By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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S/s. 9(1)(vii), 195 – Absence of Fee for technical services (FTS) article in the DTAA, does not result in the income being taxed as per the domestic laws in terms of Article 24 of India-Philippines DTAA; Services provided in the course of business covered by business income article; Not taxable in absence of a PE in India; other Income article does not cover such income.
Facts:
The Taxpayer is an Indian Company (ICo) engaged in the business of providing information technology services. The Taxpayer made certain payments to a Philippines Co. (FCo) for certain business information services, work force management, web content management and human resource accounting services without withholding tax at source.
The Taxpayer contended that in absence of FTS Article in India- Philippines DTAA, Article 7 on ‘business profits’ should be applicable, and payment made to FCo is not chargeable to tax in absence of PE in India.
However, the Tax Authorities contended that in the absence of an FTS article in the DTAA, the same should be taxable as per the domestic laws by virtue of Article 24(1) of the DTAA, which provides that the laws of the contracting states shall continue to govern the taxation of income except where provisions to the contrary are made in the DTAA.
Held:
On Applicability of Article 24:
If Article 24(1) is interpreted as conferring right to tax ‘FTS’ in accordance with the domestic laws of a contracting state, then Article 23 dealing with other income and granting exclusive right of taxation to country of residence would become redundant as Article 23 will then cease to be an omnibus clause covering the residuary income.
It is a well settled principle that a clash is to be avoided while interpreting the provisions of a treaty. Hence the scope, context and setting of the articles have to be understood in their proper perspective.
Article 24(1) does not confer a right to invoke the provisions of domestic laws for classification or taxability of income covered by other articles of the DTAA. Article 24 is limited to elimination of double taxation and operates in the field of computation of doubly taxed income and tax thereon in accordance with the domestic laws and is not part of treaty Articles which deal with the classification of income.
On interplay between Article 7 and Article 23:
The services rendered by FCo are in the course of its business and hence covered under Article 7 of the DTAA and not other income Article. Further in the absence of PE in India of FCo, the amount paid is not chargeable to tax in India.
Even assuming that the payments made to FCo are covered by Article 23, the same should also not be taxable in India, by virtue of exclusive taxation rights being provided to the country of residence.
