FTS Can’t Be Taxed in India Without a Specific DTAA Clause Unless Company Possesses a PE in India
The present appeal has been filed by a company named M/s. ABB FZ-LLC (Appellant) against the Income Tax Officer (ITO) in the Income Tax Appellate Tribunal (ITAT) Bangalore Bench ‘C’ before Shri Vijay Pal Rao (Judicial Member) and Shri Inturi Rama Rao (Accountant Member). The case is related to the assessment year 2012-13 and was decided on October 28, 2016. The assessee challenged an assessment order dated December 30, 2015, under Section 143(3) r.w.s. 144C of the Income Tax Act 1961.
The key issue raised in this appeal is, “Whether the Fees for Technical Services are chargeable to tax in India when the Indo-UAE Double Taxation Avoidance Agreement (‘DTAA’) does not contain a clause/Article for the taxation of Fees for Technical Services.”
Background of Case:
The assessee is a foreign company incorporated in the UAE. The assessee has entered into a service agreement with ABB India Ltd. for rendering certain services and received payments for those services. The tax department in India said these payments were Fees for Technical Services (FTS) and therefore taxable in India under Indian tax laws. The assessee argued that the India-UAE Double Taxation Avoidance Agreement (DTAA) does not mention any article that allows India to tax Fees for Technical Services (FTS). Hence, the income from FTS should be treated as business income, which is taxable in India only if the company possesses a Permanent Establishment (PE) in India. Since the assessee does not have a PE in India, the income from FTS should not be taxed in India.
Assessee’s Argument
The assessee said that the India-UAE DTAA does not have any article relating to FTS. The income is either treated as business income or other income. However, in both conditions, income is only taxable in the UAE and not in India, unless the company possesses a PE in India. Since the assessee did not have any PE in India, its income from FTS should not be taxed in India.
Revenue’s Argument
If DTAA does not talk about FTS, then India should apply its domestic law. Under Section 9(1)(vii) of the Income Tax Act, FTS is taxable in India. Only if the DTAA has a specific contrary provision does the treaty override the Act. Since the DTAA has no FTS Article, India can tax the income as per Indian law.
Tribunal’s Findings
When the assessee approached the ITAT Bangalore, the tribunal noted that the DTAA does not recognise FTS separately. This is not a mistake; it is an intentional decision between India and the UAE. If the treaty does not classify FTS separately, then the income should be treated as business income under Article 7 and should not be taxed in India. As business income is taxable in India only when there is a PE in India, and since the assessee does not have any PE in India, India cannot tax the payment received by the company.
Final Decision
The Tribunal held that Fees for Technical Services cannot be taxed in India because the India-UAE DTAA does not allow it. The income must be treated as business profits, and without a PE, it is not taxable in India. The addition made by the Assessing Officer was deleted. The appeal of ABB FZ-LLC was allowed.
Citation: M/s. ABB FZ-LLC Vs ITO (ITAT Bangalore); I.T.(I.T) A. No.188/Bang/2016; 28/10/2016; 2012-13
