2024 (1) TMI 1004 - AT - Income Tax

Accrual of in Income in India - assessee is a company incorporated in Thailand rendered services to its group entities in India - taxability of FTS - whether Fees for Technical Services is taxable in India as per the India-Thailand Treaty or not? - taxability will be covered under article 5 read with article 7 of DTAA with Thailand or not? - HELD THAT - It is an undisputed fact that the assessee is a non-resident and the amounts received fall under the Fee For Technical Services (FTS) and the India-Thailand DTAA do not have a provision of taxing of FTS under any of the Articles of the treaty and also cannot be treated as miscellaneous income under any residual clause. Hence, the assessee cannot be made liable tax in India. Similar, proposition laid down by the Hon ble High Court of Madras in the case of Bangkok Glass Industry Co. Ltd. 2015 (4) TMI 503 - MADRAS HIGH COURT The Co-ordinate Bench of Tribunal in the case of Paradigm Geophysical Pvt. Ltd. 2008 (6) TMI 238 - ITAT DELHI-G held that where the business profits of the non-resident include items of income for which specific or separate provisions have been made in other articles of the tax treaty, then those provisions would apply to the items. However, in case it is found that those provisions are not applicable then the items of income would have to be considered in Article 7. Co-ordinate Bench of Tribunal in the case of Bharti Airtel Ltd. 2016 (3) TMI 680 - ITAT DELHI held that where there is no FTS clause available in the treaty with a country, then the income in question would be assessable as business income and it can be taxed in India only if there is a permanent establishment in India and the income is attributable to activities or functions performed by such permanent establishment. The aforesaid expositions are fully applicable here. The assessee company has no Permanent Establishment (PE) in India. The income which has been earned in this case in absence of FTS clause in DTAA would fall as business income. Their nature would not change to be that of other income. Hence the same cannot be taxed in India in absence of a PE. Hence, keeping in view, the provisions of the Act, Articles of India-Thailand DTAA and the history of the assessee, the appeal of the assessee is hereby allowed.

Summary

Issues involved:
The appeal against the order passed by the AO under sections 147/144C of the Income Tax Act, 1961, focusing on the legality of the notice issued, the draft order passed, and the taxation of receipts as Fees for Technical Services (FTS) at a specified rate.

Issue 1 - Legality of Notice under Section 148:
The appeal raised concerns about the legality of the notice issued under Section 148 of the Act, contending that it was bad in law.

Issue 2 - Validity of Draft Order under Section 147:
Challenged the draft order passed by the AO under Section 147 read with Section 144C, claiming it was also bad in law.

Issue 3 - Taxation of Receipts as FTS:
Disputed the AO's decision to tax the receipts as Fees for Technical Services (FTS) under Section 115A of the Act.

Adjudication of the Case:
The case revolved around whether Fees for Technical Services are taxable in India as per the India-Thailand Treaty. The assessee, a company from Thailand, provided services to its Indian group entities and received payments, arguing that these were Business Support Services covered under the DTAA with Thailand.

AO's Decision and DRP's Ruling:
The AO treated the receipts as FTS, applying a 10% tax rate, rejecting the assessee's contentions. The DRP held that the absence of an FTS clause in the DTAA did not exempt the income from taxation in India, citing tax treaties' purpose to allocate taxing rights.

Tribunal's Verdict:
The Tribunal considered past judicial decisions and held that in the absence of an FTS clause in the DTAA, the income would be classified as business income and not taxable in India without a Permanent Establishment (PE) in the country.

Precedents and Conclusion:
Citing relevant case laws, the Tribunal allowed the appeal, emphasizing that the income, falling under business income due to the absence of an FTS clause in the DTAA, could not be taxed in India without a PE.

Conclusion:
The Tribunal ruled in favor of the assessee, highlighting the absence of an FTS clause in the India-Thailand DTAA and the lack of taxation in previous years, leading to the allowance of the appeal on 22/01/2024.