September 2013
Wellinx Inc vs., ADIT [2013] 35 taxmann.com 420 (Hyderabad-Trib) A.Ys.: 2006-07, Dated: 28-06-2013 Article 7(3), India-USA DTAA
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Article 7(3) of India-USA DTAA distinguishes between commercial and non-commercial services. While the former are taxable, the latter are not taxable. Customer care and medical transcription services provided by BO to HO were commercial services and hence taxable in India.
Facts:
The taxpayer was a company incorporated in USA. It was engaged in the business of medical transcription and software development related to health care. The taxpayer established a Branch Office (“BO”) in India for providing certain services to Head Office (“HO”) in USA after obtaining approval of RBI. BO received payments from HO for these services.
According to taxpayer, as BO was providing services to HO, in terms of Article 7(3) of India-USA DTAA, the resultant income was not chargeable to incometax. However, the AO concluded that the BO was engaged in software development and estimated its income on cost plus basis.
Held:
The taxpayer had a PE in India.
Article 7(3) has two parts. The first part relates to commercial and business activities carried on by a PE whereas second part relates to certain specified non-commercial services performed by PE for its HO. While the commercial and business services are taxable, if HO assigns some non-commercial activities to its BO, income from such activities would not be taxable in terms of Article 7(3) of India-USA DTAA.
In the present case, BO provided customer care and medical transcription services to the HO. These were commercial services outsourced by the HO. Hence, consideration for such services was taxable in India.
