1. Background
1.1 Quite often, an item of income may not be taxed under Articles 6 to 20 of a Tax Treaty due to application of distributive rules agreed between the two Contracting States. For example, an item of income may not be taxable as “Business Profits” under Article 7 or as “Shipping or Aircraft Profits” under Article 8 or as “Fees for Technical Services” (FTS) under Article 12 of a Tax treaty either because the income does not satisfy the definition of FTS as contained in that Treaty or it does not satisfy other conditionalities stipulated in Article 12 e.g., it may not meet the test of “make available concept” embedded in a particular treaty. The item of income may also not be taxable due to various exclusions/exemptions contained in the respective Articles. Similarly, an item of Business Income may not be taxable in the Source Country (say, India) under Article 7 of the applicable Tax treaty, as the Non-Resident (NR) Assessee does not have a Permanent Establishment (PE) in India as defined in Article 5 of the Tax Treaty. In such cases, a question arises whether such an item of income would be assessable to tax as “Other Income” under Article 21 (or the corresponding Article of the applicable Tax Treaty.)
1.2 In such cases, the Tax Department argues that even if the income of a NR is not taxable in India under Article 7 as business profits or under Article 12 as fees for technical services, such income is still taxable in India as ‘Other Income’ under Article 21.
1.3 The Department’s interpretation of the scope of Article 21 is that when taxability fails under all articles of the applicable tax treaty, the taxability automatically arises under this article. In other words, for example, when a business profit is not taxable under Article 7, it is taxable under Article 21 which in turn gives right to the Source State to tax it as per its domestic tax laws.
In this article, we shall examine the limited aspect of the scope of Article 21 and the judicial interpretation thereof. We shall focus on the applicability of article 21 on “Other Income” vis-à-vis income dealt with by other articles of a tax treaty.
2. Text of “Other Income” – Article 21 of OECD MC
“21(1): Items of Income of a Resident of a Contracting State, wherever arising, not dealt with in the foregoing articles of this Convention shall be taxable only in that State.”
Paragraph 2 is not reproduced, as it is not relevant for the purpose of our discussion. Paragraph 1 of Article 21 of UN Model Convention is identical to that Article 21(1) of OECD MC.
The dispute centers around the correct interpretation of the words “not dealt with” contained in Para 1 of Article 21, as reproduced above.
3. Essar Oil Ltd. vs DCIT 2005-TII-24-ITAT-MUMINTL
The controversy was analyzed and discussed at length in this case in the context of Article 8 of India-Singapore DTAA.
3.1 Facts of the Case: The assessee, a resident company had taken a tanker on voyage charter basis from a non-resident company (HMPL) based in Singapore for transportation of petroleum products from the port of Chennai to the port of Hazira, both in India. The AO held that the assessee had defaulted in not deducting TDS while making payment since it did not operate in international waters and had a PE in India and so protection under Article 8 would not be available. Also, section 44B would be applicable in case of the non-resident company. The same was upheld by the CIT(A).
3.2 Decision: After elaborate discussion, the Tribunal decided the issue in favour of the assessee, by observing as follows:
“38. We do not also agree with the argument of the revenue that income of HMPL is straight away covered by article 23 of Singapore DTAA. Article 23 of Singapore DTAA deals with income not expressly mentioned elsewhere in the DTAA. It deals with items of income which are not expressly mentioned in the foregoing articles of the said agreement may be taxed in accordance with the taxation laws of the Contracting States.
39. Prof. Klaus Vogel, the authority on the subject, has again held that the application of the residuary provision in article 23 is very narrow and it is generally applied to such residual receipts or income such as social insurance, annuity arising out of previous contributions, maintenance payments to relatives, accident benefit payments, income from so-called derivatives, lottery winnings and income from gambling, etc. Article 23 does not cover income arising out of business. In the present case, the income earned by M/s. HMPL is income earned out of business. Income earned by an assessee out of shipping operations is invariably business income which is recognised by the provisions of Indian Income-tax Act itself. Even according to the assessing authority, if the assessee falls under article 23 of the Singapore DTAA, the assessee is governed by provisions of section 44B of the Incometax Act, 1961. The heading given to section 44B is – “Special provision for computing profits and gains of shipping business in the case of non-residents”. The Act itself provides that income earned out of shipping business by a non-resident is to be considered as profits and gains and it is for that reason the taxability of such profit has been brought u/s. 44B which is brought under Part D of Chapter IV of the Income-tax Act, 1961. Part D deals with computation of income under the head ‘Profits and gains of business or profession’ in sections 28 to 44DA. The income attributable to operations carried out by M/s. HMPL is nothing but germane to the regular business of shipping carried on by it. Therefore, by the basic concept of Indian income taxation itself is that such income is ‘income from business’. (Emphasis supplied)
4 0. ….
41. Even if, for the sake of arguments one holds that the case is not covered by article 8 of Singapore DTAA, still it does not preclude the assessee to claim the immunity under article 7. The income attributable to the Singapore shipping company is business profit and de hors article 8, the case is still coming under article 7 of the DTAA which deals with the taxability of business profit. Article 8 is a specific provision over and above the general provision of business profits provided in article 7. If the case of the assessee does not fall under the specific provision of article 8, still, the assessee could not be deprived of the benefit already available to it under the general provisions of article 7. Only for the reason that the assessee does not come under article 8, the assessee could not be placed under a lesser advantage than article 7. ………..Article 8 provides for a specific benefit carved out of the general benefit given in article 7. Therefore, if the special benefit of article 8 is not available, let the matter be closed there. One cannot go further and cannot say that the assessee is not even entitled for the benefit of article 7.
42. Therefore, we hold that the profit attributable to M/s. HMPL was in the nature of business income and business income is covered by article 7 of DTAA even if the assessee is driven out of article 8.”
4. DCIT vs. Andaman Sea Food Pvt. Ltd. 2012-TII- 67-ITAT-KOL-INTL
The controversy was again analyzed and discussed at length in this case in the context of Article 23 of India-Singapore DTAA.
4.1 Facts of the Case: In this case, the assessee did not deduct tax at source from Consultancy Charges to the Singapore based NR. The CIT(A) held that the consultancy fees paid by the assessee to the NR was not covered by the scope of the expression ‘fees for technical services’ under Article 12 of the DTAA; that since the NR did not have any PE in India, the income of the assessee was also not taxable as ‘business profits’ in India. The Tax Department argued that even if the income was not taxable in India under Article 7 as business profits or under Article 12 as fees for technical services, still the amounts were taxable as other income under Article 23 of India-Singapore DTAA.
4.2 Decision: After elaborate discussion, the Tribunal decided the issue in favour of the assessee, as follows:
a) With regard to the Department’s Contention that the amount paid to the Non-resident fell within the category of the “other sum”, the Tribunal noted that “the CIT(A) had stated that “Section 40(a)(i) of the Income-tax Act provides that in computing income of an assessee under the head ‘profits and gains of business’, deduction will not be allowed for any expenditure being royalty, fees for technical services and other sum chargeable under the Act, if it is payable outside India, or in India to a non resident, and on which tax is deductible at source under Chapter XVII B and such tax has not been deducted”, and it was in this context that the CIT(A) noted that though the fee paid was not covered by fees for technical services, it could fall under the head ‘other sum’ but since the said other sum was not chargeable to tax in India, the assessee did not have any tax withholding obligation. This classification of income was not in the context of treaty classification but in the context of, what he believed to be, two categories of income referred to under section 40(a)(i), i.e. ‘royalties and fees for technical services’ and ‘other sums chargeable to tax’……………… What is material is that the expression ‘other income’ was used in the context of mandate of Section 40(a)(i) and not in the context of treaty classification of income.” (Emphasis Supplied).
b) With regard to the Department’s argument that “consultancy charges, brokerage, com-mission, and incomes of like nature which are covered by the expression “other sums” as stated in Section 40(a)(i) and chargeable to tax in India as per the Income Tax Act, and also are squarely covered by Article 23 of the India Singapore tax treaty, the Tribunal observed that “This argument proceeds on the fallacious assumption that ‘other sums’ u/s. 40(a)(i) constitutes an income which is not chargeable under the specific provisions of different articles of India Singapore tax treaty, whereas not only this expression ‘other income’ is to be read in conjunction with the words immediately following the expression ‘chargeable under the provisions of this (i.e. the Income-tax Act 1961) Act’, it is important to bear in mind that this expression, i.e. ‘other sums, also covers all types of incomes other than (a) interest, and (ii) royalties and fees for technical services. Even business profits are covered by the expression ‘other sums chargeable under the provisions of the Act’ so far as the provisions of section 40(a)(i) and section 195 are concerned and, therefore, going by this logic, even a business income, when not taxable under article 7, can always be taxed under article 23. That is clearly an absurd result.”
c) The Tribunal further observed that “A tax treaty assigns taxing rights of various types of income to the source state upon fulfill-ment of conditions laid down in respective clauses of the treaty. When these conditions are satisfied, the source state gets the right to tax the same, but when those conditions are not satisfied, the source state does not have the taxing right in respect of the said income. When a tax treaty does not assign taxation rights of a particular kind of income to the source state under the treaty provision dealing with that particular kind of income, such taxability cannot also be invoked under the residuary provisions of Article 23 either. The interpretation canvassed by the learned Departmental Representative, if accepted, will render allocation of taxing rights under a treaty redundant. In any case, to suggest that consultancy charges, brokerage and commission can be taxed under article 23, as has been suggested by the learned Departmental Representative, overlooks the fact that these incomes can indeed be taxed under article 7, article 12 or article 14 when conditions laid down in the respective articles are satisfied.” (Emphasis Supplied)
d) The Tribunal held that “It is also important to bear in mind the fact that article 23 begins with the words ‘items of income not expressly covered’ by provisions of Articles 6-22. There-fore, it is not the fact of taxability under articles 6-22 which leads to taxability under article 23, but the fact of income of that nature not being covered by articles 6-22 which can lead to taxability under article 23. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting state for the use of an immovable property in a third state, and damages (other than for loss of income covered by articles 6-22) etc. In our humble understanding, therefore, article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and the income from consultancy charges is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied. Learned Departmental Representative’s argument, emphatic and enthusiastic as it was, lacks legally sustainable merits and is contrary to the scheme of the tax treaty.” (Emphasis Supplied).
e) The Tribunal referred to and relied upon certain observations of the AAR in the case of Gearbulk AG – 318 ITR 66 (AAR) (2009-TII-09-ARA-INTL), discussed below.
5. ADIT vs. Mediterranean Shipping Co., S.A. [2012] 27 taxmann.com 77:
5.1 Facts of the case:
• Assessee was a Swiss company engaged in the business of operations of ships in the international waters through chartered ships. During the A.Y. 2003-04, the assessee had total collection of freight to the tune of Rs. 295.63 crore on which a sum of Rs. 9.33 crore was paid towards the tax liability. In its return of income, however, the assessee declared ‘nil’ income on the ground that there was no article in the Indo-Swiss treaty dealing specifically with taxability of shipping profit; that article 7 of the treaty, dealing with the business profits, specifically excluded profits from the operation of ships in international traffic; that article 22 of the treaty, dealing with other income, subjected shipping profits to tax only in the State of residence, i.e., the Switzerland. Accordingly, the stand of the assessee was that the international shipping profits was not taxable in India and the entire tax of Rs. 9.33 crore paid was liable to be refunded.
• The Assessing Officer, however, rejected the stand of the assessee relying upon the CBDT Circular No. 333, dated 02-04-1982 whereby it was clarified that where there is no specific provision in the agreement, it is the basic law, i.e., the Indian Income-tax Act which will govern the taxation of the income. Accordingly, the shipping profits of the assessee were held taxable under section 44B of the Income-tax Act at the rate of 7.5 per cent of the total freight collection of Rs. 295.63 crore.
• On appeal by the assessee, the Commissioner (Appeals) upheld the claim of the assessee that article 22 applied to the profits earned from shipping business in question. The Commissioner (Appeals), however, proceeded to determine as to whether the case of the assessee was covered under article 22(2), which provides for an exception to the applicability of article 22. Under sub- article (2) of article 22 it is provided, inter alia, that provisions of article 22(1) shall not apply to income if the recipient of such income, being a resident of contracting state, carries on business in the other contracting State through a PE therein and the right or property in respect of which income is paid is effectively connected with such PE. After referring to the relevant clauses of the agreement of assessee with MSC, the Commissioner (Appeals) held MSC to be assessee’s PE in India.
• After holding MSC to be assessee’s PE in India, the Commissioner (Appeals) proceeded to examine as to whether the shipping prof-its derived from operation of ships were effectively connected with said PE; and held that they were not. Accordingly, the Commissioner (Appeals) held that article 22(1) was applicable in the case of the assessee and, therefore, the profits from shipping business was taxable in Switzerland and not in India.
5.2 Decision:
The Tribunal decided the issue in favor of the assessee. The Tribunal observed and held as under:
“A reading of article 22 especially paragraph 1 thereof makes it clear that the items of income of a resident of a contracting State, i.e., Switzerland which are not dealt with in the foregoing articles of the Indo-Swiss treaty shall be taxable only that State. In the instant case, the assessee company being a resident of Switzerland, the income, wherever arising, would fall within the scope of the residuary article 22 if the same is not dealt with in any other articles of the treaty.
The question, therefore, is whether the shipping profits are dealt with in any other articles of the Indo-Swiss treaty or not. The contention raised by the revenue is that by agreeing to exclude the shipping profits from article 8 as well as article 7 of the Indo-Swiss treaty, India and Switzerland had agreed to leave the shipping profits to be taxed by each State according to its domestic law and this undisputed position prevailing up to 2001 did not change as a result of introduction of article 22 of the treaty with effect from 01-04-2001. The contention cannot be agreed with. It is held that as a result of introduction of article 22, the items of income not dealt with in the other articles of the Indo-Swiss treaty are covered in the residuary article 22 and their taxability is governed by the said article with effect from 01-04-2001. Articles 7 and 8 of the treaty, therefore, cannot be relied upon to say that by agreeing to exclude the shipping profits from said articles, the shipping profits are left to be taxed by each contracting State according to its domestic law. It is no doubt true that this was the position prior to introduction of article 22 in the Indo-Swiss treaty in the year 2001 but the same was altered as a result of introduction of the said article inasmuch as it become necessary to find out as to whether shipping profits have been dealt with in any other article of the treaty. Mere exclusion of shipping profits from the scope of treaty could have resulted in leaving the same to be taxed by the concerned contracting State according to its domestic law prior to introduction of article 22. However, such exclusion alone will not take it out of the scope of article 22 unless it is established that the shipping profits have been dealt within any other article of the treaty. The language of article 22(1) in this regard is plain and simple and the requirement for application of the said article is explicitly clear. [Para 33]
In order to say that a particular item of income has been dealt with, it is necessary that the relevant article must state whether Switzerland or India or both have a right to tax such item of income. Vesting of such jurisdiction must positively and explicitly stated and it cannot be inferred by implication as sought to be contended by the revenue relying upon articles 7 and 8 of the treaty. The mere exclusion of international shipping profit from article 7 can-not be regarded as an item of income dealt with by the said article as envisaged in article 22(1). The expression ‘dealt with’ contemplates a positive action and such positive action in the instant context would be when there is an article categorically stating the source of country or the country of residence or both have a right to tax that item of income. The fact that the expression used in article 22(1) of the Indo-Swiss treaty is ‘dealt with’ vis-a-vis the expression ‘mentioned’ used in some other treaties clearly demonstrates that the expression ‘dealt with’ is some thing more than a mere mention of such income in the article. The international shipping profits can at the most be said to have mentioned in article 7 but the same cannot be said to have been dealt with in the said article. [Para 35]
Up to assessment year 2001-02, international ship-ping profits no doubt were being taxed under the domestic laws as per the provisions of section 44B. However, it was not because of the exclusion contained in Article 7 that India was vested with the authority to tax such international shipping profit but it was because there was no other article in the Indo-Swiss treaty dealing with international shipping profits which could override the provisions of section 44B in terms of section 90(2) being more beneficial to the assessee. This position, however, has changed as a result of introduction of article 22 in the Indo-Swiss treaty which now governs the international shipping profits not being dealt with specifically by any other article of the treaty and if the provisions of article 22 are beneficial to the assessee, the same are bound to prevail over the provisions of section 44B. [Para 41]
It is held that the item of income in question, i.e., international shipping profit cannot be said to be dealt with in any other articles of the Indo- Swiss treaty and the taxability of the said income, thus, is governed by residuary article 22 introduced in the treaty with effect from 01-04-2002. [Para 48]”
We may mention that Article 8 of the Indo-Swiss DTAA has been amended vide Notification dated 27-12-2011 to include Shipping Profits within its scope and accordingly, the controversy no longer survives.
6. AAR Ruling in the case of Gearbulk AG – 318 ITR 66 (AAR) (2009-TII-09-ARA-INTL)
6.1 Similar issue arose in the case of Gearbulk AG, a Shipping Company, in the context of India-Switzerland DTAA. In this case, the Applicant, a Swiss Company, had income from Shipping Business. At the relevant point in time, Article 8 of India-Switzerland DTAA dealt with only profits from the operation of Aircraft and did not deal with profits from Operation of Ships. The issue before the AAR was whether tax-ability of such Shipping Profits was governed by Article 7 of India – Swiss DTAA or whether the same was taxable in India in terms of “Other Income” – Article 22 of the Treaty.
6.2 After discussing the meaning of the expression ‘deal with’ as given in various dictionaries, the AAR held in favor of the revenue. The AAR held that the Freight Income received by the Applicant is liable to be taxed in India under the provisions of the Income-tax Act and that such income is not covered by he provisions of Indo-Swiss DTAA.
7. ACIT vs. Viceroy Hotels Ltd. Hyderabad 2011-TII-97-ITAT-HYD-INTL
7.1 In this case, the assessee, engaged in the business of running a Five Star Hotel by the name of “VICEROY”, was being converted into Marriott Chain Hotel under the franchisee granted by the International Licensing Company SARL (Marriott USA). To meet the standard for Marriott Group, the assessee embarked upon an expansion programme by way of adding new blocks in the hotel and also upgradation by way of bringing about interior and exterior changes, landscaping etc. For this purpose the assessee entered into four separate and independent agreements with one Anthony Corbett & As-sociates of UK; Marriott International Design & Constructions of USA; Bensly Design Group International Construction Company Ltd., Thailand and Lim Hong Lian of Singapore.
7.2 With regard to payment of landscape architectural consultancy services to a Thai Company, the issue arose whether in the absence of an Article relating to fee for technical services in the India-Thailand DTAA, services of landscape architectural consultancy can be taxed under the residuary Article 22 of the DTAA.
7.3 With regard to non deduction of tax at source on the amount paid to M/s. Bensly Design, Thailand which is engaged in the business of landscape architectural consultancy, the lower authorities were of the opinion that though the DTAA does not clearly spell out the taxation of fees for technical services, the amount paid by the assessee to M/s Bensly group would fall within the purview of article 22 of the Agreement which is residuary clause dealing with other income not expressly dealt in other articles of DTAA.
7.4 According to lower authorities, the services rendered by Bensly group do not constitute professional or independent personal services under article 14 of the DTAA between India and Kingdom of Thailand. Without prejudice to this, the A.O. observed that even if the payments made to the NR is treated as fees for professional services or independent activities within the meaning of article 14 of the DTAA, then also such fees can be taxed under the IT Act. It is because, the exemption provided under article 14 is available only to such payments that are not borne by an enterprise or a PE situated in India. In the present case, the payment has been made by an enterprise situated in India and accordingly, the non-resident company is not entitled to claim any exemption on the strength of Article 14 of the DTAA.
7.5 The A.O. also stated that the instruction con-tained in CBDT circular No. 333 (F.506/42/81-FTD) dated 02-04-1982 is in effect complementary to Article 22 of the DTAA which provide that where there is no specific provision under the DTAA, it is the basic law which will govern the taxation of the income of the non-resident. Following the aforesaid stand, the A.O. invoked provision of section 9(1) r.w.s. 115A(1)(b)(B) of the IT Act and treated the entire fees as income chargeable to tax in India since all the expenses of the NR were reimbursed by the assessee deductor. The A.O. further stated that the agreement under which the technical services are rendered is neither approved by the central govt. nor does it relate to a matter included in the industrial policy and hence the deductor should have deducted tax at source at the rate of 40% plus surcharge as prescribed in the relevant Finance Act for any other income arising to a non resident company in India and since the deductor had failed to discharge its statutory obligation, the assessee was treated as an assessee in default.
7.6 According to the assessee, as there is no PE for M/s Bensly Design, Thailand in India, and no foreign employee stayed in India for more than 90 days, the CIT (A) should have exempted the business profit of the company from taxation in India. Under Article 7 of the DTAA income earned by a NR in India under the head business, can be taxed in India only if the NR has a PE in India. If the business is carried on through employees and if those employees stay in India for less than 183 days in the case of Thailand, there will be no PE in India and the corresponding business profit of the NR becomes non taxable. According to the assessee, as per Indo-Thai DTAA, there is no article in the relevant DTAA dealing with fees for technical services, there is only an article dealing with royalties, and of course, there is an article dealing with business profits. The A.O. wrongly applied the residuary Article 22 and taxed the income arising in India for the Thai company at the rate of 40%.
7.7 The Tribunal negatived the contentions of the Tax Department and held, “The fees paid to M/s Bensly Design, Thailand for rendering services of landscape architectural consultancy is not covered as per the DTAA since there is no article in the relevant DTAA dealing with this nature of payments. There is only one article dealing with Royalties and another dealing with business profit. Under Article 7 of the DTAA, income earned by a non resident in India under the head ‘business’ can be taxed in India only if the non-resident has a permanent establishment in India. In this case, the business was carried on through employees and there is no record that these employees stayed in India for more than 183 days. Accordingly there is no PE in India and corresponding business profit of non-resident cannot be taxed in India and provision of section 195 is not applicable.”
8. Credit Suisse (Singapore) Ltd. vs. ADIT – 2012-TII-214-ITAT-MUM-INTL
8.1 In this case, the assessee company incorporated in Singapore and a tax resident there was registered with SEBI as a sub-account of Credit Suisse. The assessee had inter alia, conducted portfolio investments in Indian securities. The assessee had shown net short-term capital loss from sale of shares and sale of shares underlying FCCBs besides gains from exchange traded derivative contracts. The net resultant gains were claimed as exempt under Article 13(4) of the tax treaty. The dividend income was also claimed as exempt u/s. 10(34).
8.2 The assessee also claimed that gains made by it from cancellation of forward contracts were not chargeable to tax. The assessee claimed that the foreign exchange forward contracts were entered to hedge its exposures in respect of its Indian Investments being shares/exchange traded derivative contracts; that being an FII sub-account, in view of the provisions of Section 115AD, wherein the transactions in underlying assets against which the foreign exchange forward cover contracts were entered into, were taxed as ‘capital gains’, the foreign exchange forward cover contracts also took on the color of their underlying assets, being capital assets. Consequently, the gains realised from cancellation of such forward cover contracts had to be regarded as capital gains, which were not liable to tax in India as per Article 13(4) of the tax treaty. It was claimed that although these gains could be taxed as business profits since the assessee did not have a PE in India, the same could not be taxed in India.
The AO rejected the assessee’s explanation and held that the transaction in forward purchase of foreign exchange and settlement could not be said to be resulting in capital gains as the same was never held by the assessee as capital asset but was meant to be settled by price difference. Also, as the assessee was not eligible to carry on business in India as per SEBI regulations, the income arising from settlement of forward contracts could not be treated as business income. Thus, the AO held that the assessee’s income from cancellation of foreign exchange forward contracts was neither capital gains income nor business income but ‘income from other sources’ under Article 23 of the tax treaty. However, the Tribunal, relying on the decisions in the case of Citicorp Investment Bank (Singapore) Ltd. vs. Dy. Director of Income Tax (International Taxation)(2012-TII-86-ITAT-MUM-INTL) and Citicorp Banking Corporation, Bahrain vs. Addl. Director of Income Tax (International Taxation) (2011-TII-40- ITAT-MUM-INTL), held that gains arising from early settlement of forward foreign exchange contract has to be treated as capital gain and that the A.O. and the DRP were not justified in treating the said gain as ‘income from other sources’.
8.3 We may mention that the Tribunal, while deciding the issue in favour of the assessee, did not discuss the controversy of application of Article 23 vis-à-vis application of Article 7 or Article 13 of India – Singapore DTAA.
9. Lanka Hydraulic Institute Ltd (2011-TII-09-ARA-INTL)
9.1 In this case, the applicant, a Tax Resident of Sri Lanka, had sought an advance ruling from the Authority on the taxability of the payment received under its contract with WAPCOS and in the absence of a specific article for the taxation of fees for technical services, in the India-Sri Lanka DTAA, whether this payment would be governed by Article 7 of the tax treaty which dealt with taxation of business profits.
9.2 The AAR held, without much discussion and reasoning, as follows:
“It is true that the treaty does not contain a specific article for the taxation of fees for technical services. In that event reference is to be made to Article 22 of the Tax Treaty which reads as follows:
‘Item of income of a resident of a Contract-ing State which are not expressly mentioned in the foregoing Article of this Agreement in respect of which he is subject to tax in that state shall be taxable only in that state.’
Accordingly, the fees for technical services shall be governed by Article 22 of the Tax Treaty and not as per Article 7 of the Tax Treaty which deals with taxation of business profits.”
We may mention that, effectively the Ruling was in favor of the Sri Lankan Applicant since Indo-Sri Lankan DTAA provides that income falling under the scope of Article 22 shall be taxable only in the state of the Resident i.e. in Sri Lanka. However, since the income in question was essentially in the nature of Business Profits, in our humble opinion, in the absence of FTS Article in Indo-Sri Lankan DTAA, such income should be taxable in accordance with provisions of Article 7 and not in accordance with provisions of Article 22 of the DTAA. Thus, in principle, we are not in agreement with the aforesaid AAR Ruling.
9.3 Following its Ruling in the case of Lanka Hydraulic Institute Ltd (2011-TII-09-ARA-INTL), similar view was taken by the AAR in case of XYZ (AAR Nos. 886 to 911, 913 to 924, 927, 929 and 930 of 2010)(2012) 20 taxmann.com 88 (AAR); and held that in absence of FTS Article, services would get covered by “Other Income” Article. In this case the income was in the nature of inspection, verification, testing and certification services (IVTC).
In our humble opinion, both the AAR Rulings mentioned herein above are not in accordance with Principles of Interpretation of Tax Treaties and require reconsideration.
10. Conclusion
In some Indian DTAAs, under Article 21 exclusive right of taxation is given to source state like Brazil, United Mexican States, Namibia and South Africa. In few Indian DTAAs, Right of taxation is in accordance with laws of the respective Contracting States/both the contracting states like in case of Singapore and Italy. India’s DTAAs with Greece, Netherlands and Libya does not contain ‘Other Income’ Article. In many other Indian DTAAs, Primary right of taxation to ‘State of Residence’ and Correlative right to the ‘State of Source’. In such cases, issue regarding applicability of Article 7 instead of Article 21, is of great relevance.
The issue is yet to be tested before the higher judiciary. However, in our humble view, the analysis and reasoning advanced by the Tribunal in the case of DCIT vs. Andaman Sea Food Pvt. Ltd appears to be very sound and in accordance with well accepted principles of Interpretation of Tax Treaties and is worth following.
