Absence Of 'FTS' In Treaty Is No Basis To Tax Technical Services Rendered To AE, In Absence Of Its PE In India: Delhi ITAT

The Delhi ITAT ruled that though income received by a non-resident entity towards services provided to Indian associate enterprises (AE) are in nature of 'fees for technical service' (FTS), but same cannot be taxed in India simply in absence of FTS clause under respect treaty provisions. The Division Bench comprising G.S. Pannu (Vice-President) and Anubhav Sharma (Judicial Member) also clarified that the services provided to AE are in nature of business activity covered under Article 7 of Indo-Thai DTAA, but in absence of a permanent establishment (PE) of the Assessee in India, the same cannot be brought to tax. Section 194J of Income Tax Act deals with the tax deduction at source (TDS) on professional fees or technical services. It requires the person making the payment to deduct a certain percentage of tax before making the payment to the recipient. Regarding fees for technical services provided by a person not resident in India, the TDS rate is generally higher at 20%, and Section 195 covers such payments. Facts of the case: The Assessee, a Thailand based company engaged in providing business administration, material engineering and development services to its Indian AE, received a sum of approx. 16 crores which was claimed as business income in absence of FTS clause in India-Thailand DTAA. During assessment, the AO accepted that the nature of services is FTS, however, held that in absence of FTS clause, the income would fall under Article 22 of the India-Thailand DTAA as 'other sources' and accordingly, taxed at 10% as per Section 5(2) r.w. Section 9(1)(vii). Observations of Tribunal: The Bench stated that Article 22 of India-Thailand DTAA is a residuary article which is incorporated to make taxable items of income which is not otherwise dealt in the DTAA and at the same time Article 7, lays down taxability of profits of an enterprise. The Bench opined that once the Assessee claimes that the source of its revenue is out of 'profit of an enterprise' under Article 7 of DTAA, then Article 22 is not applicable. Since the AO had invoked Article 22 of DTAA by alleging that FTS is not primary business of the Assessee and due to absence of specific FTS clause in DTAA, residuary Article 22 can be invoked, the Bench clarified that onus lies on the Revenue to bring on record that the fees received on technical services are business income and specifically relates to PE. The Bench therefore stated that the AO/ DRP without examining the business activity of the Assessee, had erroneously drawn an inference on the basis of information available on web portal of the Assessee. The Bench observed that the income earned by the Assessee are in the regular course of their business and therefore clearly dealt by Article 7, however in absence of PE the same cannot be brought to tax. The Bench went on to observe that Assessee had established that FTS actually is part of business activity which is not taxable in India in absence of PE, and thus, the benefit of Article 7 is available. Hence, the ITAT allowed the Assessee's appeal and concluded that whereas Revenue failed to avail the opportunity to examine the business activity and give a conclusive finding as to what is primary activity of the Assessee and why the provision of services by the Assessee, is not part of business income, that being not done, then by recourse to Article 22, FTS income could not have been brought to tax by taking recourse to Article 22 of the Indo-Thai DTAA. Counsel for assessee: Vishal Kalra Counsel for Revenue: Vijay B Vasanta Case Title: Denso (Thailand) Co. Ltd Vs ACIT Case Number: ITA No.1986/Del/2023 Click here to read/ download the Order

Absence Of 'FTS' In Treaty Is No Basis To Tax Technical Services Rendered To AE, In Absence Of Its PE In India: Delhi ITAT

Pankaj Bajpai

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