In the absence of FTS clause, income to be treated as Business Income

In the absence of FTS clause, income to be treated as Business Income

In the recent case of Booz UAE, Mumbai ITAT held that in the absence of specific article regarding FTS, income will be taxable as business income under Article 7. Further since the Booz UAE did not have any PE in India, such income would be taxable in UAE only and not in India.

Facts of the Case:

  1. UAE based company, Booz UAE provided services to its Associated Enterprise in India, Booz India
  2. The nature of services provided are Fees For Technical Services(FTS).
  3. Tax Treaty between India and UAE do not contain any clause regarding taxability of FTS. Thus Booz UAE treated receipts from Booz India as business income.


Issue Involved:

  1. Whether UAE company has any PE in India in the form of Fixed Place PE/Service PE/Dependent Agent PE?? If it is established that UAE company has PE in India, then as per Article 7 of India-UAE tax treaty, income of UAE company to the extent derived from such PE will become taxable in India.


Provisions Applicable:

  1. Article 7 of India-UAE tax treaty deals with business income. As per Article 7, business income of a company situated in UAE and rendering services in India will be taxable in UAE only. In case UAE company has PE in India, then only business income derived by UAE company will be taxable in India but only to the extent of income derived from such PE.
  2. Article 5 of said treaty deals with determination of PE. As per this article, there exists service PE when services are rendered in India by UAE company for a period exceeding 9 months within any 12 months period.


Mumbai Tribunal Ruling:

  1. Working of employees of Booz UAE does not exceed 9 months.
  2. Booz UAE does not have any specific control over a place in India. Booz India is independent from Booz UAE in terms of control.
  3. Booz UAE only provided services to Booz India but did not receive any service in return, thus question of dependent agent PE also does not arise.


Conclusion:

  1. In the instant case, Mumbai Tribunal concluded that in the absence of specific article regarding FTS, income will be taxable as business income under Article 7. Further since the Booz UAE did not have any PE in India, such income would be taxable in UAE only and not in India.
  2. As per my considerate opinion, decision of ITAT is just and fair. The main business of Booz UAE is to render consultancy services. So income received by them from India is business income. If we go into detail of such income, we conclude that such income is FTS. So if clause of FTS is missing, such income are primarily business income of the the Booz UAE. Thus as per this view, decision of ITAT is an informed and correct decision.


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