Income from supply of information relating to various markets should be taxed as business profits under the India-Singapore tax treaty

Court: Mumbai bench of the Income Tax Appellate Tribunal

Citation: JCIT Vs. Telerate [2010-TII-72-ITAT-MUM-INTL]

Brief :Mumbai bench of the Income Tax Appellate Tribunal  held that the income from supply of information relating to various markets should be taxed as business profits under Article 7(3) of the India- Singapore tax treaty (tax treaty) and accordingly the expenses incurred for earning the income should be allowed as a deduction.

Further, the Tribunal upheld the view that when the taxpayer chooses to be covered by provisions of an applicable tax treaty, the tax department cannot thrust provisions of the Income Tax Act, 1961 (‘the Act’) on the taxpayer unless those are more beneficial to the taxpayer.

Facts of the case

• The taxpayer, a company resident in Singapore, had a branch office in India. It was engaged in collecting and disseminating information available in the public domain with respect to various markets such as equity market, fixed income market, commodity market, future and option market, forex market, derivatives and money market etc.

• The information was transmitted through telephone lines or V-Sat on a continuous basis to subscribers of the branch office in India.

• The taxpayer had also filed tax return declaring loss as per Article 7(3) of the tax treaty.

• During the course of the assessment proceedings, the Assessing Officer (AO) observed that the taxpayer collected information relating to various commodities which after analyzing were provided to the clients for utilization in their business and therefore, revenues were taxable as fees for technical services (FTS).

• The AO also held that notwithstanding the provisions of Article 12(6) of the tax treaty envisaging taxing of FTS of a Permanent Establishment (PE) as business profits under Article 7(3) of the tax treaty, the income of the taxpayer should be computed in accordance with section 44D (See Note-1 below) of the Act. The AO accordingly taxed the entire revenue of the taxpayer on gross basis at 20 percent under section 115A of the Act.

• Reliance was placed by the AO on the decision {(P-13 of 1995, In re [1995] 228 ITR 487 (AAR)} of the Authority for Advance Ruling (AAR) in the case of a French company wherein it was held that when royalty or FTS are connected with the PE, the income of the non-resident should be computed in accordance with Section 44D of the Act.

Taxpayer’s contention

• Income should be taxed as business profits under Article 7(3) (See Note-2 below) of the tax treaty and accordingly the expenses incurred for earning the income should be allowed as a deduction.

• The taxpayer relied on the judgment in the case of Boston Consulting Group5, wherein a similar matter was adjudicated in favor of the taxpayer.

Issue before the ITAT:- Whether the income from supply of information related to markets is chargeable to tax as business profits or FTS?

Tribunal’s ruling

• The Tribunal relied on the case of DCIT v. Boston Consulting Group Pvt. Ltd. [2005] 94 ITD 31 (Mum) where in circumstances similar to the case under consideration, it was held that-

o When the taxpayer chooses to be covered by provisions of an applicable tax treaty, the tax department cannot thrust provisions of the Act on the taxpayer.

o The tax treaty and the Act offer alternative but similar modes of taxation of FTS therefore, the provisions of tax treaty shall prevail if they are more beneficial to the taxpayer.

o In case of non-technical consultancy services of instant nature, for computing profits attributable to PE in India, limitation on deduction of expenses under Section 44D of the Act would not be applicable.

• The Tribunal held that the income from supply of information relating to various markets should be taxed as business profits under Article 7(3) of the tax treaty and accordingly, the expenses incurred for earning the income should be allowed as a deduction.

Our comments:- This is an important ruling of the Mumbai Tribunal which reiterates that the provisions of tax treaty shall prevail over the provisions of the Act if they are more beneficial to the taxpayer and profits attributable to PE should be calculated as business profits after allowing expenses incurred in earning the same.

Note

1. Section 44D of the Act provides no deduction in respect of any expenditure or allowance under sections 28 to 44C in computing the income by way of royalty or fees for technical services received by a foreign company.

2. As per Article 7(3) of the tax treaty, for calculating profits of a permanent establishment, expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses shall be allowed as deduction.

NF