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TMI Blog2020 (2) TMI 1276X X X X Extracts X X X X X X X X Extracts X X X X ..... (in short 'Act'). M/s Paramina Earth Technologies Inc. (PET) is a foreign company having expertise in the mining activity. It was engaged by M/s Teknomin Construction Ltd., Vijayawada (M/s TCL) to recruit skilled and experienced employees for mining at the mines of Hindustan Zinc Ltd., situated at Rajasthan. The assessee company was represented by M/s Teknomin Constructions Ltd., Vijayawada. The assessee filed the return of income for the A.Y. 2013-14 and 2014-15 admitting 'Nil' income. The case was selected for scrutiny and found that the assessee company had received retainer fee from Teknomin Constructions Ltd., Vijayawada for an amount of Rs. 8,55,638/- for the A.Y.2013-14 and Rs. 64,76,103/- for the A.Y.2014-15 and claimed the same as non taxable as per the Double Taxation Avoidance Agreement (DTAA) entered between India and Philippines. The Assessing Officer (AO) noticed from the computation statement that the assessee claimed the deduction of the entire receipt stating that in the absence of PE in India as per the Indo Philippines DTAA and in the absence of FTS article in the Indo Philippines DTAA, the same is not taxable in India and arrived at Nil income. The AO asked for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income Tax, International Taxation, Cicle-1(1), Bangalore in IT(IT)A Nos.489 to 498/Bang/2013 dated 24.01.2014. The Ld.AR further submitted before the AO that as per Article 23 of the DTAA between India and Philippines, other income is to be taxed only in the country of residence of the recipient of the income, therefore, it cannot be brought to tax in India under the Article 23 also as PET is a tax resident of Philippines. The AO not being convinced with the explanation of the assessee relied on Circular 333 dated 02.04.1982 and issued show cause notice for which the assessee filed explanation stating that Circular No.333 dated 02.04.1982 covers method of computation of income and it does not provide for classification of income. However, the AO observed that the assessee initially deducted the tax u/s 195 after grossing up of tax @21.115% on remittances made to PET by TCL and later on revised TDS return. The AO viewed that the case law relied upon by the assessee in the case of IBM India Private Ltd (in short IBM) is distinguishable since in the case of IBM, the work was carried out in Philippines and no employees of IBM Philippines have travelled to India to perform any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the assessee had received retainer fee from Teknomin Constructions @10% of the salary of certain specified employees. The same is taxed by AO as Fee for Technical Services. There exists DTAA between India and Philippines and in the DTAA, there is no separate article for taxing the FTS separately. Since, there is no separate article to tax the FTS, the same required to be taxed under the head 'business profit' but not under the Fee for Technical Services. The Ld.AR further argued that for taxing the business profits, there must be a permanent establishment (PE) in India and the business profits are not to be taxed in India in the absence of PE. The Ld.AR further submitted that the incomes which were not mentioned in the articles of DTAA are taxable only in the residence state, therefore, argued that the sum paid to the PET or received by PET as retainer fee is not taxable in India, hence requested to set aside the order of the lower authorities and allow the appeal of the assessee. The assessee relied on the decisions of ITAT Bangalore Bench in the case of ABB FZ-LLC Vs. ITO (IT) [162 ITD 89] I.T.(I.T.)A.No.188/Bang/2016 and the decision of ITAT Bangalore in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Private Limited Vs. DDIT, Circle-1(1), Bangalore and also ABB FZ-LLC Vs. Income Tax Officer (supra) 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. Though the decision was rendered in the context of India-UAE agreement, the same is very much relevant in the assessee's case. The coordinate bench of ITAT in the case law referred above, considered the absence of article for taxing the fee for Technical Services, Article 7, 23 and 24 and also Circular No.333 which was relied upon by the AO as well as lower authorities and held that the same cannot be taxed as income under the category of Fee for Technical Services. The coordinate Bench in the case of M/s ABB FZ-LLC Vs. Income Tax Officer in I.T.(I.T)A No.188/Bang/2016 dated 28.10.2016 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. For the sake of clarity and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s tax treaty. However these two categories of income are separately classified for the purpose of charging to tax. Once the DTAA does not recognize any income as Fees for Technical Services or royalty then classification of the said income has to be as per the other provisions of the DTAA. There is no dispute that in the case of the assessee the income derived by the assessee is from providing services to the Indian counterpart which is a regular business activity and therefore the said receipt has to be recognized under the provisions of the DTAA as business income because the DTAA does not contain any provision to recognize or tax any income in the nature of Fees for Technical Services. The absence of the provision in the DTAA is not an omission but is a deliberate mutual agreement between the contracting states not to recognize/classify any income as Fees for Technical Services for taxation. Therefore the intention for not incorporating any provision in the DTAA is not to tax an income under the category of Fees for Technical Services. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid decision of the Tribunal in IBM India Pvt. Ltd. (supra), the admitted position is that there is no specific clause in DTAA regarding income in the nature of FTS. The assessee contended that in the absence of an FTS' clause in the DTAA, Article 7 (business profits) thereof would be applicable since IBM-Philippines is providing services in the course of its business and since it does not have a PE in India, payments made to IBM-Philippines are not chargeable to tax in India. Alternatively it was contended that if Article 7 of the DTAA is not applicable, the payments would be covered by Article 23 (1) of the DTAA which deals with 'Other Income which lays down the rule that it is only the State of residence of the recipient (Philippines) that would have right to tax 'other income' therefore payments to IBM- Philippines a tax resident of Philippines, would be taxable in Philippines and not in India. Per contra, Revenue contended that in the absence of FTS clause in the DTAA, as per Article 24(1) thereof, the taxability of the said payments would be governed by the domestic laws i.e. Section 9(1)(vii) of the Act and consequently these payments are chargeable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of the taxes paid in either of the states based on either exemption method or providing for credit for taxes paid in the other country and that Article 25 by itself does not provide any rules on the mechanism for computing relief. It is only for such purposes the domestic laws may have to be referred and it cannot be extended to tax business income falling under Article 7 as per domestic law. The Tribunal referring to the aforesaid decision held that Article 24(1) of the India- Philippines DTAA, which is similar to Article 25(1) of the India-UAE Treaty, does not confer a right to invoke the provisions of domestic laws for classification or taxability of income which is governed by Article 6 to 23 of the India-Philippines Treaty and that Article 24(1) operates in the field of computation of doubly taxed income and tax thereon in accordance with the domestic laws of each contracting state and is not part of Articles 6 to 23 which deal with the classification of income into different heads. Para 2 of CBDT Circular NO.333 dt.2.4.1982 exemplifies what is stated in Article 24 of the India- Philippines DTAA; providing that the Mode of Computation of income as provided in the DTAA shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down therein are satisfied. The Tribunal clarified that the fact that the remuneration paid to the assessee may be in the nature of technical fee within the scope of section 9(l)(vii) does not make a difference. Fees of this nature can be earned in business or otherwise. If earned in the course of business, they constitute income from business. There is no incompatibility between recognizing the receipts as royalties or technical fees and also looking upon them as the profits of a business. Judicial decisions have recognized the principle in regard to other types of receipts such as dividends and interest. That being so, when technical fees are received in the course of business, one cannot deny them the treatment envisages by Article 7 specifically intended for application to business income. That apart as pointed out earlier, there are several DTAAs which prescribe different modes of taxation for business and for royalties and fees for technical services, but they are clear that the provisions of the "business" clause of the treaty (Article 7 here) will govern where such technical fees are earned in the course of business with a permanent establishment in the State in quest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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