Vijay Pal Rao, Judicial Member - This appeal by the assessee is directed against the assessment order dt.30.12.2015 passed under Section 143(3) r.w.s. 144C of the Income-tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short 'DRP') dt.1.12.2015 for the Assessment Year 2012-13.
2. The assessee has raised the following grounds :
1. |
Holding that where there is no specific Article for taxability of particular payment in the Double Taxation Avoidance Agreement ('DTAA'), the provisions of the Income-tax Act, 1961 ('the Act') would be applicable |
(a) |
On the facts and in the circumstances of the case, the learned Assessing Officer ('AO') erred in law in holding and the learned Dispute Resolution Panel ('DRP') erred in law in confirming that where there is no specific Article for taxability of a particular payment in the DTAA, the provisions of the Act would be applicable. |
(b) |
On the facts and in the circumstances of the case, the learned AO erred in law in holding that the fees received (i.e. fees for technical services ('FTS')) as taxable under the Act, irrespective of there being no Article in the DTAA for taxation of FTS. |
2. |
Penalty proceedings under section 271(1)(c) |
|
The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. |
3. |
Relief |
(a) |
The appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. |
(b) |
The appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. |
(c) |
Further, the appellant prays that all the above adjustments/additions/disallowances made by the learned AO and upheld by the learned DRP are bad in law and liable to be deleted. |
3. The only issue raised by the assessee in this appeal is whether the Fees for Technical Services is chargeable to tax in India when Indo-UAE Double Taxation Avoidance Agreement ('DTAA') does not contain a clause/Article for taxation of Fees for Technical Services. The assessee is a foreign company incorporated in UAE. The assessee has entered into a service agreement with ABB India Ltd. for rendering certain services. The assessee has not offered to tax the fees from ABB India Ltd. on the ground that the provisions of DTAA which does not have a clause on Fees for Technical Services are more beneficial than the corresponding provision of Income-tax Act. Thus there is no dispute that the fees received by the assessee from ABB India Ltd. is in the nature of Fees for Technical Services as per the provisions of Section 9(1)(vii) of the Act. The Assessing Officer did not accept the contention of the assessee that when there is no clause for taxation of Fees for Technical Services in the Indo-UAE tax treaty such payment would be classified as business profit under Article 7 of the DTAA and in the absence of Permanent Establishment ('PE') in India the receipts are not taxable in India. The Assessing Officer was of the view that when the DTAA is silent then the provisions of the Income-tax Act has to be considered and applied in respect of the income in question. Since the term 'FTS' appears has not been defined in DTAA therefore the expression defined in the Income-tax Act would be attracted. Only in case of conflict between the provisions of DTAA and Income-tax Act the specific provisions made in the DTAA would prevail over the general provisions contained in Income-tax Act. The Assessing Officer was of the view that when there is no contrary provision in the DTAA then the receipt in question is FTS as per the provisions of section 9(1)(vii) of the Act. The provisions of Income-tax Act will govern the taxation of the said income. The assessee challenged the proposed action of the Assessing Officer before the DRP however, the DRP has confirmed the view taken by the Assessing Officer.
3.1 Before us, the learned Authorised Representative of the assessee has submitted that there is no dispute that the Indo-UAE DTAA does not contain any provision for taxation of FTS. Therefore the receipt in question will be treated as business income of the assessee and in the absence of PE in India the same is not chargeable to tax in India. He has further submitted even otherwise as per Article 22 of the Indo-UAE DTAA any item of income falling in the category of other income not specifically deal with by the other Article of the Treaty shall be taxable only in the country of recipient or the payee. Hence even if it is assumed that the income received by the assessee in the nature of other income the same should be taxed in UAE and not anywhere. When the DTAA between India and UAE has not classified an income as Fees for Technical Services then the said income would be considered either business income or other income of the assessee depending upon the facts and circumstances. Once the treaty does not confer a right to tax a particular income then the provisions of domestic law cannot be invoked to tax the said income. The learned Authorised Representative has relied upon the decision dt.24.1.2014 of co-ordinate bench of this Tribunal in the case of IBM India (P.) Ltd. v. Dy. DIT [IT Appeal Nos. 489 to 498 (Bang.) of 2013] and submitted that an identical issue was considered by this Tribunal regarding the chargeability to tax of the income in the nature of FTS when there is no such provision of taxing for Fees for Technical Services in the Indo-Phillipines Treaty. The learned Authorised Representative has then referred to the decision of Mumbai Bench of the Tribunal in the case of BNP Paribas SA v. Dy. CIT [IT Appeal Nos. 8693/Mum/1995 & 507/Mum/2000] and submitted that the Tribunal has taken a similar view that DTAA which is more beneficial should be applied and deduction/disallowances under the provisions of the Income-tax Act should not have made while allowing general and administrative expenditure. The learned Authorised Representative has then relied upon the judgment of Hon'ble Madras High Court in the case of Bangkok Glass Industry Co. Ltd. v. Asstt. CIT [2013] 215 Taxman 116/34 taxmann.com 77 and submitted that the provisions regarding other income under the DTAA can be applied only when the income does not fall in the category of the income which is taxable under the specific provisions of the DTAA. Thus the Hon'ble High Court has held that the provisions of other income in the DTAA which considered only in the case of miscellaneous income when the income is derived by way of regular business activity, the same will fall in the classification of business income. Thus the learned Authorised Representative has submitted that in the absence of the provisions of taxing the Fees for Technical Services in the Indo-UAE DTAA and further in the absence of PE in India the receipt in question is not taxable in India.
4. On the other hand, the ld. DR has submitted that when the liability to tax arising under the provisions of sections 4 & 5 of the Income-tax Act which provides for taxation of income of assessee chargeable to tax then the benefit of DTAA is available to the assessee only when a beneficial contrary provision is made in the DTAA. When the tax liability is imposed by the Act, the DTAA may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In the case of any conflict between the provisions of DTAA and the Act the provisions of agreement would prevail over the provisions of the Act in view of the provisions of Section 90(2) of the Income-tax Act. Thus the ld. DR has submitted that where there is no conflict between the Act and the DTAA in respect of Fees for Technical Services then in the absence of any such provision in the DTAA the provisions of the Act would be applicable for charging the said income to tax. He has referred to the judgment of Hon'ble Supreme Court in the case of CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 654/137 Taxman 460. The ld. DR then relied upon the decision of the Chennai Bench of the Tribunal in the case of Dy. CIT v. TVS Electronics Ltd. [2012] 52 SOT 287/22 taxmann.com 215 and submitted that the Tribunal has held that when DTAA between India and Mauritius did not provide for taxing Fees for Technical Services in such situation the provisions of the Act would have been considered and applied. He has relied upon the orders of the authorities below.
5. In a rejoinder the ld. AR has submitted that Sections 4 & 5 of the Income Tax Act are subjected to the other provisions of the Act and consequently these charging sections are subject to Section 90(2) of Income-tax Act therefore the provisions which are beneficial to the assessee would be applied. The learned Authorised Representative has further pointed out that the Tribunal in the case of IBM India (P.) Ltd.'s (supra) has decided the issue after considering the decision in the case of TVS Electronics Ltd.'s. (supra).
6. We have considered the rival submissions as well as the relevant material on record. There is no dispute as regards the nature of receipt by the assessee from ABB India Ltd. is Fees for Technical Services. The Assessing Officer has accepted the nature of receipt being Fees for Technical Services. It is also not in dispute that the Indo-UAE Treaty does not contain any provision/Article to tax Fees for Technical Services. Article 3(2) provides that if any term is not defined in the agreement then the meaning of which as per the law of the State concerning the taxes will be taken for the purpose of application of the agreement. For ready reference we reproduce Article 3(2) as under :
" ARTICLE 3
General Conditions
(2) As regards the application of the Agreement by a contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the laws of that State concerning the taxes to which the Agreement applies."
As it is clear that when a term is used in the agreement (DTAA) but has not been defined therein then the meaning of the said term unless the context otherwise requires shall have the meaning as defined under tax statute of the contracting State. The need of importing the meaning of the term from the tax statute arises only when a term is provided in the agreement but the meaning of the same has not been defined therein. Therefore the question arises is that when a term is not used in the tax treaty then the meaning of the said term or the term itself can be imported or can be applied for charging a particular income to tax in the contracting State. As regards the provisions of DTAA prevail over the provisions of tax statute so far as it is beneficial to the assessee is concerned there is no quarrel on this point that in case of any conflict between the provisions of agreement and the Act, the provisions of the agreement will prevail over the provisions of the Act as mandated by the provisions of section 90(2) of the Act. The income which is classified as royalty or Fees for Technical Services if derived from the regular business activities of the assessee then the said income is inherently regarded as business income for the purpose of taxation under the Act as well as 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 income cannot be expended by importing the said provision from the Income-tax Act when it is excluded under the DTAA. The co-ordinate bench of this Tribunal in the case of IBM India (P.) Ltd.'s (supra) while dealing an identical issue has held in paras 7.3.1 to 9.1.5 as under :
'7.3.1 We have heard the rival submissions and perused and carefully considered the material on record. From an appreciation of the material on record it appears that there is no dispute with regard to the facts of the case and the nature of services provided by IBM-Philippines. The issue for our consideration is whether the payments made by the assessee to IBM-Philippines are chargeable to tax in India as 'FTS' u/s. 9(1)(vii) of the Act in the absence of Article dealing specifically with 'FTS' under the India-Philippines DTAA. The assessee contends that in the absence of an 'FTS' clause in the DTAA, Article 7 thereof would be applicable since IBM-Philippines is providing services in the course of its business and consequently since it does not have a PE in India, payments made to IBM-Philippines are not chargeable to tax in India. The assessee contends that without prejudice to the above submission, if Article 7 of the DTAA is not applicable, the payments would be covered by Article 23 of the DTAA which deals with 'Other Income' and therefore payments to IBM-Philippines would be taxable in Philippines and not in India. Per contra, Revenue contends 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 tax in India and liable for TDS u/s.195 of the Act.
7.3.2 It would be pertinent to first consider the scheme/layout of the India-Philippines DTAA which was entered into on 21.3.1994. The Protocol to this Treaty was entered into on 12.1.1996. The Govt. of India by virtue of the powers conferred by section 90 of the Act, issued Notification No.GSR 173(E) dt.2.4.1996 directing that all the provisions of the DTAA shall be given effect to in the Union of India. This Treaty is divided into various Articles :-
Article 1 - Provides that this convention shall apply to persons who are residents of one or both of the contracting States;
Article 2 - deals with taxes covered within the scope of the convention for the purposes of avoiding double taxation;
Article 3 - deals with the definition of certain taxes;
Article 4 - deals with the definition of the term 'resident of a contracting State'; and
Article 5 - deals with the meaning of 'Permanent Establishment.'
Articles 6 to 22 - deal with the distributive rules dealing with classification of income into various heads and the right to tax such income in India or in the Philippines or by both countries. These Articles deal with the classification of income into different heads like income from immovable property business profits, air transport, shipping, dividends, interest, loyalties, capital gains, etc. There is no specific Article dealing with 'FTS'.
Article 23 - deals with the taxability of other income, i.e. items of income not dealt with in the foregoing Articles of the DTAA i.e. 6 to 22. As pointed out by the learned Authorised Representative, Article 23 would cover incomes like alimony, income from gambling, lottery etc. The classification of income and the right to tax such income by one or the other or both the contracting States ends with Article 23.
7.3.3 Article 24 of the DTAA deals with the elimination of double taxation. The said Article is extracted and reproduced hereunder :
" ARTICLE 24
ELIMINATION OF DOUBLE TAXATION
| 1. |
The laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention. |
2. |
The amount of Philippine tax payable, under the laws of the Philippines and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of India, in respect of profits or income arising in the Philippines, which have been subjected to tax both in India and in the Philippines, shall be allowed as a credit against the Indian tax payable in respect of such profits or income provided that such credit shall not exceed the Indian tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in the Philippines. Further, where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first instance against income tax payable by the company in India and as to the balance, if any, against surtax payable by it in India. |
3. |
The term 'Philippine tax payable' shall be deemed to include the amount of Philippine tax which would have been paid if the Philippine tax had not been exempted or reduced in accordance with this Convention and the special incentive laws designed to promote economic development in the Philippines, effective on the date of signature of this Convention, or which may be introduced in the future in the Philippine taxation laws in modification of, or in addition to, the existing laws. |
4. |
The amount of Indian tax payable under the laws of India and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of the Philippines, in respect of profits or income arising in India, which has been subjected to tax both in India and the Philippines, shall be allowed as a credit against Philippine tax payable in respect of such profits or income provided that such credit shall not exceed the Philippine tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in India. |
5. |
For the purpose of the credit referred to in paragraph 4, the term "Indian tax payable" shall be deemed to include any amount which would have been payable as Indian tax for any assessment year but for an exemption or reduction of tax granted for that year or any part thereof by the special incentive measures under the provisions of the Income-tax Act,1961 (43 of 1961), which are designed to promote economic development, or which may be introduced hereafter in modification of, or in addition to, the existing provisions for promoting economic development in India." |
Article 24(1) provides that the laws in force in either of the contracting States shall continue to govern the taxation of income in the respective contracting States except where provisions to the contrary are made in the convention. At first sight, it may appear that Articles 23 and 24(1) of the DTAA are in conflict with each other. It may be argued that if Article 23 is an omnibus clause covering all items of income not dealt with in Articles 6 to 22, then Article 24(1) would be rendered redundant for the reason that there would be no income left to be governed by Article 24(1) if all the residuary income is absorbed by Article 23. On the other hand, if one were to interpret Article 24(1) as conferring right to tax 'FTS' in accordance with the domestic law of a contracting State, which is the contention of revenue in the case on hand, then Article 23 would become redundant since it ceases to be a residuary/omnibus clause covering items of income, wherever arising, not dealt with in the foregoing Articles of the Treaty.
7.3.4 It is a settled principle that a clash is to be avoided while interpreting the provisions of a law or Treaty. In CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449, the Hon'ble Apex Court, referring to its earlier decisions on the approach to be followed in case of conflicting provisions, held as under at para 28 thereof :-
"The court must ascertain the intention of the Legislature by directing its attention not merely to the clauses to be construed but to the entire statute; it must compare the clause with other parts of the law and the setting in which the clause to be interpreted occurs. (see RS.Raghunath v. State of Karnataka AIR 1992 SC 81). Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between two different sections or provisions of the same statute. It is the duty of the court to avoid a head on clash between two sections of the same Act. (See Sultana Begum v. Prem Chand Jain, AIR 1997 SC 1006)."
Even though the DTAA is entered into by the Central Government under the powers conferred by section 90 of the Act, the above principles explained by the Hon'ble Apex Court are applicable in interpreting the provisions of a Treaty to avoid conflict between various Articles therein. Para 5.3 of the written submissions of the learned Departmental Representative refer to Article 31 of the Vienna Convention as per which a Treaty has to be interpreted in good faith. The Central Government by Notification No.173(E) dt. 2.4.1996 by which the India-Philippines DTAA was brought into force has directed that all the provisions of the convention shall be given effect to in the Union of India. In this view of the matter, no redundancy can be attributed to either Article 23 or Article 24(1) of the India-Philippines DTAA.
7.3.5 The contrast or clash between Article 23 and Article 24(1) can be avoided if the scope, context and setting of these Articles are understood in their proper perspective. In the case of BNB Paribas SA v. Dy. CIT [2013] Tax Corp (AT) 32700, the purpose of Article 25(1) of the India-UAE DTAA which is similar to Article 24(1) of the India-Philippines Treaty was explained by the Mumbai Tribunal. The relevant portion of the said decision is extracted as under :
'12 A lot of stress has been given by the department and the learned DR that such an exception already existed by virtue of Article 25(1) which provides that,
"The laws in force in either of the Contracting States shall continue to govern the taxation of income and capital in the respective Contracting States except where express provisions to the contrary are made in this Agreement."
Article 25 which is similar to Article 23 of other treaties, deals with the Elimination of double taxation and it is for this purpose, it has been provided that the 'laws in force' in either of the Contracting States shall continue to govern the taxation of the income unless express provision to the contrary are made in this Agreement. Further paragraphs of Article 25 provide for deductions or credit of the taxes paid in either of the States. Various countries in their agreements based on different models have adopted different method of credit of taxes or deductions or exemptions to eliminate the incidents of double taxation in their domestic laws. Article 25 per se does not provide any rules on the mechanism for computing relief. Hence for this purpose, the domestic laws may have to be referred. Interpretation of Article 25 that it extends to Article 7 for applicability of domestic law will not be correct. If a computation of profit has been provided in a certain manner in Article 7, restrictions cannot imported therein by virtue of Article 25'
7.3.6 From the above decision, it is clear 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 Articles 6 to 23 of the India-Philippines Treaty. That Article 24(1) is limited to the elimination of double taxation becomes clear if Article 24 is read as a whole. Article 24(2) provides credit for the amount of 'Philippine tax payable' by a resident of India against the Indian tax payable in respect of profits or income arising in the Philippines which has been subjected to tax in both India and the Philippines i.e. 'doubly taxed income'. Article 24(3) deals with the meaning of 'Philippine tax payable'. Article 24(4) of the DTAA provides for credit for the amount of 'Indian Tax Payable' by a resident of Philippines in respect of profits or income arising in Philippines which have been subjected to tax both in India and the Philippines i.e. 'doubly taxed income.' Article 24(5) deals with the meaning of the term Indian tax payable. Article 24, however, does not provide any separate mechanism for quantification or computation of 'Philippine tax payable' or 'Indian tax income' which is the starting point for claiming foreign tax credit. This means 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.
7.3.7 Article 24(1) also contains an exception which provides that where provisions to the contrary are made in the DTAA, the laws in force in either of contracting States would not govern the taxation of income which also operates in field of computation of doubly taxed income and tax thereon as per domestic laws. The reason for the same can be found in paras 3 & 5 of Article 24 which define the term 'Philippine tax payable' and 'Indian tax payable' respectively. As per para 3 of Article 24, 'Philippine tax payable' shall be deemed to include the amount of Philippine tax which would have been paid if the Philippine tax had not been exempted or reduced in accordance with this DTAA and Special incentive laws designed to promote economic development in the Philippines effective on the date of the DTAA or which may be introduced in future in the Philippine taxation laws in modification of or in addition to, the existing laws. Similarly in para 5 of Article 24 in the case of 'Indian tax payable' under the provisions of the Income-tax Act, 1961. Normally, income exigible to tax in the source country but exempt in the country of residence cannot be regarded as doubly taxed income and consequently credit for the same may not be available in the country of residence. However, under Article 24(3) and 24(5), 'Philippine tax payable; or 'Indian tax payable', as the case may be, includes, inter alia, the tax which would have been payable but for an exemption or reduction of tax granted by the special incentive provisions which would are designed to promote economic development of the country. Thus, in cases where the above exception apply, the computation of doubly taxed income and tax thereon would be made in accordance with Article 24(3)/24(5). In cases where the exception part of Article 24(1) does not apply, the computation of doubly taxed income and tax thereon are governed by the provisions of the laws in force in either contracting State.
7.3.8 In this view of the matter, both Article 24(1) and the exemption contained therein operate in the field of computation of doubly taxed income and tax thereon which is indispensible for the purpose of elimination of double taxation. 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 should be followed and where there is no specific provision in the treaty, the Income-tax Act will govern the same. Both Article 24 of the India-Philippine DTAA and CBDT Circular No.332 dt.2.4.1982 have no role to play in classification of income and allocation of right to tax such income to one or both of the contracting States as the same are to be dealt with in accordance with Articles 6 to 23 of the DTAA. Even though the India-Philippines DTAA does not have an Article dealing with 'FTS', its taxation would be governed by Article 7 or Article 23 as the case may be, depending on the facts and circumstances of each case. If Article 24(1) of the DTAA is interpreted as dealing with taxation of items of income not dealt within the foregoing Articles 6 to 23 of the India-Philippines DTAA, as per domestic laws, it would render Article 23 thereof redundant.
7.3.9 In view of the above, we are of the view that there is no merit in the contention put forth by revenue that in the absence of 'FTS' Article under the India-Philippines Treaty, payments made to IBM-Philippines are taxable in India as per Article 24(1). As explained above, Article 24 of the India-Philippines DTAA deals with the elimination of double taxation and in our view has no applicability regarding taxation of an item of income, FTS in this case, dealt with under the DTAA. Consequently, the findings of the authorities below that the payments made to IBM Philippines are taxable under section 9(1)(vii) of the Act on the basis of Article 24(1) of the India-Philippines DTAA, is incorrect and unsustainable.
8.1.1 Having dealt with the scope and the meaning of Article 24(1) of the India-Philippines DTAA, the next issue for consideration in the nature of payments made by the assessee to IBM-Philippines under the India-Philippines DTAA. It is a settled principle that the assessee can rely on the provisions of the DTAA if they are more beneficial that the Income-tax Act, 1961 and inter alia the decision of the Hon'ble Apex Court in the case UOI v. Azadi Bachao Andolan [2003] 263 ITR 706 establish the above principle.
8.1.2 In the case on hand, as per the material on record, the payments to IBM- Philippines were for services rendered in the field of pay roll, data management, benefits administration, balance sheet reconciliation, generation of reports, stock option administration, etc. in connection with the project with P & G Home Products India Ltd. It is submitted that the services by IBM-Philippines also included services provided to the assessee as part of internal arrangement in connection with 'Sunrise Project'.
8.1.3 As per Article 7(1) of the India-Philippines DTAA, business profits of an enterprise of a contracting State shall be taxable only in that state unless the enterprise carries on business in the other contracting State though a PE situated therein and in that event the profits may be taxed in the other state only to that extent as are attributable to that PE. Article 7(7) stipulates that when the profits include items of income which are dealt with separately in other Articles of this DTAA, then the taxability of those items have to be determined as per those Articles and not as per Article 7.
8.1.4 In the case on hand what is relevant for consideration are Article 7 - 'Business Profits' and Article 23 - 'Other Income', as these govern the nature of payments made by the assessee to IBM Philippines. Article 23, dealing with 'Other Income' states that items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention/DTAA i.e. Article 6 to Article 22, shall be taxable only in that State. An item of income is said to have been dealt with by other Articles of this DTAA if such income can be classified as taxable or not under any of the Articles 6 to 22. This aspect has been considered by the Kolkata Bench of the ITAT in Dy. CIT v. Andaman Sea Food (P.) Ltd., in ITA No.1412/Kol/2011 dt.19.6.2012 (copy at pages 65 to 75 of Compilation of cases). In the said case, revenue contended that 'FTS' even though not taxable under Article 12 of the India-Singapore DTAA, is nevertheless covered under the residuary Article 23 dealing with 'Other Income'. Rejecting revenue's contention, the Tribunal held that income from consultancy services, which cannot be taxed under Articles 7, 12 or 14 because conditions laid down therein are not satisfied cannot be taxed under Article 23 either. Explaining the meaning of the expression 'not dealt with' it was held at para 9 thereof as under :
"9. It is also important to bear in mind the fact that article 23 begins with the words 'items of income not expressly covered' by provisions of Articles 6-22. Therefore, it is not the fact of taxability under articles 6-22 which leads to taxability under article 23, but the fact of income of that nature being covered by articles 6-22 which can lead to taxability under article 23. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting State for the use of an immovable property in a third State, and damages (other than for loss of income covered by articles 6-22) etc. In our humble understanding, therefore, article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and the income from consultancy charges on is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied. Learned Departmental Representative's argument, emphatic and enthusiastic as it was, lacks legally sustainable merits and is contrary to the scheme of the tax treaty. While dealing with the scope of residuary article of income under the tax treaties, and in support of the above conclusions, we may also refer to certain observation, with which we are in most respectful agreement, made by the Hon'ble Justice P.V. Reddi, articulating the views of the Authority for Advance Ruling in the case of Gearbulk AG (318 ITR 66), and in his felicitous words as follows :
....The question is whether the profits from the shipping operations in international traffic can be said to be "an item of income" "not dealt with " in the previous articles of DTAA ? We do not think so. Among the various items of income in the foregoing articles, business profits into which the shipping income falls has been dealt with under article 7. Profits from the international operation of ships are only a species of business profits just as the profits from international air transport. The latter is dealt with separately in article 8 for the reason that it does not fall in line with the scheme of taxation of business profits under article 7. Exclusive right is given to the State in which the enterprise resides. Permanent Establishment test is irrelevant under article 8. Hence, a separate article. As far as the profits from international operation of ships are concerned, it is an integral part of business profits; at the same time, they are excluded from the business profits - article for the obvious reason that it is not intended to be covered by the Treaty. That income has been left to the care of domestic law under which the burden of taxation on such income has been minimized (vide section172 of Income-tax Act). We are of the considered view that a particular species of Income which is specifically referred to in article 7 and deliberately left out of its genus, namely business profits, cannot be said to be an item of income not dealt with under article 7. The expression deal with is a comprehensive expression having different shades of meaning. In the New Chambers Thesaurus, the meanings of 'deal with' are given thus : "1. deal with a situation, attend to, concern, see to, manage, handle, tackle, cope with, get to grips with, take care of, look after, sort out, process."
In Colins Cobuild English Language Dictionary, it is stated thus :
"If a book, speech, film etc. deals with a particular thing, it has that thing as its subject or is concerned with it."
In Shorter Oxford Dictionary (Thumb Index Edn.) one of the meanings given is :
"be concerned with (a thing) in any way; busy or occupied oneself with, esp. with a view to discuss or refutation."
The following meaning given in the New Oxford American Dictionary may also be noted :
"take measures concerning (someone or something).... take or have as a subject; discuss."
9.1 The applicant's counsel submitted that an item of income can be said to have been dealt with in an article of the Treaty only if it defines its scope as well as allocates the right to tax such income between the two Contracting States. Mere exclusion of shipping business profits from article 7 does not amount to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression 'dealt with' does not necessarily mean that there should be a detailed or elaborate treatment of the subject.
10. Clearly, therefore, the income from consultancy services, which cannot be taxed under article 7, 12 or 14 because conditions laid down therein are not satisfied."
Coming back to the case on hand, it is not disputed that the services provided by IBM-Philippines were in the nature of pay roll related services, data management services, benefits administration, balance sheet reconciliation, generation of reports, stock option administration, etc. in connection with the contract with Proctor & Gamble (P & G). The services by IBM-Philippines also included services provided to the assessee as part of internal arrangement in connection with the 'Sunrise Project'. The case of the assessee before the authorities below i.e. in proceedings u/s.201 of the Act and before the CIT(Appeals) was that the above services were provided by IBM-Philippines in the course of its business and the payment made by the assessee to IBM-Philippines was against monthly invoices raised for services rendered, details of which are listed out at the Annexures to orders passed u/s.201(1) of the Act for each financial year concerned. The costs incurred by IBM-Philippines in the course of its business for providing services to the assessee are charged with a profit percentage mark up of 5%, as is evident from para 2.0 on page 3 of the order passed u/s.201(1) of the Act. Admittedly the learned CIT(Appeals) at para 55 of his order has held that the transactions entered into between the assessee and IBM-Philippines were performed in the course of its business. The learned Departmental Representative while not disputing this fact, contends that the payments to IBM-Philippines are in the nature of 'FTS' u/s.9(1)(vii) of the Act.
8.1.5 In view of the above discussion of the facts and circumstances of the case at paras 8.1.1 to 8.1.4 of this order (supra), we are of the considered view that the services provided by IBM-Philippines were in the course of its business and therefore the payments received by it from the assessee partake the character of 'Business Profit' under Article 7 of the India-Philippines DTAA. On the issue of the existence or otherwise of a PE of IBM-Philippines in India, the assessee both in proceedings before the Assessing Officer u/s.201 of the Act and before the learned CIT(Appeals) has submitted that IBM-Philippines does not have a PE in India, which fact has not been controverted by both these worthies. Consequently, as per Article 7(1) of the India-Philippines Treaty, the business profits arising out of payments made by the assessee to IBM-Philippines are not chargeable to tax in India in the absence of a PE of IBM-Philippines in India. Since the payments made to IBM-Philippines partake the character of 'business profits' and covered and dealt with by Article 7 of the DTAA, Article 23 thereof has no application even though the said business profits are not chargeable to tax in India in the absence of a PE of IBM-Philippines in India. In the absence of a specific Article dealing with 'FTS' under the India-Philippines Treaty, the aforesaid payments to IBM-Philippines for services rendered in the course of its business has to be considered and examined as business income only.
8.1.6 The aforesaid finding rendered by us that in the absence of an Article dealing with 'FTS', payments made for services rendered in the course of business would be covered by Article 7 of the India-Philippines Treaty dealing with 'Business Profit', and not by Article 23 'Other Income' is supported by the following judicial precedents :—
The case of Christiani & Nielsen Copenhagan v. First ITO [1991] 39 ITD 355 (Bom.) wherein at page 8 thereof it was held as under :
".........The fees for technical services' in the normal business parlance is a part of the profits earned by an enterprise. It is earned through a systematic series of activities carried on by the assessee, i.e. in preparing the project by conducting preliminary studies, collection and assimilation of data and finally preparing the feasibility report and, in this case, with regard to Trans-Harbour Communication Link between the Island city of Bombay and the Mainland. In the general sense of its meaning, it would be a part of the industrial and commercial profits and, therefore, it cannot be said that there is no specific provision for dealing with such kind of proof in AADT...."
In Tekniskil (Sendirian) Berhard v. CIT [1996] 222 ITR 551 (AAR), revenue argued that in the absence of an Article dealing with 'FTS' in the India-Malaysia DTAA (as it then existed), the business profits of a non-resident are taxable as 'FTS' u/s.9(1)(vii) of the Act. The Authority for Advance Rulings (AAR) held that in the absence of Article dealing with 'FTS' under the DTAA, the business profits of the non-resident are governed by Article 7 of the Treaty and in the absence of a PE in India, the said business profits are not chargeable to tax in India. The relevant observations at this decision are extracted hereunder :—
"12. The authority is of the opinion that neither of these contentions put forward by the Department can be accepted. It is true that the income derived by the TSB under the agreement can be described as fees for technical services though that specific expression does not find a place in the contract. But this makes no difference because that description is not sufficient to take it out of the purview of Article 7 which makes the income or profits of an enterprise of a State taxable only in that State, unless the enterprise carries on business in other State through a permanent establishment situated therein. To say that TSB is not carrying on a business and that income by way of technical services has not been specifically provided for by the DTAA may indeed be fatal to the case of the Department because by virtue of Article 7 all the income or profits of an enterprise in a State are taxable only in that State save in two cases. The two exceptions are : (a) the profits of a business carried on through a permanent establishment in another State and attributable to such permanent establishment; and (b) income or profits which are dealt with separately in other articles of the agreement. That apart, there can be no doubt, whatsoever that the supply of skilled labourers to other companies is in the nature of a business activity. In its application dated April 4, 1995, under section 197, the applicant has stated that it is engaged in the business of supplying skilled labour for execution of offshore projects for jacket and riser installations. The contract with HHI was entered into in the course of its business. No details of assessment year contracts of similar nature entered into by the applicant with other parties have been furnished. Still, the very nature of the contract is such that it spells out a business. The assessee is to engage skilled labour and supplies the labourers to other companies requiring such labour. It gets paid on the basis of certain rates per unit of labour employed and, by effecting economies in the scale of wages it offers to its employees, earns a margin of profit for itself. This is clearly in the nature of a business and Article 7 will be attracted.
13. The fact that the remuneration paid to the assessee may be in the nature of technical fee within the scope of section 9(1)(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 DTAA's 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 question. See for e.g., the DTAA's between India and Australia (Article 11(41)), Canada [Article XIII (SC)] or USA [Article 12(6)]. These indicate that even where royalties and fees for technical services receive separate treatment under a DTAA, it is the Article relating to computation of business income that would apply where such royalties or fees arise in the course of business carried on by the recipient. For these reasons, the payments received by TSB in the case from HHP have to be taxed under Article 7 of the DTAA."
In Parsons Brinckerhoff India (P) Ltd. v. ADIT [2008] 118 TTJ 214 (Delhi) (placed at pages 99 to 111 of the compilation of cases), it was held that outright sale of drawings and designs by the Thailand company would fall under Article 7 of the Treaty, and not under Article 22 dealing with "Other Income" and in the absence of a PE in India, the business profits of the non-resident are not exigible to tax in India. The relevant observations in this decision at para 20 thereof are extracted hereunder :
'20. The learned CIT, DR drew our attention to Article 22 of the treaty which deals with "Other Income". It says that items of income of a resident of a contracting State, wherever arising, not expressly dealt with in the foregoing articles may be taxed in that State. It goes on to say that such items of income may also be taxed in the contracting State where the income arises. This article was also referred to in the order of the Assessing Officer and therefore cannot be termed as a new plea. It applies to items of income which have not been expressly dealt with in the other articles of the treaty. However, Article 7 of the treaty applies to the present case as it deals with "business profits". The amount received by PBAT for sale of drawings and designs having been held to represent business profits they will fall under Article 7 which rules out the applicability of Article 22. In addition, the basic principle applies, viz., that the double tax avoidance agreement cannot be construed as a taxing enactment.'
In Golf in Dubai v. DIT [2008] 306 ITR 374 (AAR) (placed at pages 47 to 64 of compilation of cases), it was held that in the absence of Article dealing with 'FTS' under the India-UAE DTAA, the management fees would be covered under Article 7 and not under Article 22 dealing with 'Other Income'.
In Channel Guide India Ltd. v. CIT [2012] 153 TTJ 432 (Mum.) (placed at pages 31 to 46 of compilation of cases), at para 23 it was held as under :—
"23. At the time of hearing before us, the learned Departmental Representative has raised an altogether new contention that there being no clause in the Indo- Thailand Treaty dealing with fees for technical services, the amount in question paid by the assessee to SSA is covered by the residuary Article 22 of the Treaty and the same is chargeable to tax in India as Other Income. We find it difficult to accept this contention of ld. DR. M/s. SSA to whom the payment in question was made by the assessee is a licensee of certain satellite owned by Government of Thailand and it is in the business of providing TV Channels facility of broadcasting their programmes through the transponders located in the said satellite. For the said facility, M/s. SSA recovers service charges from TV Channels like the amount in question recovered form the assessee. Keeping in view this nature of business of M/s.SSA, the amount paid by the assessee certainly constitutes business income of M/s. SSA and when the same is not in the nature of royalty or fees for technical services, it is covered by article 7 of the Indo-Thailand Treaty dealing with business income. There is thus no need to take a recourse to Article 22 of the treaty which covers only the items of income which are not covered expressly by any other article of the Treaty "
In PT Mckinsey Indonesia v. DDIT [2013] 7 Tax Corp (AT) 31369 (Mum.) (placed at pages 25 to 30 of compilation of case laws), at para 8 thereof it was held as under :—
"8........As far as taxing the receipts under the head 'Other Income' is concerned, as held by the penal, we are of the opinion that residuary head is analogous to sections 56-57 of the Act. If a certain receipt cannot be taxed under any other head, only then the sections dealing with 'Income from Other Sources', come into play in domestic taxation matters. Likewise, under the DTAAs, if a sum can be taxed under any other Article, provisions of Article 22 will not be applicable. We are of the opinion, in the light of the earlier decisions of the Mumbai Tribunal income received by the assessee-company from MicKinesy India is not to be treated as Royalty rather it has to be assessed as business income as per Article 7 of the DTAA."
8.1.7 After considering the decisions in Christiani Nielsen Copenhagen (supra), Tekniskil (Sendirian) Berhard v. CIT [1996] 221 ITR 551 (AAR); Channel Guide India Ltd. (supra), the co-ordinate bench of this Tribunal in Wifi Networks (P.) Ltd. (supra) and Exotic Fruits (P.) Ltd. v. ITO in ITA Nos.1008 to 1013/Bang/2012 dt.4.10.2013, held that in the absence of the Article dealing with 'FTS' under the India-UAE Treaty, payments made to services rendered by the UAE resident would fall under Article 7 - 'Business Profits' and not under Article 22 - 'Other Income' and in the absence of a PE of the UAE resident in India, the said payments are not exigible to tax in India under the India-UAE DTAA.
8.1.8 Similar situation, as in the case on hand, was before the Hon'ble Madras High Court in Bangkok Glass Industry Co. Ltd. (supra) wherein in the absence of an Article for 'FTS' in the India-Thailand DTAA, revenue sought to assess the FTS in the hands of the Thailand Company u/s.9(1)(vii) of the Act or in the alternate under Article 22 of the India-Thailand Treaty. The Hon'ble Madras High Court, rejecting the contentions of revenue, held that the 'FTS' earned by the Thailand Company in the course of business was covered under Article 7 of the India-Thailand DTAA and in the absence of a PE in India, the said income was not chargeable to tax in India. The Hon'ble Madras High Court also held that the income of the Thailand Company was not chargeable to tax under Article 22 of the India - Thailand Treaty. The relevant portions of the Court judgments at paras 19 and 20 are extracted hereunder :—
"19. Even though the Revenue canvassed this issue before the Tribunal, in the absence of any material to read the clauses otherwise, rightly, the Tribunal came to the conclusion that a sum of 4,79,640 USD alone would fall for consideration under art. 12 as royalty income and the other to be assessed as by way of technical services. As already pointed out even herein, with the finding of the assessing authority on the remand order that the assessee had no PE, the said amount cannot be brought under art. 7. In the light of the above, we have no hesitation I confirming the order of the Tribunal. 20 As far as the order in art. 22 is concerned, we do not find any justifiable ground to uphold this portion of the order after the discussion on the extent of income falling for consideration under royalty as defined under art. 12 and the amount paid as towards technical services falling for consideration under art. 7. Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22."
8.1.9 In view of the above, we are of the considered view that payments to IBM-Philippines, in the case on hand, for providing services in the course of its business would be covered by Article 7 of India-Philippines DTAA in the absence of a specific Article dealing with 'FTS' and further in the absence of a PE of IBM-Philippines in India, the said payments would not be chargeable to tax in India and consequently not liable for TDS u/s.195 of the Act.
9.1.1 On a perusal of the orders of the authorities below, it is seen that the Assessing Officer and the learned CIT(Appeals) have placed reliance on the following decisions in support of the contention that in the absence of Article dealing with 'FTS' under the DTAA, the income of the non-resident is exigible to tax under the provisions of domestic law :
| (i) |
PILCOM v. ITO - 77 ITD 218 (Cal.); |
(ii) |
BCCI v. DIT - 96 ITD 263 (Mum.); |
(iii) |
A.P. Moller, Maersk Agency India (P) Ltd. v. Dy. CIT [2004] 89 ITD 563 (Mum.); |
(iv) |
IAC v. Daimler Benz AG, West Germany [1981] 36 ITD 508 (Bom.); |
(v) |
Dy. CIT v. Turuoise Investment & Finance Ltd. (299 ITR 143) (MP); and |
(vi) |
Dy. CIT v. TVS Electronics Ltd. in ITA No.811/MDS/2010. |
9.1.2 In PILCOM v. ITO - (77 ITD 218) (Cal.), the contention of the assessee was that payments made to non-residents are covered under Article 22 of the DTAA dealing with 'Other Income' and hence the said payments are taxable only in the other country but not in India. The Calcutta Bench of the ITAT however held that the said payments are covered by Article 17 and not by Article 22. In context, the Hon'ble Bench held that there is no conflict in the provisions of the Act and the DTAA and therefore it was held that the payments made by the assessee are taxable in India under Article 17 of the DTAA.
In BCCI v. DIT - 96 ITD 263 (Mum.), the Mumbai Bench of the ITAT considered the question as to whether the CIT can revise the order passed u/s.195 of the Act under the reversionary provisions of section 263 of the Act. Further, the decision in PILCOM case (supra) was followed by the Mumbai Bench in concluding that the guarantee money paid to non-resident cricket associations are chargeable to tax under Article 17(1) of the Treaty.
The above two decisions (supra), in our view, have no relevance to the case on hand since the facts, arguments and issues in dispute before the Benches are different from the present case. The Hon'ble Benches in the above two cases were not concerned with the taxability of 'FTS' in the absence of a similar clause in the DTAA. Further, the Benches did not conclude that the impugned payments are taxable u/s.9(1)(vii) of the Act. Rather, in the above cases, the tax implications were examined form the Treaty perspective and it was concluded that the payments are chargeable to tax under Article 17 of the DTAA which coincide with the tax implications under the I.T. Act, 1961. Therefore, the above two decisions do not further the case of revenue.
9.1.3 In A.P. Moller, Maersk Agency India (P.) Ltd. v. Dy. CIT [2004] 89 ITD 563 (Mum.), it was held that since the India-Denmark DTAA is silent on slot fees and ancillary charges earned by a shipping company which is derived otherwise than from the operation of ships, the profits can be taxed in India as per the provisions of the Income-tax Act, 1961. In the case on hand, however, the payments made to IBM-Philippines were for services rendered by IBM-Philippines in the course of its business and therefore it is clear that the above decision is factually different from the case on hand and hence not applicable.
In IAC v. Diamler Benz AG West Germany [1991] 36 ITD 508 (Bombay), it was held that royalty income is excluded from the purview of 'Industrial and Commercial Profits' under Article III of the India - Germany DTAA (as it then existed) and consequently the said income is chargeable to tax under the provisions of the I.T. Act, 1961. In the case on hand, while, there is no Article dealing with 'FTS' under the India-Philippines DTAA, the said category of income is not excluded from the purview of Article 7 of the India-Philippines DTAA, since they are payments made to IBM-Philippines for rendering services in the course of its business. In this view of the matter, we find that the above case is distinguishable from the case on hand.
In Dy. CIT v. Turuoise Investment & Finance Ltd. [2008] 299 ITR 143 (M.P.), it was held that dividend income earned by the assessee in Malaysia was not taxable in India under any of the provisions of the Income-tax Act, 1961 in view of the India-Malaysia DTAA. In this context, the Hon'ble High Court held that wherever the DTAA provides for a particular mode of computation of income, the said method alone is required to be followed, irrespective of the provisions of the Income-tax Act and it is only when there is no specific provision in the DTAA to the contrary that the domestic law will get attracted and govern the taxation of such income. The facts, arguments and the questions before the Hon'ble Court were different from that of the present case, and the observation of the Hon'ble Court were with regard to the computation of income and not classification of a particular category of income under the DTAA. Even otherwise, in the case on hand, we have already held that the payments to IBM-Philippines would be covered by Article 7 of the India-Philippines DTAA and the absence of PE of IBM-Philippines, the said payments are not exigible to tax in India. In this view of the matter, the above decision does not help the case of revenue.
In Dy. CIT v. TVS Electronics Ltd., in ITA No.811/MDS/2010 dt.25.5.2012, the ITAT, Chennai Bench held that in the absence of 'FTS' clause in the India-Mauritius DTAA, the said income is exigible to tax u/s.9(1)(vii) of the Act. The recent decision of the Hon'ble Madras High Court in the case of Bangkok Glass Industry Co. Ltd. (supra) squarely deals with the issue in appeal in the case on hand and has rendered a contrary verdict in similar circumstances to the decision of the ITAT, Chennai Benches in the above case of TVS Electronics Ltd. (supra). We are, therefore, not inclined to follow the above decision of the ITAT, Chennai (supra).
9.1.4 The written submissions filed by the learned Departmental Representative states that the reasons for the absence of Article dealing with 'FTS' in the India-Philippines DTAA may be different from the reasons for the absence of such Article in the India-Mauritius DTAA or the India-UAE DTAA. It was contended that it was necessary for the DTAA negotiation documents, minutes of the meeting in relation to the India-Philippines DTAA to be referred to in order to understand the reasons for not having an Article dealing with 'FTS' in the India-Philippines DTAA. The learned Departmental Representative however except for making this claim, did not submit the above referred documents for our consideration in the course of hearing of the case and hence we are unable to deal with this contention.
9.1.5 Even if it is assumed that payments to IBM-Philippines are not covered by Article 7, the said payments made to it are covered by Article 23 of the India-Philippines DTAA dealing with 'Other Income'. As per Article 23, items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this convention shall be taxable only in that State. Consequently, payments to IBM-Philippines would be chargeable to tax only in the Philippines and not in India and as a result, the said payments were not liable for TDS u/s.195 of the Income-tax Act, 1961.'
It is clear that the Tribunal has given the finding after considering the decision of the co-ordinate bench as well as decision of Hon'ble Madras High Court in the case of Bangkok Glass Industry Co. Ltd.'s (supra). In view of the above discussion and by following the decision of the co-ordinate bench in the case of IBM India (P.) Ltd.'s (supra), we are of the considered opinion that in the absence of the provision in the DTAA to tax Fees for Technical Services the same would be taxed as per the Article 7 of the DTAA applicable for business profit and in the absence of PE in India, the said income is not chargeable to tax in India. Accordingly, we set aside the orders of the authorities below and delete the addition made by the Assessing Officer.
7. In the result, the appeal of the assessee is allowed.