in ABB FZ-LLC Vs. Income Tax Officer 2016 (11) TMI 368 - ITAT BANGALORE held that in the absence of provision of DTAA to tax fee for technical services, the same would be taxed as per article 7 of DTAA as business profits and in the absence of PE in India, the said income is not chargeable to tax in India. The coordinate Bench in the case of M/s ABB FZ-LLC Vs. Income Tax Officer 2016 (11) TMI 368 - ITAT BANGALORE held that once the income chargeable to tax as per the DTAA are categorized by excluding the Fees for Technical Services then the scope of taxing the said income cannot be expended by importing the said provision from the Income Tax Act. Payment made on account of FTS required to be taxed under Article 7 and in the absence of permanent establishment, the business receipts are not chargeable to tax in India In the instant case, there is no dispute that the payment made was in the nature of FTS and there is no article in DTAA for taxing the FTS separately. Therefore, the payment made to the non resident required to be taxed under article 7 under the head business profits . There is no PE in India to non resident. The AO has not made out a case of having PE to non resident in India. Therefore, the payment made to non resident are not to be taxed in India as business profits. Though the department has tried to distinguish the case laws, the fact remains that in the case laws referred above, the payment was made in the nature of Fee for Technical Services and the department has also accepted that the payment made to the non resident was in the nature of FTS. We hold that the lower authorities have erred in taxing the FTS separately u/s 9(1)(vii) of the Act. Accordingly orders of the lower authorities are set aside and the appeals of the assessee are allowed.

Issues Involved:
1. Taxability of Fees for Technical Services (FTS) under section 9(1)(vii) of the Income Tax Act, 1961.
2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Philippines.
3. Determination of Permanent Establishment (PE) in India.
4. Tax rate and interest under section 234B.

Detailed Analysis:

1. Taxability of Fees for Technical Services (FTS) under section 9(1)(vii) of the Income Tax Act, 1961:
The primary issue was whether the retainer fees received by the foreign company, M/s Paramina Earth Technologies Inc. (PET), from M/s Teknomin Construction Ltd. (TCL) should be taxed as Fees for Technical Services (FTS) under section 9(1)(vii) of the Income Tax Act, 1961. The Assessing Officer (AO) concluded that the retainer fees were taxable as FTS and made additions to the income for the assessment years 2013-14 and 2014-15. The AO also relied on the decision of DCIT(IT) Vs. TVS Electronics Ltd. and CBDT Circular No.333 dated 02.04.1982 to support this view.

2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Philippines:
The assessee argued that as per the DTAA between India and Philippines, there was no specific article for taxing FTS. Therefore, the retainer fees should be taxed under the head ‘business profit’ and not as FTS. The assessee relied on the decisions of ITAT Bangalore in the cases of IBM India Private Limited Vs. DDIT and ABB FZ-LLC Vs. ITO, where it was held that in the absence of a specific provision in the DTAA for FTS, the income should be taxed as business profits under Article 7 of the DTAA.

3. Determination of Permanent Establishment (PE) in India:
The assessee contended that PET did not have a Permanent Establishment (PE) in India, and hence, the business profits could not be taxed in India. The AO did not establish the existence of a PE for PET in India. The CIT(A) also dismissed the assessee’s appeal, stating that PET had a PE in India due to its mining activities in the Philippines. However, the Tribunal found that the AO had not made a case for the existence of a PE in India.

4. Tax rate and interest under section 234B:
Given that the Tribunal allowed the appeal on the primary issue of taxing FTS, the grounds related to the tax rate of 40% and interest under section 234B became infructuous and were dismissed as such.

Tribunal's Findings:
The Tribunal concluded that the payment made to PET was in the nature of FTS, and there was no specific article in the DTAA for taxing FTS. Therefore, the payment should be taxed under Article 7 of the DTAA as business profits. Since PET did not have a PE in India, the business profits were not chargeable to tax in India. The Tribunal relied on the decisions of ITAT Bangalore in the cases of IBM India Private Limited and ABB FZ-LLC, which were similar to the present case. Consequently, the Tribunal set aside the orders of the lower authorities and allowed the appeals of the assessee.

Conclusion:
The Tribunal allowed the appeals of the assessee, holding that the retainer fees received by PET should be taxed as business profits under Article 7 of the DTAA between India and Philippines, and not as FTS under section 9(1)(vii) of the Income Tax Act, 1961. Since PET did not have a PE in India, the income was not chargeable to tax in India. The grounds related to the tax rate and interest under section 234B were dismissed as infructuous.

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