Diamond Manufacturing Management and Consultancy Ltd. Mauritius vs ACIT (ITAT Visakhapatnam)
Background
The ITAT in its recent judgment held that where a company incorporated in Mauritius received fees for entering into a technical collaboration with its Associated Enterprise (AE) in India, aimed at providing technical, process, marketing and sales assistance services outside India, in the absence of specific clause under DTAA not dealing with particular item of income, such fees would be treated as business income instead of residuary income. Further, in the absence of Permanent Establishment in India, such fees would not be chargeable to tax in India.
Brief facts of the case:
1. The Assessee is a tax resident of Mauritius, engaged in the business of of managing diamond factories and facilitating diamantaires to operate economically for high quality diamond factories across the Globe. It had entered into a technical collaboration with its AEs namely M/s. Worldwide Diamond Manufacturers Pvt Ltd and M/s. Worldwide Diamond Sorting Pvt Ltd, in India viz., for providing technical, process, marketing and sales assistance services outside India and received fees for technical services (FTS)
2. The Assessee has received an amount of Rs. 1,80,19,861/- from M/s. Worldwide Diamond Manufacturers Pvt Ltd and Rs. 69,98,338/- from M/s. Worldwide Diamond Sorting Pvt Ltd as FTS during the FY 2016-17.
3. The Assesseing Officer (‘AO’) on perusal of the Form 15CA and Form 15CB observed that Assessee has deducted 10% tax at the time of making remittance for such fees for technical services.
4. The Learned AO considered that, Assessee has Services Permanent Establishment (‘Services PE’) in India and hence the remittance is chargeable to tax in India as per section 9(1)(vii) r.w.s. 115A(1)(b) of the Income-tax Act, 1961.
5. Aggrieved by the addition made by the Ld. AO, the Assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) considering the submissions made by the Assessee, directed the Ld. AO to tax the fees received by the Assessee as FTS @ 10% as per the provisions of section 115A of the Act.
6. Aggrieved by the order of the Ld. CIT(A), the Assessee preferred an appeal before the Tribunal.
Assessee’s Contention:
1. The Assessee submitted that it has the legal right u/s. 90(2) of the Act to apply the provisions of the Act or applicable tax treaty whichever is more beneficial and the same is not legal opportunism.
2. Further, under the India – Mauritius Tax Treaty, the Article on taxation of FTS was inserted with effect from 1st April 2017 i.e., after the year under consideration and for the year under consideration the said income was business profits which could not be taxed in India in absence of a Permanent Establishment [PE] in India.
3. Moreover, the CIT(A) has erred in law and as well as facts of the case in confirming the order of the AO that the appellant had a service PE in India without appreciating that the clause on service PE was inserted in India – Mauritius Tax Treaty with effect from 1st April 2017 i.e., after the year under consideration.
4. Furthermore, Assessee submitted that, on the similar facts, in Assessee’s own case for AY 2016-17 the Ld. CIT(A) held that the provisions of India-Mauritius Tax Treaty would prevail and FTS income would not be taxable in India as the appellant does not have a PE India.
Revenue’s Contention:
1. The Ld. DR argued that in the absence of any specific provisions in DTAA regarding the taxability of the income, the provisions of section 115A squarely applies.
2. The Ld. DR relied on the Circular No. 333 [F.No.506/42/81-FTD], dated 2-4-1982, which provides that where a DTAA provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is basic law, i.e., the Income-tax Act, that will govern the taxation of income.
ITAT Decision:
1. There is no dispute on the fact that the Assessee is not having a PE in India.
2. Further, there is no specific clause in the DTAA entered into between the Republic of India and Mauritius, article 12A was inserted with effect from 1 April 2017 and cannot be applied for the assessment year 2017-18.
3. It is settled position of law that in the absence of a clause in DTAA not dealing with a particular item of income, the payments are not regarded as residuary income but as business income which is not chargeable to tax in India in the absence of any PE of the non-resident in India[1]. Thus, in the light of the above the FTS income would not be taxable in India.
[1] Paramina Earth Technologies Inc vs. DCIT (International Taxation) Visakhapatnam
