In the absence of FTS clause in India-Mauritius DTAA, FTS under the Act to be considered – Chennai ITAT


DCIT v TVS Electronics Ltd IT Appeal NO. 811 (MDS.) of 2010 (Chennai ITAT)

Facts of the case

  • The assessee made payment to M/s Rosewell Group Services Ltd. based in Mauritius for market survey, qualitative consumer measurement, retail store site information, etc. without deducting tax at source under section 195 of the Act
  • The AO concluded that the payment made was nothing but fees for technical services relying on Explanation 2 to Section 9(1)(vii) of the Act. 

Assessee’s contentions

  • Entire services were rendered outside India and the amounts were business income of the concerned non-resident.
  • Chapter III of the DTAA between India and Mauritius did not provide for taxing any fees paid for technical services and therefore, fee for technical services could only be considered as business income in the hands of the recipient and hence taxable only in Mauritius. In the absence of permanent establishment in India, the same was not taxable in India.
  • Without prejudice, market survey expenses could not be considered as fees for technical services or royalty since what was transferred to the assessee was only commercial information. Just because technical services were required for gathering such commercial information would not make such commercial information itself a technical service.

HELD

  • A “market survey” definitely involved exercise of technical knowledge and skill by the persons doing the survey. We cannot say that the work done by the Mauritius company for the assessee was not a technical service.
  • By virtue of Explanation 2 to Section 9(1)(vii) of the Act, the type of service received by the assessee M/s Rosewell Group Services Ltd., Mauritius was nothing but fees for technical services.
  • Chapter III of DTAA between India and Mauritius did not provide for taxing any fees paid for technical services. Only for a reason that DTAA is silent on a particular type of income, we cannot say that such income will automatically become business income of the recipient. In our opinion, when DTAA is silent on an aspect, the provisions of the Act has to be considered and applied.
  • This aspect has not been dealt with by the authorities below. We are, therefore, of the opinion that this issue requires a fresh look by the A.O.

Other issues

Unexpired Service Contract falling due after the accounting period – The obligation arising out of the AMC as well as earning of the income ran side by side and progressed simultaneously. Therefore, contention of the assessee that it could not recognize revenue for the unexpired period of AMC is on strong footing. Principle of matching concept of income and expenses, comes to the aid of the assessee in such a situation.

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