Income cannot be taxed as FTS in India in absence of FTS clause in DTAA

Brief of the case:

• The ITAT Mumbai in the case of Mckinsey Business Consultants Vs. DDIT held that if there is no clause in DTAA to tax fees for technical services (FTS) then the same is taxable as business profits provided the income is earned by assessee through a PE in India.
• Further , such income cannot be taxed as FTS under the provisions of Act because the residuary clause of India- Greece DTAA does not allow the incomes earned in ordinary course of business to be checked with I.T Act , it is only residuary incomes which need to be checked under the Act that too when DTAA is silent.

 Facts of the case:

• The assessee is a foreign company incorporated in Greece providing assistance in the form of borrowed service to its associate concern (McKinsey India) in consideration for which, the assessee received an amount from the Indian company.
• The said income was not offered to tax by the assessee in the return on the ground that the said income was earned in the course of business of the assessee and, therefore, it qualified as business profits under Article 3 of India-Greece DTAA.
• Since the assessee did not have any permanent establishment (PE) in India, its income was not liable to be taxed in India. The Assessing Officer observed that in view of the findings given in the assessment orders for the earlier years of the group entities, the said amount was to be taxed as fees for technical services(FTS) within meaning of section 9(1)(vii) and also under the provisions of India-Greece DTAA.
• DRP confirmed the order of AO to tax the consideration as Fees for technical services on the ground that since the DTAA is silent on FTS, provision of Act shall apply.

Contention of Assessee:

• There is no FTS clause in the India -Greece DTAA and therefore, such an income being earned in the ordinary course of business is business profits as per Article 3 of India-Greece DTAA.
• Business profits can taxed in India only when foreign company is carrying on business in India through a PE which is not so in the present case.

 Contention of Revenue:

• Revenue supported the order of DRP that merely because the treaty is silent on a particular type of income, the income would not automatically qualify as business profits.
• In such a case the provision of Income Tax Act need to be checked and income to be taxed under the item which is most specific cover the case excluded by DTAA. Such a view is also in line with Article 17 of treaty which provides that the cases not covered by DTAA would be governed by domestic law.
• Thus, the services rendered by the assessee company are clearly taxable as ‘fees for technical services u/s 9(1)(vii).

Held by ITAT Mumbai:

• The point of dispute is that whether consideration for rendering of services is taxable in India as fees for technical services (FTS) in the absence of FTS clause in India-Greece DTAA.
• ITAT held that in absence of FTS clause in the India-Greece DTAA, the fees received by the assessee the fees cannot be treated as FTS and the same to be treated as business profits in the absence of India-Greece DTAA.
• ITAT relied on the decision of its own decision in the case of Mckinsey (Thailand) wherein it was held that if the income is earned in the ordinary course of business it would be business profits unless in DTAA it is specifically treated as other income.
• Thus, in the present case since the clause of FTS is missing in DTAA, the possibility of taxing income as FTS have been ruled out and such income taxable as business profits only.
• Since the resident assessee company does not have PE in India its business profits cannot be taxed in India.