Income earned in Absence of FTS clause in DTAA would fall as Business Income and cannot Taxed in India in Absence of PE: ITAT [Read Order]

The Delhi Bench Income Tax Appellate Tribunal has held that income earned in absence of Fee for Technical Service (FTS) clause in Double tax avoidance agreement (DTAA) would fall as business income and cannot taxed in India in absence of Permanent Establishment (PE).

The assessee, Michelin ROH Co. Ltd., 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 these engineering services, the assessee obtained a revenue ofRs.9,01,61,150.

The assessee did not offer itsrevenue for tax, as the DTAA between India and Thailand did not have any article pertaining to taxation of ITS. The AO in his assessment order has stated that since there is no Article for taxability of FTS under the India Thailand Treaty, the same are required to be included under Article 22 of the Treaty which taxes

other income.

On appeal CIT (A) reversed the decision of AO and held that “the absence of article on FTS, the consideration for service which is business income is automatically taxed in accordance with Article 7, which may result in no taxability in the Indian jurisdiction in the absence of a PE, which is the case of the assessee. However, this clearly implies that the income is covered under Article 7. Therefore, Article 22 has no application”. Aggrieved by the order, revenue filed appeal before ITAT.

The Tribunal observed that the assessee company has no Permanent Establishment (PE) in India. The income which has been earned in absence of F.T.S. clause in DTAA would fall as business income. Their nature would not change to be that of other income. Hence the same cannot be taxed in India in absence of a PE.

The Coram of Mr. Shamim Yahya, Accountant Member and Ms. Astha Chandra, Judicial Member has relied the decision of Delhi Tribunal while deciding the case of Bharti Airtel Ltd.:-

“where there is no FTS clause available in the treaty with a country, then the income in question would be assessable as business incomeand 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”.

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