Income from activities not attributable to PE in India cannot be taxed as business profits of foreign company under DTAA

Case Citation: ABB Inc. vs. Deputy Director of Income Tax (International Taxation), ITAT Bangalore ,IT(TP) Appeal No. -1613/2012, Date of Pronouncement- June 30, 2015

Brief of the case:

• The ITAT Bangalore in the case of ABB Inc cracking down the order of Dispute Resolution Panel held that the incomes earned by foreign company from India can be taxed in India only when the incomes are attributable to the PE of foreign company in India.
• The Indian entities when PE for the purpose of trading activity cannot make liable any other income earned by foreign company from India in tax net by extending the coverage of PE to tap other activities also.

Facts of the case:                 

• The assessee is a US based company engaged in providing business development, market and other support services to its Indian associated enterprises to its Associated Enterprises (AEs) – ABB Ltd. and ABB Global Services Ltd.
• The assessee in its Indian income tax return claimed the fees so received as a consideration for such services to be taxable in US only by taking the benefit of Article 12(4)(b) of India – US Double Taxation Avoidance Agreement (DTAA).
• The AO however rejected the assessee’s explanations and passed a draft order to tax the income in India.
• Dispute Resolution Panel (DRP)on a reference made by assessee held that the India AEs of assessee company are Dependent Agency Permanent Establishment (DAPE) of the assessee on account of purchase and sale of certain products manufactured by assessee company. Therefore, the fees received by the assessee company is taxable as Business Profits of the assessee company as per Article 7 of India-US DTAA.

Contention of the Assessee:

• There is no transfer of technical knowledge from the service provider company to assessee so as to make assessee able to utilize the same without recourse to the former.
• This, the test of ‘make available’ of technical knowledge has not satisfied which is necessary to tax the services as fee for technical services as per DTAA.

Contention of the Revenue:

• The assessee has provided technical services to its associated enterprises and also makes available technical knowledge to the AEs. The knowledge gained by the assessee company, infact, helped it in its business growth.
• Further, the AEs are PE of the assessee as the AEs are engaged in trading certain products manufactured by the assessee. Therefore, the income earned by assessee is otherwise also taxable as business profits under Article 7 of India-US DTAA.
  

Held by ITAT Bangalore:

• Under Article 7(1) of the Indo US tax treaty, the profits of the assessee may be taxed in the source jurisdiction but only so much of them as are “attributable to (a) that permanent establishment (PE).
• In the present case the AEs are PE only in respect of trading transactions, therefore, any earnings from rendering of services in India cannot be attributed to such PE. As such no part of income earned from rendering services in India can be taxed in the hand of assessee company.
• Further, there is no transfer of technical knowledge from the assessee to its AEs as the services not enable AEs to utilize knowledge without recourse to service provider. Therefore, the said incomes are not fees for technical services (FTS) as defined in Article 12(4)(b) of DTAA.
• On the basis of above observations the said incomes earned by assessee is not taxable in India under India – US DTAA.