When there is no taxability under the respective treaty (DTAA) provisions, there cannot be any taxability under the provisions of the Income Tax Act either
Recently, in DCIT vs. Ford India Limited & vice-versa[I.T.A. Nos. 673 and 840 /Chny/2015 and I.T.A. Nos. 748 and 749 /Chny/2015, A.Y. 2011-12 and 2012-13, decided on 31.01.2017], one of the question raised before ITAT, Chennai was whether CIT(A) erred in deleting the tax and interest levied under section 201(1)/201(1A) of the Income Tax Act, 1961 (for short ‘the Act’) by the Assessing Officer(AO) on account of non deduction of tax at source in respect payments made by the assessee to the following parties :-
|S. No.||Name of the Party||Country||Amount
|Nature of service|
|1||Fuji Asia Co Ltd||Thailand||5,36,550||Commissioning
charges for tools &
|2||Fuji Asia Co Ltd||Thailand||2,45,250||Commissioning and
to add 3 holes
|3||Auto Alliance Co
|Thailand||2,12,298||Reflash cost for stage
4pcms-Pull ahead –
Business income –
other than categories
2.1 The Id. CIT(A) failed to appreciate that the services rendered by the above parties to the assessee falls within the meaning of fee for Technical services(FTS) as per explanation 2 to Sec.9(1)(vii)of Income Tax Act, hence the assessee was liable to deduct tax on the same.
2.2 The Id. CIT(A) erred in holding that Article 12 of DTAA with Thailand provides only for taxation of royalty and the fee for technical services is not defined and therefore same was in the nature of “business profit” falls within the ambit of Article 7 of DTAA as per which business profit can be taxed in India only if the enterprises carries on business in India through PE situated in India and thus the assessee was not liable for deduction u/s.195 in respect of these payments.
2.3 The Id. CIT(A) erred in not considering the Circular No. 333 dated 02/04/1982 of the CBDT as per which when there is no specific provision in the agreement, it is basic law i.e. the Income Tax Act will govern the taxation of income.
2.4 The Ld. CIT(A) failed to appreciate that as the services rendered by the non-resident in Thailand fall within the definition of fee for technical service as per Income tax Act, there is no requirement for PE in India and the same is taxable in India and hence the assessee ought to have deducted TDS on the said payments.
Briefly, the material facts were that during the course of scrutiny proceedings before AO, it was noticed that the assessee has remitted these sums (i.e. Rs 7,81,800 to Fuji Asia Co Ltd- Thailand, and Rs 2,12,298 to Auto Alliance Co Ltd- Thailand) to Thailand based entities without any deductions of tax at source. The plea of the assessee was that these remittances were payments in the nature of fees for technical services, and since the recipients did not have any permanent establishment in India, the income embedded in these remittances was not taxable in India under the provisions of the India Thailand Double Taxation Avoidance Agreement [(1986) 161 ITR (St) 82; Indo Thai tax treaty, in short]. The AO, however, rejected this plea. He was of the view that since the Indo Thai tax treaty did not have any specific provision for the taxation of fees for technical services, to that extent, the provisions of the domestic law will apply. The AO thus held that the provisions of Section 9(1)(vii) of the Act are applicable on the facts of this case and, accordingly, the assessee ought to have withheld tax at source from these payments. Thereupon, assessee carried the matter in appeal before the CIT(A). In this brief order, learned CIT(A) referred to various judicial precedents on the issue and concluded that since the related tax treaty does not have any specific provision for taxation of fees for technical services, and since these amounts are not taxable in India as business profits under the said treaty, the income embedded in these payments for fees for technical services is not taxable in India. Thereafter AO preferred the appeal before ITAT, Chennai.
The learned Members of the ITAT, Chennai held that even though the remittances in question are in the nature of fees for technical services in the hands of Thai entities, the income embedded in these remittances is not taxable in India in the hands of these entities, in terms of the provisions of Indo Thai tax treaty. The plea of the AO, for invoking the domestic law provisions in respect of fees for technical services, as the Indo Thai tax treaty does not specifically deal with the same, already stands negated by Hon’ble jurisdictional High Court in the case of Bangkok Glass Industries vs. ACIT [(2013) 257 CTR 356 (Mad)], in the context of Indo Thai tax treaty itself. It is only elementary that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, “the provisions of this (i.e. Income Tax) Act shall apply to the extent they are more beneficial to that assessee”. While on this issue, we may also take note of the landmark Special Bench decision in the case of Motorola Inc. vs. Dy. CIT [(2005) 96 TTJ (Del)(SB) 1] wherein the Tribunal had, inter alia, observed that “DTAA is only an alternate tax regime and not an exemption regime” and, therefore, “the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA”. Quite clearly, when there is no taxability under the respective treaty provisions, there cannot be any taxability under the provisions of the Income Tax Act either.