4 Article 12 & Article 14 of India-Germany DTAA – Article 14 applies to payments made for obtaining scientific services from a non-resident individual; Article 14 being more specific provision applicable to professional services rendered by individuals shall prevail over Article 12

Poddar Pigments Limited vs. ACIT

A.Y: 2008-09; Date of Order: 23^rd
August, 2018

Article 12 & Article 14 of
India-Germany DTAA – Article 14 applies to payments made for obtaining
scientific services from a non-resident individual; Article 14 being more
specific provision applicable to professional services rendered by individuals
shall prevail over Article 12

Facts

The Taxpayer, an
Indian company, was engaged in the business of manufacturing master batches and
engineering plastic compounds. During the year, the Taxpayer entered into a
technical services agreement with a German scientist (Mr. X). As per the
agreement, Mr X was required to invent different processes of polymers by
applying different chemistry to raw materials used by the Taxpayer.

The Taxpayer
contended that payments made to Mr X was in the nature of independent
scientific services and hence, it qualified as independent personnel services
(IPS) under Article 14 of India-Germany DTAA. Since Mr X did not have a fixed
base in India and his stay in India did not exceed 120 days, payments made to
Mr X were not taxable in India as per Article 14 of India –Germany DTAA.

The AO rejected the
Taxpayer’s contention and held that the payments were in the nature of ‘fees
for technical services’ under Article 12 of DTAA as well as ITA. Hence, they
were subject to withholding of tax. Since the Taxpayer made payments to Mr X
without withholding tax, AO disallowed such expense u/s. 40(a)(i) of the Act.

The CIT (A) upheld
AO’s contention. Aggrieved, the Taxpayer filed an appeal before the Tribunal.

Held

–     As per Article 14 of
India- Germany DTAA, income derived by an individual resident of Germany from
the performance of professional services or other independent activities is
chargeable to tax only in Germany, if the individual German resident does not
have any fixed base regularly available to him in India for performing his activities
and further, if he has not stayed in India for a period or period exceeding 120
days in the relevant previous year. Also, professional services for the
purposes of Article 14 includes ‘independent scientific services’.

–     ITAT noted the documentary
evidence submitted by the Taxpayer and held that the services rendered by Mr X
were in the nature of scientific services. Hence, they would qualify as
professional services under Article 14 of the DTAA.

–     ITAT also noted that such
services would also qualify as technical services under the FTS Article of the
DTAA which would trigger source taxation in India. The issue, therefore was,
which of the two Articles governed taxability of Mr. X.

–     In the facts of the case,
Article 14 is applicable and not Article 12 for the following reasons:

•     Article 14 deals with income from
professional services of an “individual” taxpayer whereas Article 12 deals with
all the taxpayers (including individuals)

•     Article 12 is broader in scope and general
in nature as compared to Article 14 of DTAA. Accordingly, Article 14 would
apply on the facts of the case.

•     It is a general rule of interpretation that
specific or special provisions prevail over and take precedence over the
general provisions.

–     Thus,
in absence of a fixed base of the Taxpayer in India, and since the Taxpayer was
not present in India for a period exceeding 120 days, income from such services
was not taxable in India by virtue of Article 14 of the DTAA.