|CORAM:||G. Pavan Kumar (JM), Pramod Kumar (AM)|
|SECTION(S):||Article 12, Article 13(4), Article 21|
|CATCH WORDS:||Fees for technical services, India-Thailand DTAA, Other income|
|DATE:||January 31, 2017 (Date of pronouncement)|
|DATE:||March 17, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Taxability of "Other income" under DTAA: Income which is not chargeable under specific provisions of Articles 6 to 21 cannot be taxed under the residuary provision. Only income not covered by specific Articles (e.g. alimony, lottery income, gambling income, damages etc) can be charged as "Other income"|
(i) There is no dispute that there is no specific provision for taxation of fees for technical services in India Thailand tax treaty. There is also no dispute that Fuji Asia Co Ltd Thailand and Auto Alliance Co Ltd Thailand did not have any permanent establishments in India.
(ii) The stand of the Revenue, however, is that the income embedded in the amounts received by the assessee could anyway be taxed as ‘other income’ under the respective tax treaties. There is a decision of a coordinate bench of this Tribunal, in the case of DCIT VS TVS Electronics Ltd [(2012) 52 SOT 287 (Chennai)], which support this school of thought and holds that
“Admittedly, Chapter III of DTAA between India and Mauritius did not provide for taxing any fees paid for technical services. Only for a reason that DTAA is silent on a particular type of income, we cannot say that such income will automatically become business income of the recipient. In our opinion, when DTAA is silent on an aspect, the provisions of the Act has to be considered and applied.”
However, nothing turns on this decision as the principle laid down therein find favour with the jurisdictional High Court. In the case of Bangkok Glass Industries Pvt Ltd Vs ACIT [(2013) 257 CTR 356 (Mad)], Hon’ble Madras High Court rejected this school of thought and dealing with India Thailand tax treaty, which does not have FTS clause, rejected the claim of the revenue that even though the Thai entity did not have any PE in India and, for that reason this amount could not have taxed in India under article 7, FTS could be taxed as ‘other income’ under article 22. Their Lordships, in this context, also observed that, “Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22.” Of course, the question as to what really constitutes miscellaneous income, as visualized by Their Lordships, covered by Article 22 was left open- a question which we will endeavor to humbly address. As we deal with this aspect of the matter, and to explain the related principle in little more detail. Let us first take a look at the relevant treaty provision. The relevant treaty provisions are as follows:
ARTICLE 22- Other income
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. Such items of income may also be taxed in the Contracting State where the income arises.
(iii) To understand the scope of these treaty provisions, which are broadly in pari materia with the provisions of article 21 of UN Model Convention, we find guidance from the OECD Model Convention Commentary which states that
“The Article covers income of a class not expressly dealt with in the preceding articles (e.g. an alimony or a lottery income) as well as income from sources not expressly referred to therein (e.g. a rent paid by a resident of a Contracting State for the use of immovable property situated in a third State). The Article covers income arising in third States as well as income from a Contracting State”.
In other words, an income is of such a nature as, on satisfaction of conditions specified in the related provision, could be taxed under any of these specific treaty provisions, cannot be covered by this residuary clause. Take for example, income earned by a resident of a contracting state by carrying on business in the other contracting state. When, for example, article 5 provides that the income of resident of a contracting state, from carrying on business in the other contracting state, cannot be taxed in the source state unless such a resident has a permanent establishment in the other contracting state, i.e. source state, it cannot be open to the tax administration of source state to contend that even if it cannot be taxed as business income, it can be taxed as ‘other income’ nevertheless. It is important to bear in mind the import of expression ‘not expressly dealt with in the foregoing articles’. Similarly, if independent personal services cannot be taxed in the source state as minimum threshold limit of fixed base is not satisfied, such a treaty concession cannot be nullified by invoking article 21. When a particular nature of income is dealt with in the treaty provisions, and its taxability fails because of the conditions precedent to such taxability and as specified in that provision are not satisfied, that is the end of the road for taxability in the source state. It is also important to bear in mind the fact that article 21 states that it applies to the “items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement”. Therefore, it is not the fact of non taxability under the operative articles (i.e. article 6 to 21) which leads to taxability under residuary clause in article 22, but the fact of income of that nature being covered by those articles which can lead to taxability under article 22. 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 immoveable property in a third state, and damages (other than for loss of income covered by specific provisions of the treaty) etc. This is how UN Model Convention Commentary, which is referred to earlier in this order, also explains the scope of this article. In our humble understanding, therefore, article 22 does not apply to items of income which can be taxed in any situations under article 6-21 whether or not such an income is actually taxable under these articles. The question then arises whether income earned by the recipients in question, i.e. Fuji Asia Co Ltd-Thailand ad Auto Alliance Co Ltd-Thailand, can be said to in the nature of an income which is not expressly dealt with by other operative articles (i.e. article 6 to 21) of the treaty. The income earned by these entities was in the regular course of their business, and there is no dispute about this fundamental aspect. There cannot also be dispute about the fact that in the event of these entities satisfying the conditions regarding existence of permanent establishment in India, the amounts so received by these entities would have been taxable as business income. The income in question is thus clearly dealt with by article 7 read with article 5 and the reason why it has not been taxed is that the entities concerned did not have permanent establishments in India. Clearly, therefore, the income in question is covered by the provisions of the Indo Thai tax treaty but is not taxable on the facts of the case before us as the recipients did not have a PE in India. Once we come to the conclusion that the income embedded in the payments in question is of such a nature which is covered by articles 6 to 21 of the treaty but is not taxable in India as the condition precedent for the taxability under the related article is not satisfied, it is an inevitable corollary of this finding that article 22 cannot be pressed into service in respect of the said income. As we hold so, we are alive to the fact that there is no specific taxability provision, under India Thailand tax treaty with respect to taxability of fees for technical services. Profits earned by rendering fees for technical services are only a species of business profits just as the profits any other economic activity. However, without the character of such receipts in the nature of business receipts being altered, the fee for technical services is dealt with separately in some treaties for the reason because, under those treaties the related contracting states proceed on the basis that even in the absence of the permanent establishment or fixed base requirements, the receipts of this nature can be taxed, on gross basis, at the agreed tax rate, and, to that extent, such receipts does not fall in line with the scheme of taxation of business profits under art. 7 and professional income under 14. It is interesting to note that the moment the threshold limits for permanent establishment or fixed base, as the case may be, is satisfied, the taxability shifts on net basis as business profits or professional (independent personal services) income. The business receipts or professional receipts thus cannot be seen in isolation with the fees for technical services. Its only the fact of, and mode of, taxation in the absence of PE or fixed base, which gets affected as a result of the fees for technical services. When there is an FTS clause, the FTS gets taxed even in the absence of the PE or the fixed base, but the character of FTS receipt is the same, i.e. business income or professional (independent personal) income, in the hands of the same. When there is no FTS clause, this sub categorization of income becomes irrelevant, because FTS or any other business receipt, the income embedded in such receipts gets taxed only if there is a permanent establishment or fixed base- as the case may be. The scope of business profit and independent personal service completely covers the fees for technical services as well. With FTS article or without FTS article, the income by way of fees of technical services continues to be dealt with the provisions of articles relating to business profits, independent personal services, and additionally, in the event of existence of an FTS article, with the article relating to the fees for technical services.
(iv) In view of the above discussions, in our considered view, even though the remittances in question are in the nature of fees for technical services in the hands of Thai entities, the income embedded in these remittances is not taxable in India in the hands of these entities, in terms of the provisions of Indo Thai tax treaty. The plea of the Assessing Officer, for invoking the domestic law provisions in respect of fees for technical services, as the Indo Thai tax treaty does not specifically deal with the same, already stands negated by Hon’ble jurisdictional High Court in the case of Bangkok Glass Industries (supra), in the context of Indo Thai tax treaty itself. It is only elementary that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, “the provisions of this (i.e. Income Tax) Act shall apply to the extent they are more beneficial to that assessee”. While on this issue, we may also take note of the landmark Special Bench decision in the case of Motorola Inc. vs. Dy. CIT [(2005) 96 TTJ (Del)(SB) 1] wherein the Tribunal had, inter alia, observed that “DTAA is only an alternate tax regime and not an exemption regime” and, therefore, “the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA”. Quite clearly, when there is no taxability under the respective treaty provisions, there cannot be any taxability under the provisions of the Income Tax Act either.
Re Taxability of fees for technical services under the “Make Available” requirement
(v) We have noted that even going by the case of the Assessing Officer, it is at best a case of payment of fees for technical services but then it is not even the case of the Assessing Officer that by rendition of these services, there was any transfer of technology in the sense that the recipient of service was enabled to render this service on his own without recourse to the service provider. There is no dispute that the recipient of these amounts are based in USA and UK and are entitled to the benefits of India US Double Taxation Avoidance Agreement [(1991) 187 ITR St 102; Indo US tax treaty, in short] and India UK Double Taxation Avoidance Agreement [(1994) 206 ITR (St) 235; Indo UK tax treaty, in short]. There is also no dispute that in both of these treaties, there is ‘make available’ requirement in the article dealing with taxation of fees for technical services. These treaty provisions are as follows:
India UK tax treaty Article 13: Royalty and fees for included services
4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term “fees for technical services” means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.
Indo US tax treaty Article 12- Royalty and fees for included services
4. For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. [Emphasis by underlining etc supplied by us]
(vi) We find that the common thread in both of these tax treaties is the requirement of ‘make available’ clause. As learned counsel rightly puts it, its not simply the rendition of a technical service which is sufficient to invoke the taxability of technical services under the make available clause. Additionally, there has to be a transfer of technology in the sense that the user of service should be enabled to do the same thing next time without recourse to the service provider. The services provided by non residents did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression ‘make available’.
(vii) As for the connotations of make available clause in the treaty, this issue is no longer res integra. There are at least two non-jurisdictional High Court decisions, namely Honble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd ([(2012) 346 ITR 504 (Del)] and Honble Karnataka High Court in the case of CIT Vs De Beers India Pvt Ltd [(2012) 346 ITR 467 (Kar)] in favour of the assessee, and there is no contrary decision by Honble jurisdictional High Court or by Honble Supreme Court. In De Beers case (supra), Their Lordships posed the question, as to “what is meaning of make available”, to themselves, and proceeded to deal with it as follows: The technical or consultancy service rendered should be of such a nature that it “makes available” to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology “making available”, the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as “fee for technical/included services” only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. As we have noted earlier, it is not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to the service providers. The tests laid down by Hon’ble Court were clearly not satisfied. For this short reason alone, the amounts in question were not taxable as fees for technical services under the provisions of the respective tax treaties. The law is well settled, we may add at the cost of repetition, that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, “the provisions of this (i.e. Income Tax) Act shall apply to the extent they are more beneficial to that assessee”. When the amounts are not taxable under the provisions of the respective tax treaties, there cannot be any occasion to deal with the provisions of the Income Tax Act.