- The assessee, a division of Technical Resources Prt. Ltd. Australia, had entered into contracts with Rio Tinto India Pvt. Ltd. (“RTIPL”) for evaluation of coal deposits in Maharashtra and Orissa and for corresponding feasibility studies for transporting the same.
- For this purpose, the assessee had established a project office in India pursuant to approvals granted by the Reserve Bank of India (“RBI”).The project office of the assessee in India constituted a PE of the assessee in India as per Article 5 (See note-1 below) of the India-Australia Double Taxation Avoidance Agreement (“DTAA”).
- The assessee filed its returns of income for the relevant assessment years which were duly processed.
- In the course of assessment proceedings, the Assessing Officer (AO) held that the amounts received from RTIPL were fees for technical services.
– The AO also accepted that the assessee was covered by Article 7 (See note-2 below) of the India-Australia Double Taxation Avoidance Agreement (“DTAA”).
– However, he held that Article 7 did not prescribe any rate of tax, therefore reference was made to the Income tax Act, 1961 (“the Act”). Since the nature of the receipt was fee for technical services, the AO applied the provisions of section 11 5A (See note-3 below) and section 44D (See note-4 below) of the Act and taxed the gross receipts at 20%.
- This was upheld by the CIT(A) and being aggrieved, the assessee preferred an appeal before the Income tax Appellate Tribunal (“the Tribunal”).
Issues before the Tribunal
The following issues were raised before the Tribunal:
- Whether the gross receipts of the assessee should be taxed at the rate of 20% applicable for fees for technical services or,
- Considering that the assessee has a Permanent Establishment (“PE”) in India, the profits attributable to the PE are to be taxed after allowing permissible deductions under the Act?
Ruling of the Tribunal
- The assessee has admitted that it has a PE in India and has opted to be taxed as per the provisions of the DTAA, thus, in so far as the assessee has a PE in India, its income would be liable to be taxed as per Article 7 of the DTAA.
Therefore, as per Article 7(2) of the DTAA, the PE of the assessee would have to be treated as a wholly independent enterprise which is liable to be taxed in India.
Further, Article 7(3) would also come into play and deduction for expenses in accordance with and subject to the law relating to tax in India would apply.
- Since it is held that Article 7 of the DTAA applies, section 9(1)(vii) of the Act dealing with fees for technical services would no more be applicable as the DTAA specifies that the PE is to be treated as a wholly independent enterprise and it is the profits of the PE in India which are to be taxed.
- Further, since Article 7 of the DTAA is to be applied, section 44D and section 11 5A of the Act also will not apply in so far as they relate to foreign companies whereas Article 7(2) of the DTAA specifies that the PE in India is to be treated as a wholly independent enterprise in India.
In such a situation, the income of the assessee would have to be assessed by applying the regular provisions of the Indian tax laws i.e the provisions of sections 28 to 43C (See note-5 below) of the Act.
- It is the business profits which are chargeable under Article 7 of the DTAA. The business of the assessee is as per the contracts entered into by the assessee with the various persons. The contracts are inclusive contracts of technical nature and it cannot be said that the activities of the assessee are purely technical services. The drilling, excavation and testing activities cannot be delinked from the evaluation and feasibility studies and the same is a consolidated activity. Thus, the activities cannot be held to fall within Article 12 (See note-6 below) of the DTAA.
- The assessee is to be taxed as an independent enterprise in India and hence the provisions of section 9(1)(vii), section 44D and section 1 15A of the Act would not be applicable, but the regular provisions of the Act would apply.
Conclusion:- Where a non-resident assessee provides consolidated services (including in part, technical services under a contract) in the course of business carried out through its PE in India, the receipts would not be treated as “fees for technical services” which are subject to tax on a gross basis, but would be taxed based on the profits attributable to the PE as per Article 7 of the DTAA.
Source: Rio Tinto Technical Services Vs DCIT – ITA Nos. 3399/Del/2002, 5372/Del/2003 & 4742/Del/2004 dated 19 March 2009.
1. Article 5 of the DTAA defines the term permanent establishment and inter alia, includes an office
2. Article 7 of the DTAA deals with tax ability of income in the nature of business profits
3. Section 11 5A of the Act deals with tax on dividends, royalties and technical service fees in case of foreign companies and prescribes a tax rate varying from 10%- 20%. For the assessment year in this case, the rate prescribed is 20%.
4. Section 44D of the Act contains special provisions for computing income by way of royalties and technical service fees for foreign companies and states that no deductions shall be allowed in computing the said income.
5. Section 28 to section 43C of the Act deal with the mechanism for computing business income, and allow certain expenses as a deduction.
6. Article 12 of the DTAA provides for taxation of royalties and payments for rendering technical services.