International Tax Alert Global perspectives

India
Tax & Regulatory
For private circulation only
International Tax Alert
Global perspectives
Volume: ITX/5/2014
21 February 2014
In this issue:
Synopsis
Facts
Significant issue before the Tribunal
Tribunal Ruling
Comments
Way forward
Contacts
In the absence of ‘FTS’ Article in the tax treaty, the provisions of
the domestic law cannot be invoked
Synopsis

Recently, the Bangalore Tribunal held that Article 24 dealing with ‘Elimination of Double Taxation’ had no
role to play in classification of income and allocation of right to tax. Further, it was held that in the absence
of ‘Fees for Technical Services’ (FTS) Article in the India-Philippines tax treaty, the payments made to an
offshore entity for services rendered in the course of business were covered by Article 7 dealing with
‘Business Profits’, and not by Article 23 dealing with ‘Other Income’.
Facts

IBM India Private Limited (tax payer) is an Indian company engaged in the business of providing
information technology services.

The tax payer outsourced certain services such as payroll related services, data management services,
benefits administration, balance sheet reconciliation, generation of reports, stock option administration, etc.
to IBM Business Services, Philippines (IBM Philippines).

The tax payer made payments for the above services without deducting tax at source on the following
grounds:
a)
The India-Philippines tax treaty does not have an Article on FTS and in the absence of such Article,
the payments constituted ‘Business Profits’ under Article 7 of the tax treaty. In the absence of a PE of
the tax payer in India, the same was not chargeable to tax in India.
b)
As per Article 23 dealing with ‘Other Income’ of the tax treaty, income of IBM Philippines was taxable
only in Philippines and not in India.

The Assessing Officer (AO) considered the tax payer as an ‘assessee in default’ for not deducting tax at
source on the basis that in the absence of an Article dealing with FTS under the tax treaty, the provisions of
Income Tax Act, 1961 (ITA) would apply. The AO placed reliance on Article 24 of the tax treaty dealing with
‘Elimination of Double Taxation’ and the Circular 333 dated 2 April 1982 issued by the Central Board of
Direct Taxes (CBDT).

On appeals by the tax payer, the Commissioner of Income Tax [CIT (A)] confirmed the order passed by the
AO.

The tax payer filed an appeal before the Tribunal against the aforesaid order of CIT (A).
Significant issue before the Tribunal

In the absence of an Article dealing specifically with FTS under the India-Philippines tax treaty, whether the
payments made by the tax payer to IBM Philippines were chargeable to tax in India as FTS under the
provisions of the ITA?
Tribunal Ruling

Article 24 (1) of the tax treaty, does not confer a right to invoke the provisions of the ITA for classification of
income or taxability of income which is governed by Article 6 to Article 23 of the tax treaty. The Article 24 is
limited to the elimination of double taxation.

The CBDT circular exemplifies what is stated in Article 24 of the tax treaty; providing that the mode of
computation of income as provided in the tax treaty should be followed, and where there is no specific
provision in the treaty, the ITA will govern the same.

Thus, Article 24 of the tax treaty and the CBDT Circular No.333 dated 2 April 1982 have no role to play in
classification of income and allocation of right to tax such income to one or both the contracting states as
the same are to be dealt in accordance with Articles 6 to 23 of the tax treaty. Thus, the tax authorities’
contention that in the absence of an Article dealing with FTS, provisions of the ITA would apply was not
correct.

In the absence of an Article dealing with ‘FTS’, payments made for services rendered in course of business
would be covered by Article 7 of the tax treaty dealing with ‘Business Profits’ and not by Article 23 of the
tax treaty dealing with ‘Other Income’.

Payments made to IBM Philippines for providing services in course of business were covered by Article 7
of the tax treaty dealing with ‘Business Profits' in the absence of a specific Article dealing with FTS. Further,
in the absence of a PE of IBM Philippines in India, the said payments were not chargeable to tax in India.

Even if it is assumed that payments to IBM Philippines were not covered by Article 7 dealing with ‘Business
Profits’, the said payments were covered by Article 23 dealing with ‘Other Income’ of the tax treaty. As per
Article 23 dealing with ‘Other Income’, the said payments were chargeable to tax only in Philippines and not
in India.
Comments

The Tribunal has comprehensively discussed Article 24 dealing with ‘Elimination of double taxation’ and
has clarified that Article 24 is limited to elimination of double taxation and has no role to play in
classification of income.

The decision has further re-iterated the principle that in absence of FTS Article in a tax treaty, the services
rendered in normal course of business could be characterized as ‘Business Profits’ under Article 7 and not
Article 23 dealing with ‘Other Income’.
Way Forward

Tax payers can review their arrangements in the light of the above ruling and depending upon their specific
facts and the relevant tax treaty may consider applicability of Article 7 dealing with ‘Business Profits’ in the
absence of specific Article dealing with ‘FTS’.
Source:
IBM India Private Limited vs Dy. Director of Income-tax – IT(ITA) Nos. 489 to 498 / Bang / 2013 (ITAT Bangalore)
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