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TMI Blog1988 (3) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... e foreign company was not chargeable to tax under the provisions of the agreement for avoidance of double taxation inIndiaandDenmark. The relevant articles of the agreement are as follows: "Article III. (1) Subject to the provisions of paragraph (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first-mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment. (2) There shall be attributed to the permanent establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of the operation of mines, quarries or other natural resources or in respect of cinematographic films". " Article XIV. (1) Profits or remuneration from professional services (including services as a director) or from services as an employee derived by an individual who is a resident of one of the territories may be taxed in the other territory only if such services are rendered in that other territory. (2) An individual who is a resident ofIndiashall not be taxed inDenmarkon profits or remuneration referred to in paragraph (1) if (a) he is temporarily present inDenmarkfor a period or periods not exceeding in the aggregate 183 days during a taxable year. (b) the services are rendered for or on behalf of a resident ofIndia. (c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st.) further directed that the tax be deducted at 40 per cent of the receipt in the hands of the foreign company. As the foreign company was to get the payment net of taxes, the tax liability was to be worked out on tax basis. 2. When the matter came before the CIT(A), he noted the nature of the agreement between the assessee-company and the company ofDenmark. The foreign company was to carry out the study for capacity of the reforming section and for that purpose the study had to make various estimates about the working of the tubes for a life of different number of years. For this study a lump sum amount of U.S. Dollers 15,000 was to be paid. The necessary study was to be made by the foreign company inDenmarkand the report of the same w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Denmark. The results were to be communicated to the Indian company on the payment of stipulated amounts. It was contended that in the hands of the foreign company it was in the nature of commercial profit and as the Danish company was not having a permanent establishment inIndia, this could not be taxed under Art. III of the agreement for avoidance of double taxation. It was submitted that the payments were not in the nature of rents, royalties, interest, dividends, management charges, remuneration for labour or for personal services and they were in fact in the nature of technical fees for carrying out the status and the tests. In the alternative, it was submitted that the payment would be covered under Art. XIV of the agreement. 6. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n with the transfer of a technical know-how, which is considered as royalty. In that case, it becomes taxable inIndianotwithstanding the existence of the permanent establishment. It was further clarified that the tax treatment of fees for technical services may change when the revised agreement comes into force. This was, however, in respect of the agreement withGermany. 7. It was, therefore, contended that the payment in the hands of the foreign company should be treated as commercial profit in their hands, and should therefore, be covered under Art. III of the avoidance of double taxation agreement. It was further submitted that the provisions of the agreement for avoidance of double taxation will have precedence over the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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