In Deputy Commissioner of Income Tax (International Taxation) Ahmedabad v. Welspun Corporation Limited, the division bench of the Ahmedabad ITAT held that the commission paid to non-resident agents is not taxable in India when there is no Permanent Establishment can be attributed. It was further observed that the payments made by assessee for services rendered by non-resident agents cannot be categorized as fees for payment for technical services, these payments were in nature of commission earned from services rendered outside India which had no tax implications in India.
The assessee-Company employed several non-resident companies, including M/s GMS Interneer Co. Ltd (Thailand) and M/s Afras Ltd (UAE), as commission agents during the relevant assessment years. The AO competed assessment against the assessee by holding that commission paid to non-resident “export commission agents” are taxable in India under the head “fee for technical reasons” both under section 9(1)(vii)relevant article of the DTAA.
The bench observed that the above agents are residents of the tax jurisdictions with which India has tax treaties but these treaties have no specific article dealing with the taxability of ‘fees for technical services’. It was further noted that GMS-Thailand and Afras-UAE did not have any permanent establishments in India and therefore, income in the hands of the recipients of this income could neither be taxed in as business income or under the head fees for technical services.”
“Profits earned by rendering fees for technical services are only a species of business profits just as the profits any other economic activity. However, without the character of such receipts in the nature of business receipts being altered, the fee for technical services is dealt with separately in some treaties for the reason because, under those treaties the related contracting states proceed on the basis that even in the absence of the permanent establishment or fixed base requirements, the receipts of this nature can be taxed, on gross basis, at the agreed tax rate, and, to that extent, such receipts does not fall in line with the scheme of taxation of business profits under art. 7 and professional income under 14. It is interesting to note that the moment the threshold limits for permanent establishment or fixed base, as the case may be, is satisfied, the taxability shifts on net basis as business profits or professional (independent personal services) income. The business receipts or professional receipts thus cannot be seen in isolation with the fees for technical services. Its only the fact of, and mode of, taxation in the absence of PE or fixed base, which gets affected as a result of the fees for technical services. When there is an FTS clause, the FTS gets taxed even in the absence of the PE or the fixed base, but the character of FTS receipt is the same, i.e. business income or professional (independent personal) income, in the hands of the same. When there is no FTS clause, this sub categorization of income becomes irrelevant, because FTS or any other business receipt, the income embedded in such receipts gets taxed only if there is a permanent establishment or fixed base- as the case may be. The scope of business profit and independent personal service completely covers the fees for technical services as well. With FTS article or without FTS article, the income by way of fees of technical services continues to be dealt with the provisions of articles relating to business profits, independent personal services, and additionally, in the event of existence of an FTS article, with the article relating to the fees for technical services.”
Read the full text of the order below.
