Document Fragment View

Matching Fragments

"Conclusion on the first issue i.e. on existence of PE:
41.1 In the light of these discussions, in our considered view, the assessee company did not have any PE in India, much less a PE to which subject 'royalties' and 'fees for technical services' can be attributed. In terms of the India-Germany DTAA, India does not have right to tax these receipts as business profits under art. 7. Of course, in the light of our finding that no revenues earned by the assessee company could be said to be attributable to the PE, even if one was to come to the conclusion that a PE existed, no taxability could arise under art. 7. The assessee has offered the royalties and fees for technical services for taxability in India under art. 12, and, to that extent, admitted tax liability exists. The overzealous approach of the AO has been rightly rejected by the CIT(A). We approve and confirm the stand of the CIT(A), and decline to interfere in the matter.
Observations on the second issue i.e. on taxability @ 20 per cent in terms of s. 44D r/w s. 115A in case PE is found to be in existence:
42. While dealing with the interplay between existence of a PE and taxability as 'royalties and fees for technical services', we had taken note of the proposition advanced by the Revenue authorities that once art. 12(5) is invoked, all the receipts as 'royalties and fees for technical services' are taxable in India on gross basis under s. 44D, though, as per the provisions of s. 115A, at a lower rate of 20 per cent.
43. This proposition proceeds on the fallacy that once the first conditions under art. 12(5) are satisfied, i.e. once the assessee company has a PE in India, the 'royalties and fees for technical services' are to be necessarily taxed in India under art. 7. That is clearly erroneous, because, as noted above, twin conditions of existence of the PE as also the effective nexus between the PE and the subject 'royalties' and 'fees for technical services' are to be satisfied. We are of the view that on account of existence of a PE in India, only such profits of the assessee company can be brought to tax in India as are "attributable to that PE". It is a typical chicken and egg situation of circular logic. On one hand, the wording of art. 12(5) is such that this exclusion clause is triggered only when 'royalties and fees for technical services' have a live economic nexus, reflected by effective connection with 'rights', 'properties' and "contracts', in respect of which such royalties and fees for technical services are paid, with PE, and, on the other hand, the scheme of taxability under art. 7, which is complementary to this approach, is also such that the taxability under art. 7 is attracted only in respect of such 'royalties' and 'fees for technical servicer' as are so attributable to the PE. Unless an amount is such that it is taxable under art. 7, even if it is in the nature of 'royalties' or 'fees for technical services', the exclusion clause under art. 12(5) will not come into play. At the same time, unless an amount representing 'royalties' or 'fees for technical services' is such that it triggers exclusion clause under art. 12(5), it would not be taxable under art. 7.

Conclusion on the second issue i.e., taxability @ 20 per cent in terns s. 44D r/w S.115A in case PE is found to be in existence :

47. In our considered view, in terms of the indo German tax treaty provisions, it will have to be demonstrated that such royalties and fees for technical services have a live economic nexus with the PE and only then exclusion clause under art.

12(5) as also taxability under arts. 7(1) and 7(2), will come into play. It is only after these royalties and fees for technical services are so included in the business profits attributable to the PE that the provisions of ss. 44D and 115A can be invoked. Therefore, even if we are to hold that the taxpayer had a PE in India, unless there is a categorical finding that entire receipts were attributable to that PE, entire business receipts of the taxpayer sourced from India would not have been taxable in India under art. 7. The provisions of s. 44D and s. 115A do not, therefore, come into play only because there is a PE in India."