
The key issues:-
(a) Whether a transaction gets covered under an Article dealing with ‘Business Profits’ or under the residuary Article ‘Other Income’? and/or
(b) Whether the taxability needs to be evaluated under the Act?
Whether the taxability needs to be evaluated under Business Income or Other Income?
As a basic rule, specific provisions override general provisions. Hence, typically, in cases where a FTS clause is present in a treaty, the transaction is taxed under the specific FTS clause, unless FTS is effectively connected to the Permanent Establishment (‘PE’), in which case, it would be taxed as business profits under Article 7 of most of the treaties.
Typically, the ‘Business Profit’ covers profits earned by an enterprise in the source state through a PE in that state. The ‘Other Income’ Article covers income from any source that is not expressly dealt with by any other Article. Thus, if one considers the intent, ‘Business Profit’ is a specific provision compared to ‘Other Income’, which is residuary head.
Kolkata Tribunal in the case of Dy. CIT v. Andaman Sea Food (P.) Ltd [2012] 22 taxmann.com 400/ 52 SOT 562 (Kol.) While the evaluation was in the context of the treaty between India and Singapore having a narrow FTS definition, it is relevant in the current context:
Whether the taxability under ‘other Income’ clause of DTA?
Lanka Hydrolic Institute Ltd. In re (2011) 337 ITR 47 (AAR)
Electrical Material Centre Co. Ltd v. DDIT TS-451-ITAT-2017 (Bang)
Whether the taxability needs to be evaluated under the Act?
As we know, all treaties entered into by India provide that any term not defined in the treaty shall have the same meaning as that of the domestic law of the source country in which taxes arise. Drawing an analogy from this, the Courts have questioned this part and the key issue that arises for consideration is whether the provisions of the Act will apply if there is no FTS clause in the treaty. The Madras Tribunal, in the case of Dy. CIT v. TVS Electronics [2012] 52 SOT 287/22 taxmann.com 215 (Chennai) , held that if a treaty is silent on a particular type of income, such income cannot be automatically construed as ‘Business Profits’ and reference should be made to the provisions of the Act.
Conclusion:
Other relevant – Tekniskil (Sendirian) Berhard v. CIT (1996) 222 ITR 551 (AAR); Bangkok Glass Industry Co. Ltd. v. ACIT [2013] 34 taxmann.com 77/215 Taxman 116 (Mag.) (Mad.); McKinsey & Co. (Thailand) Co. Ltd. v. Dy. DIT (IT) (2013) 36 taxmann.com 375 (Mum.); Channel Guide India Ltd v. Asstt. CIT [2012] 139 ITD 49/25 taxmann.com 25 (Mum.)
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