Income of non-resident attributed to its PE in India taxable as business profits; balance income not to be taxed as fee for technical services – ITAT Mumbai

Nippon Keiji Kyokoi v. ITO (ITAT Mumbai)-  Notwithstanding a change in the position by the assessee, the Tribunal has held that the effective connection with the permanent establishment in India has to be determined based on a functional test in the case of  fees for technical services . Furthermore, the Tribunal also upheld that if the services are said to have been effectively connected with the permanent establishment, the income would be taxable only as business profits to the extent of attribution and the balance income would not be liable to tax in India as  fees for technical services .

Article-12(5) of the DTAA, excludes the entire receipt  from Article-12(1) and 12(2), if the receipt has an effective connecting with the P.E. The argument that Port is to be taxed under Article-7 and balance under Article-12, is devoid of merit. The DTAA does not contemplate the same. Such an interpretation said to be placed by learned Departmental Representative is incorrect and, hence, we reject the same. When certain FTS is effectively connected with the P.E., then so much of the fees i.e., directly or indirectly attributable to the P.E. is to be taxed under Article-7.

Services rendered through own staff and those rendered through independent surveyors cannot be dealt with differently and hence the services rendered through independent surveyors have an effective connection with the PE.

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Nippon Keiji Kyokoi v. ITO (ITAT Mumbai)

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