INTERNATIONAL TAX: Absence of article dealing with FTS in DTAA will not make it taxable under other income article.
Facts of the Case:
The Assessee is a company incorporated in Thailand and offers a number of services, such as, business planning and coordination, engineering services, product research and development etc. to its Indian subsidiary.
On offering engineering services, the Assessee received a revenue of Rs.9,01,61,150 which was not offered for tax as Fess for Technical Services (FTS) since the DTAA between India and Thailand did not have any article pertaining to taxation of FTS.
However, AO was of the opinion that in absence of FTS clause in DTAA, the same shall be taxable under Article 22 of the Indo-Thailand DTAA i.e., as other income.
AO’s view was challenged by the assessee before CIT(A) and CIT(A) upheld the decision in favor of assessee by stating the absence of article dealing with FTS will make it taxable under Article 7 read with Article 5 of the DTAA.
Hence this appeal before ITAT: –
As per Article 7 of Indo Thailand Treaty, if income is assessable as business income, it can be taxed in India only if there is a permanent establishment in India and the income is attributable to activities or functions performed by such permanent establishment.
As per Article 22, any income of resident of contracting state not dealt with in the other Articles of the treaty and such income arising in the other Contracting State may taxed in that other state only.
Fees for technical services is essentially business revenue, since the rendering of such services is the business of non-resident
Hence ITAT Held:
In order to take out an item of income from the business profits, it is necessary that there should be some other provision in the treaty dealing specifically with the item of income, which is not the case above.
Therefore, in absence of any provisions relating to FTS in Indo Thailand Treaty, the same should not be treated as the income from other sources as per Article 22 and should only be treated as business income, reason being, the core business activity of the assessee is providing technical services.
However, such business income is not taxable in India as per the treaty, as Thailand company has no permanent establishment in India.
Accordingly, the decision was taken in the favour of the assessee that such income was held not liable to tax in India.
