1991 (7) TMI 126 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of fees received by the assessee.
2. Application of Article III of the Avoidance of Double Taxation Agreement (AADT) with Denmark.
3. Interpretation of "industrial and commercial profits" under Article III of AADT.
4. Applicability of Article XIV of AADT to the fees received.
5. Application of Section 9(1)(vii) of the Income-tax Act, 1961.

Summary:

1. Taxability of Fees Received by the Assessee:
The primary issue in this appeal is the taxability of Rs. 20,11,527 received by the assessee, a Public Limited Company registered in Denmark, for conducting preliminary studies, collecting data, and preparing a feasibility report for the Trans-Harbour Communication Link between Bombay and the Mainland. The Income-tax Officer (ITO) concluded that the fees were for technical services rendered in India and thus taxable under section 9(1)(vii) of the Income-tax Act, 1961, and Article XIV of the AADT with Denmark.

2. Application of Article III of AADT:
The ITO argued that Article III of AADT did not apply as the assessee had no permanent establishment in India. However, the Tribunal rejected this contention, stating that Article III provides exemption from taxability of profits in one territory if derived from a permanent establishment in the other territory. Since the assessee had no permanent establishment in India, Article III should apply, exempting the fees from tax.

3. Interpretation of "Industrial and Commercial Profits" under Article III of AADT:
The Tribunal examined whether the fees for technical services could be considered "industrial or commercial profits" under Article III. The term is not explicitly defined in AADT, but it excludes rents, royalties, interest, dividends, management charges, remuneration for labour or personal services. The Tribunal referred to the Special Bench decision in Siemens Aktiengesellschaft v. ITO, concluding that fees for technical services are part of industrial and commercial profits. The Tribunal noted that other treaties explicitly exclude fees for technical services from industrial and commercial profits, but AADT with Denmark does not.

4. Applicability of Article XIV of AADT:
The Tribunal considered whether the fees could be termed as profits or remuneration for labour or personal services under Article XIV. Article XIV applies to profits or remuneration derived by an individual. The Tribunal concluded that the term "individual" refers to a living person, not an artificial entity like a company. Therefore, Article XIV does not apply to the assessee, a corporate entity.

5. Application of Section 9(1)(vii) of the Income-tax Act, 1961:
The Tribunal rejected the revenue's contention that section 9(1)(vii) of the Income-tax Act, 1961, should apply in the absence of a specific provision in AADT for fees for technical services. The Tribunal emphasized that fees for technical services are part of industrial and commercial profits under AADT with Denmark and thus not taxable in India.

Conclusion:
The Tribunal concluded that the fees received by the assessee were in the nature of industrial and commercial profits. Since the assessee had no permanent establishment in India, the fees were not taxable in India under Article III of AADT with Denmark. The appeal was allowed.