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Facts
The Revenue appealed against the orders of the CIT(A) concerning the taxability of payments made by the assessee to an entity in Thailand for technical services and R&D. The Assessing Officer held these payments as fees for technical services taxable under the Income Tax Act, invoking Article 22 of the DTAA.
Held
The Tribunal held that the payments made for technical and R&D services, when the recipient has no Permanent Establishment (PE) in India and the services form part of the assessee's business, are to be treated as business income under Article 7 of the India-Thailand DTAA and are not taxable in India. The residual Article 22 cannot be invoked.
Key Issues
Whether payments for technical and R&D services, in the absence of a specific FTS article in the DTAA and a PE in India, constitute business income taxable in India.
Sections Cited
250, 9(1)(vii), 7, 22, 23, 27
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Income Tax Appellate Tribunal, PUNE BENCHES “A” :: PUNE
ORDER PER DR. DIPAK P. RIPOTE, AM: These three appeals filed by the Revenue against the separate orders of ld.Commissioner of Income Tax(Appeal), Pune-13 passed under section 250 of the Income Tax Act, 1961 for A.Y.2018-19, A.Y.2019-20 and A.Y.2020-21respectively, all dated 31.01.2025. For the sake of convenience, all these three appeals were heard , 857 & 858/PUN/2025 [A] - 03 Appeals together and are being disposed of by this common order. We treat appeal in as lead case. The Revenue in has raised the following grounds of appeal :
1. 1. 1. 1. On the facts and circumstances of the case, Ld. CIT(A) erred in law and facts in rejecting the finding given by the Assessing Officer (AO) that since there is no specific Article for taxability of a particular payment in the DTAA, the provisions of the Act would be applicable.
2. On the facts and circumstances of the case, Ld. CIT(A) erred in law and facts in rejecting the finding given by the Assessing Officer (AO) that payments made by the assessee amounting to Rs. 1,91,82,330/- are in nature of Fees for technical services under the Income tax Act and therefore, taxable under section 9(1)(vii) of the Act.
3. On the facts and circumstances of the case, Ld. CIT(A) erred in law and facts in not appreciating the fact that since there is no specific Article for taxability of FTS in India-Thailand DTAA, the remittance becomes taxable article 22 of the DTAA which, in its para 3 states that "Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles and arising in the other Contracting State may also be taxed in that other State."
4. On the facts and circumstances of the case, Ld. CIT(A) erred in law and facts in holding that the payments made by the assessee amounting to Rs. 1,91,82,330/- for services received are taxable as business income as per article 5 and article 7 of the double taxation avoidance agreement (DTAA).”
, 857 & 858/PUN/2025 [A] - 03 Appeals for A.Y.2018-19 Findings & Analysis : 2. We have heard both the parties and perused the records. This is the appeal filed by Revenue against the order of ld.Commissioner of Income Tax(Appeals), Pune-13 dated 31.01.2025.
In this case, Assessing Officer-ITO(International Taxation), Ward-1, Pune had passed an order u/s.201 for A.Y.2018-19 in the case of assessee i.e. East West Seeds India Private Limited. Assessee has entered into a research and development agreement in 2008 with “Hortigenetics Research (S E Asia) Limited, based in Thailand” to carry out research processes with specific trades in specific crops. Hortigenetics Research (S E Asia) Limited, based in Thailand provides the assessee with all technical materials and information regarding the seed technology including computer software, Biological Materials, Derivatives and other materials. It was submitted before the ITO that Hortigenetics Research (S E Asia) Limited, based in Thailand is into business of Research and Development of Seeds, Vegetables. It was pleaded before the ITO that as per India Thailand DTAA, the income earned by 3 , 857 & 858/PUN/2025 [A] - 03 Appeals Hortigenetics Research (S E Asia) Limited, is not taxable in India. However, the ITO(IT) held that income received as fees for technical services is nowhere mentioned in the India Thailand DTAA. Therefore, ITO invoked Article 22 of the DTAA and held that said income shall be taxable as per Section 9(1)(vii) of the Income Tax Act, 1961 in India. Therefore, ITO hold that Assessee Company was liable to withhold tax on following income : “i. Rs.15,12,130/- Fees for Technical Services @10% ii. Rs.15,52,824/- R & D Charges @ 10% iii. Rs.21,49,376/- Fees for technical Services @ 10%.”
Aggrieved by the order of the ITO, Assessee filed appeal before ld.CIT(A). Ld.CIT(A) held as under : “3.4.4 It is not in dispute that the payment made by the Appellant to its AE partakes the nature of 'fee for technical services' (FTS) and it has been accepted as such by the Appellant-assessee. It is also true that the Double Taxation Avoidance Agreement (DTAA) between India and Thailand does not explicitly address the taxation of "Fees for Technical Services" (FTS), since it does not have any provision/article/clause relating to taxation of FTS.
3.4.5 From the facts of the case, it is established that Hortigenetics Thailand has been in the business of rendering Research & Development services to its customers including the Appellant-AE for past several years, and this is its main business. Being so, it therefore becomes clear that the payments to Hortigenetics would constitute its 4 revenues and thus form part of its business income. It is also true that , 857 & 858/PUN/2025 [A] - 03 Appeals Hortigenetics does not have any Permanent Establishment (PE) in India.
3.4.6 The controversy therefore boils down essentially to the question as to whether the provisions of Article 7 apply as has been claimed by the Appellant to apply or Article 23 (and 27) as have been advocated and applied by the Assessing Officer?
3.4.9 Judicial Precedent in the case of Bangkok Glass Industry Co. Ltd. vs. ACIT: The Madras High Court in the specific context of the India- Thailand DTAA has held that "fee for technical services" cannot be taxed under the residual Article 22 of the Indo-Thailand DTAA.
3.4.10 DRP Order: The Dispute Resolution Panel in an order in Appellant's own case in a previous assessment year took the stand that the payment made by the Appellant towards R&D charges to Hortigenetics is a business receipt (in the hands of Hortigenetics) and therefore does not require withholding of tax / TDS, and cannot be taxed as business income India in the absence of a PE in India.
3.4.11 In view of the above discussion, I find that Article 7 and not Article 22 (or 27) is applicable to the case of the Appellant's payment to Hortigenetics. Coupled with the fact that Hortigenetics does not have a PE in India, it takes the payments made to it by the Appellant outside the scope of application of provisions relating to withholding of tax / tax deduction at source (TDS). Being so, no tax is liable to be deducted by the Appellant. Therefore, the addition made on this account is hereby ordered to be deleted.
As a result, these grounds of appeal are allowed.
4.0 Conclusion 5 , 857 & 858/PUN/2025 [A] - 03 Appeals In view of the findings in this Order, the appeal of the assessee is allowed.”
Ld.Departmental Representative(ld.DR) for the Revenue vehemently relied on the order of the Assessing Officer.
Ld.Authorised Representative(ld.AR) for the Assessee submitted that for A.Y.2011-12 in assessee’s own case, Dispute Resolution Panel[DRP] had held that payment towards R & D Charges are in the nature of business receipts and same would be not liable for tax deductions in the absence of PE in India. Therefore, ld.AR submitted that the issue is already covered in favour of Assessee in Assessee’s own case. However, ld.AR read out the relevant articles of India Thailand DTAA. Ld.AR invited our attention to Hon’ble Madras High Court’s decision in the case of Bangkok Glass Industry Co. Ltd., Vs. ACIT [2013] 34 taxmann.com 77 (Madras) dated 12.06.2012. Ld.AR submitted that on identical facts, Hon’ble Madras High Court(supra) held that the Fees for Technical Services does not fall as Miscellaneous Income hence cannot be brought under Article 22 of India Thailand DTAA, further Hon’ble High Court held that since there is no permanent establishment, it cannot be brought to tax under Article 7. Ld.AR 6 , 857 & 858/PUN/2025 [A] - 03 Appeals submitted that ld.CIT(A) has followed the decision of Hon’ble Madras High Court and ITAT Pune in allowing the assessee’s appeal. Ld.DR for the Revenue has not brought to our notice any contrary decision of Jurisdictional High Court. Ld.AR for the Assessee relied on the following decisions : Bangkok Glass Industry Co. Limited v. ACIT [Tax Case (Appeal) Nos. 1187, 1307, 1342, 1460 & 1464 of 2005, 34 of 2006 and743 of 2007 (Madras HC)] Dy DIT, (IT)-II, Pune v. Tetra Pak India (P.) Ltd. to 1866/PUN/2014 Dy DIT (IT) v. Sparsh Infratech [IT Appeal Nos. 2509 (PN) of 2012 and 1047 to 1056 (PN) of 2014 Bramhacorp Hotels & Resorts Ltd. v. Dy. DIT(IT)
2111, 2377 & 2378/PN/2012 Dy. CIT (International Taxation) v. Welspun Corporation Ltd. and 48/Rjt/15 Denso (Thailand) Co. Ltd. v. ACIT (International Taxation)
[2024] 163 taxmann.com 257 (Delhi - Trib.) Deputy Commissioner of Income-tax v. Michelin ROH Co. Ltd. [2022] 138 taxmann.com 497 (Delhi - Trib.) , 857 & 858/PUN/2025 [A] - 03 Appeals
ITAT Delhi Bench in the case of DCIT Vs. Michelin ROH Co. Ltd [2022] 138 taxmann.com 497 (Delhi Tribunal) dated 27.05.2022 has held as under : “The aforesaid expositions are fully applicable here. The assessee company has no Permanent Establishment (PE) in India. The income which has been earned in this case in absence of FTS clause in DTAA would fall as business income. Their nature would not change to be that of other income Hence the same cannot be taxed in India in absence of a PE.
8. Accordingly, in the background of aforesaid discussion and precedent, we do not find any infirmity in the order of ld. CIT (A).
In the result, the Revenue's appeal is dismissed.”
ITAT Delhi Bench in the case of Denso (Thailand) co. Ltd., vs. ACIT (International Taxation) [2024] 163 taxmann.com 257 (Delhi Tribunal) dated 31.05.2024 has held as under : “18. Now Section 9 of the Act enumerates certain incomes to be deemed to accrue or arise in India and Section 9(1) of the Act provides under what conditions FTS income shall be considered accrue or arise in India. Explanation 2 to Section 9(1)(vu) of the Act gives definition of FIS and which provides that any service falls within the definition of FTS are either be in the nature of managerial services, technical services or consultancy services. Thus FTS is a species of income with specific definition and components. Thus where a DIAA does not make a reference for taxability of ITS, as separate term then Article 22, which vests residuary powers, cannot be invoked. The intention of having 8 , 857 & 858/PUN/2025 [A] - 03 Appeals residuary powers of taxing an income vested in any of the contracting state is to deal with those incomes which due to lack of regularity, continuity and frequency do not form part of regular business activity of the entity. The residuary provisions of Article 22 will not apply to items of income, which can be classified under other provisions of the tax treaty, but their taxability is subject to fulfillment of conditions mentioned therein. Thus we conclude the fee paid towards technical services can be brought under the item of business income, if there is no material to show that the same is not related to the business of the assessee. That onus lies on AΟ
In the case in hand AO without examining the business activity of the assessee has drawn an interference on the basis of information available on web portal of the assessee. However, on a perusal of the documentary evidences filed and taking into consideration the nature of services provided by Assessee, we would concluded that the services provided by the assessee to the Indian AEs are in the nature of technical, managerial or consultancy, which, themselves together as FTS, de not fall in any Article of the DTAA, can very well be part of business income. Thus for the applicability of Article 1 assessee had brought on record the evidence which establish that FTS, actually is part of business activity and assessee does not have a PL. in India. So benefit of Article 7 is to be extended. AO had all the opportunities to examine the business activity and to give a conclusive finding as to what is primary business activity of assessee and why operations of the assessee in providing FTS, is not part of business income. That being not done, then by recourse to Article 22. FTS income could not have been brought an , 857 & 858/PUN/2025 [A] - 03 Appeals
In light of the aforesaid, we are inclined to allow the Grounds raised by the Assessee. The appeal is allowed and the impugned addition quashed”
9. Thus the ITAT (supra) following the Hon’ble Madras High Court (supra) held that the Fee for Technical Services (FTS) in the absence of any specific clause for FTS in DTAA will be treated as Business Income unless AO has brought on record any specific contrary fact. If there is no Permanent Establishment (PE) in India then such FTS will not be taxable as per DTAA in India and the FTS cannot be classified as miscellaneous income to bring it under the Article 22 of DTAA.
The facts in the case of the Assessee are identical. In the case of the assessee, the payments have been made by the assessee to Hortigenetics Research (S E Asia) Limited. These payments as mentioned by the ITO are in the nature of the Fees for Technical Services. The ITO has not brought on record any evidence to prove existence of any PE of Hortigenetics Research (S E Asia) Limited in India. Therefore, as claimed by the assessee, there is no PE of Hortigenetics Research (S E Asia) Limited in India. Since there is no specific mention of FTS in India Thailand DTAA and assessee 10 , 857 & 858/PUN/2025 [A] - 03 Appeals has claimed that Hortigenetics Research (S E Asia) Limited is into business of Research and Development of Seeds, Vegetables, the impugned FTS will be business income. Admittedly, there is no permanent establishment of Hortigenetics Research (S E Asia) Limited in India. Therefore, as per Article 7 of India Thailand DTAA, Hortigenetics Research (S E Asia) Limited’s business income is not taxable in India. As observed by Hon’ble High Court(supra), the FTS cannot be classified as Miscellaneous Income. Hence, it is outside the purview of Article 22 of India Thailand DTAA. Therefore, respectfully following ITAT(supra) and Hon’ble Madras High Court, we uphold the order of ld.CIT(A). Accordingly, all the grounds of appeal raised by Revenue are dismissed.
In the result, appeal filed by the Revenue is dismissed.
12. Since we have already discussed and decided the same issue in the “Lead Case – the said decision shall mutatis-mutandis apply to both these appeals i.e. also. Therefore, 11 , 857 & 858/PUN/2025 [A] - 03 Appeals grounds of appeal raised by the Revenue in both the appeals are dismissed.
To sum up, all three appeals raised by the Revenue are dismissed. Order pronounced in the open Court on 19 December, 2025.