Consultancy services that are not taxable under the narrow definition of FTS article of the DTAA, since the conditions laid down therein are not satisfied, cannot be taxed under the other income article of the DTAA. ? Taxation under residuary article of the DTAA is possible only in cases of income which are not covered under any other articles of the DTAA or when the income is taxable within scope of the residuary article itself.

Taxation under residuary article of the DTAA is possible only in cases of income which are not covered under any other articles of the DTAA or when the income is taxable within scope of the residuary article itself.

• Taxpayer, an Indian Company (ICO), is engaged in the business of trading and export of sea- food. ICO availed consultancy services in relation to certain foreign exchange derivative transactions from a Singapore company (FCO).
• ICO was of the view that the consultancy services were rendered outside India and hence the same was not taxable in India under the Incometax Act. In any case, the amount was not taxable under the DTAA, as FCO had not ‘made available’ any services to ICO. ICO made payments to FCO without deducting tax at source.
• The Tax Department regarded the amount as taxable under the Income-tax Act as the services were utilised by ICO in India. While it accepted that the payments were not taxable under the FTS article of the DTAA as services did not meet make available test, it was contended that as taxability failed under specific articles of the DTAA, its taxability automatically arises under the residuary article i.e., ‘Other Income’ article of the DTAA.
  

ITAT Ruling:

The ITAT rejected the Tax Department’s contentions and held:

• Taxing rights for various types of income are assigned to the source state upon fulfilment of conditions laid down in respective clauses of the DTAA. When those conditions are not satisfied, the source state does not have the taxing right in respect of the said income.

• When a DTAA does not assign taxability rights of a particular income to the source state under the respective article, such taxability cannot be invoked under the other income article. The other income article covers only income which is either covered under specific scope of that article itself or such income which is not covered within the scope of any other article of the DTAA.
• Under the DTAA, FTS is taxable under Article 12 if the services enable the person acquiring the services to apply technology contained therein. FCO had rendered consultancy services and it did not involve any transfer of technology, nor did it enable ICO to apply technology contained therein. The payments were in the nature of business profits and as FCO did not have a PE in India, the same was not liable to tax in India.
• In the facts of the case, the income could potentially be covered by the FTS article or business profits article or independent personal services article. However, the fees may not be taxed as the conditions prescribed in the respective articles are not satisfied. If income is covered by one or more specific articles, the residuary (other income) article does not apply.