Article 7, 15 of India-UK DTAA; section 9(1) – Since professional services are not covered under section 9(1)(vii) of the Act, retrospective amendment impacting special source taxation applicable to FTS etc has no effect; Since Article 7(3) of India- UK DTAA unambiguously explains “indirectly attributable” profits to PE, reference to Article 7(1) of UN Model convention is not warranted.
Facts: The taxpayer was a partnership firm of Solicitors in UK, engaged in providing international legal services operating through its principal office in UK and branch offices in certain other countries. During the years under consideration, it had provided legal consultancy services in connection with different projects in India. While it did not have an office in India, some part of the work relating to the projects in India was performed in India by its partners and employees during their visits to India. Relying on Article 15 of the India-UK DTAA, the taxpayer claimed exemption from tax on the ground that short duration test in Article 15 was satisfied as its presence in India was of less than 90 days . However, according to AO the said test was not satisfied and hence, taxpayer had constituted a PE in India as per Article 5 and as the services had been rendered in India, the entire income in respect of Indian projects was chargeable to tax in India under Article 7.
Having regard to the retrospective amendment to section 9 of the Act, issues before the special bench were as follows.
(i) Whether insertion of Explanation to section 9 by way of retrospective amendment changes the position in law?
(ii) Whether on interpretation of the term “directly or indirectly attributable to Permanent Establishment” in Article 7(1) of the India-UK DTAA, it is correct in law to hold that the consideration attributable to the services rendered in UK is taxable in India?
Held
(i) Position under the Act
a) In an earlier case of the taxpayer, Bombay High Court [(2009) 318 ITR 237] had held that Article 15 and section 9(1)(i) of the Act was applicable for determination of its taxable income in India.
b) In DIT vs. Ericsson [2012] 343 ITR 470, Delhi High Court has held that the retrospective amendment in section 9 impacts only special source rule provision applicable to interest, royalty and FTS as contemplated in clauses (v), (vi) and (vii) of section 9(1).
c) Accordingly, as the tax department has not been able to substantiate applicability of section 9(1)(vii) and the earlier proceedings have proceeded on the basis that income derived by the taxpayer from professional services in respect of projects in India was covered u/s. 9(1)(i) of the Act, taxation is to be restricted to income in India to the extent attributable to the services performed in India. Retrospective amendment to special source rule has no applicability to taxation u/s 9(1)(i) and the earlier ruling in case of taxpayer holds good despite the amendment
(ii) Position under India-UK DTAA
a) In terms of Article 7(1), profits “directly or indirectly” attributable to the PE in India are chargeable to tax in India. Article 7(2) explains what constitutes “directly attributable” profits and Article 7(3) explains what constitutes “indirectly attributable” profits. In terms of the treaty only that proportion of the profits of the contract in which PE actively participates in negotiating, concluding or fulfilling contracts is to be treated as “indirectly” attributable.
b) In terms of Article 7(3) in India-UK DTAA “indirectly attributable” profits are to be apportioned in proportion to the contribution of PE to that of the enterprise as a whole and hence, profits apportioned to the contribution of other parts of the enterprise cannot be brought to tax in India.
c) Provisions of Article 7(1)(b) and (c) of UN Model convention are materially different from Article 7(3) of India-UK DTAA, which are unambiguous. Hence, reference to Article 7(1) of UN Model convention in Linklaters LLP vs. ITO [2010] 40 SOT 51 (Mum) was misplaced.
