India-Australia DTAA; S. 9(1)(vii) — Receipts for monitoring and supervision of project work — Not royalties — Business income, chargeable to the extent attributable to PE

The applicant was an Australian company, which was tax
resident of Australia. It was in the business of providing professional services
such as engineering, procurement and object management. It executed a contract
with an Indian company for monitoring a gas pipeline project as project
monitoring consultant. The applicant had to carry out various responsibilities
that were set out in the tender document under the section titled as
“consultant’s scope of work”.

The AAR considered the following issues :

The applicant had submitted that most of the services
relating to the work assigned to it were performed in India; its employees were
present in India for 165 days during the relevant year; nearly 90 to 95% of the
work related to the contract was performed in India; and hence, it should be
deemed to have have construction supervisory PE in India within the meaning of
Article 5(2)(k) of India-Australia DTAA. The applicant also contended that the
payments received by it under the contract were not in the nature of royalty
under Article 12 of India-Australia DTAA, but were attributable to its PE and
taxable as business profits in terms of Article 7 of India-Australia DTAA — a
contention not disputed by the Department.

The AAR then referred to the definition of ‘royalties’ in
Article 12(3) of India-Australia DTAA. In particular, AAR referred to clause (g)
of Article 12(3), in terms of which payment made as consideration for “the
rendering of any services (including those of technical or other personnel),
which make available technical knowledge, experience, skill, know-how or
processes or consist of the development and transfer of a technical plan or
design” ‘royalties’. The AAR observed that monitoring and supervision of project
work with a view to ensure its timely completion within the approved cost does
not amount to ‘making available’ technical knowledge, experience, etc. which can
be subsequently used by the Indian company on its own. Hence, by rendering the
services the applicant had not ‘made available’ any technical knowledge,
experience, skill or know-how to the Indian company.

The Department had contended that the contractual receipts
were in the nature of fees for technical services in terms of S. 9(1)(vii)(b) of
the Act. The AAR rejected this contention on the ground that the receipts cannot
be taxed under the Act in derogation of DTAA provisions and since the income
could be brought within the purview of Article VII, which deals with business
profits, only that provision was relevant. The AAR noted that in its reply, the
Department had admitted the applicability of Article 7(1) of India-Australia
DTAA. Further, no Article other than Article 12 dealt with ‘fees for technical
services’. Hence, the receipts of the applicant were business profits and since,
admittedly, the applicant carried on its business through a PE, profits
attributable to that PE were taxable in India in terms of Article 7.

The AAR then referred to Article 5(2)(k) and agreed with the
applicant’s contention that it constituted a PE in India in terms of Article
5(2)(k), since the activities were carried on in India for more than six months
during financial year 2003-04.

(i) The applicant’s receipts under the contract were not
‘royalties’ in terms of Article 12(3)(g) of India-Australia DTAA, since
monitoring and supervision project work does not amount to making available
technical knowledge, experience, etc.

(ii) The applicant had construction supervisory PE in India
in terms of Article 5(2)(k) of India-Australia DTAA.

(iii) Since the payment is not covered by specific Article 12
dealing with royalties, it is business income to be taxed in terms of Article 7
of India-Australia DTAA, but only to the extent of the profits attributable to
the applicant’s PE in India and in accordance with the provisions of the Act.