Section 9 of the Act; Article 13, 5 of India-UK DTAA – (i) as per amended section 9 of the Act, the payment made was FTS under section 9(1)(vii); (ii) since the exclusive ownership of the work prepared by Taxpayer was of I Co, technical knowledge, etc. were made available and hence, payment was taxable as FTS ; (iii) place provided to Taxpayer for limited and restrictive purpose could not constitute PE.
Facts
The Taxpayer, a UK company, was engaged in the business of providing consultancy services for execution of projects. An Indian company (“I Co”) engaged the Taxpayer for providing consultancy services for modernisation of its shipyard. The representatives of the Taxpayer visited the shipyard in India to study the existing design, plan and facilities. The collected data was sent to UK and the experts of the Taxpayer at UK prepared the project report containing plans, design, structural design, cost estimate, manner of implementation, etc.
While filing its return of income, the Taxpayer showed the profit from execution of contract as attributable to its PE in India. However, in course of assessment proceedings, the Taxpayer claimed that it did not have PE in India and also that amount received was not FTS as the services provided did not fulfil ‘make available’ condition in Article 13 of the India-UK DTAA. The AO, however, concluded that the Taxpayer had PE in India; the amount received was FTS in terms of Article 13. ;Further as the services were ‘effectively connected’ with the PE in India, the consideration for such services was taxable in India in terms of Article 7 read with article 13(6).
Held
As regards the Act
(i) The services provided by the Taxpayer being in nature of technical or consultancy services, the payment was in the nature of FTS and is deemed to accrue or arise in India in terms of section 9(1)(vii)(b)of the Act.
(ii) Having regard to the retrospective amendment to section 9, since the services were utilized in a business or profession carried on by payer in India, the payment was deemed to accrue or arise in India, irrespective of whether the non-resident had PE in India or whether the non-resident rendered services in India.
As regards India-UK DTAA
(ii) The agreement provided that all plans, drawings, specifications, designs, reports, etc. prepared by the Taxpayer shall become and remain the exclusive property of I Co. therefore technical knowledge, etc. were made available. Accordingly, payment was taxable as FTS even in terms of the treaty.
(iii) Further as the payer is a resident of India, such FTS arises in India and is taxable in India by virtue of Article 13 of the DTAA .
As regards constitution of PE
(i) It was noted that, I Co was contractually required to provide office space to the Taxpayer. However such space was used only for limited purpose of providing services under the contract and its usage was also subject to various restrictions. The Taxpayer did not carry on any other business in India.
(ii) Article 5(1) requires that to constitute a PE, business should be carried on through the fixed place. Carrying on of business would involve carrying on of any activity related to the business of the enterprise.
(iii) Since the Taxpayer could not carry on any other activity, the place provided by I Co for limited and restrictive use could not be said to be PE in India of the Taxpayer. Reliance in this regard was placed on the Special bench decision in the case of Motorola Inc [(2005) 95 ITD 269 (Delhi)] and Tribunal decision in the case of Airline Rotables Ltd [(2011)(44 SOT 368)(Mum)].
