AGT INTERNATIONAL GMBH,MUMBAI vs. DCIT(IT)-1(1)(1), MUMBAI

Per Pramod Kumar, VP:

This appeal challenges correctness of the order dated 24th October 2018 [1] passed by the Assessing Officer under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2014-15. [2] Core grievance of the assessee, in substance, is that the Assessing Officer ought to have taxed the fees for technical services of Rs 1,00,14,582, received by the assessee from an Indian company, @ 10% under article 12(2) of India Switzerland Double Taxation Avoidance Agreement [(1995) 214 ITR (Stat) 223- as updated till the relevant point of time; Indo Swiss tax treaty in short]

ITA No. 7465/Mum/18 Assessment year: 2015-16 Page 2 of 5 [3] To adjudicate on this issue, only a few material facts need to be taken note of. The assessee before us is a fiscally domiciled in Switzerland, and, beyond any dispute or controversy, eligible for the treaty protection of Indo Swiss tax treaty. The assessee has received Rs 1,00,14,582, on account of fees for technical services from an Indian company by the name of TAS-AGT Systems Limited, and has offered the said income to tax @ 10%, on gross basis, under article 12(2) of the Indo Swiss tax treaty. It was noted by the Assessing Officer that the Indian company had withheld tax @ 42.024% on the entire amount. The Assessing Officer was also of the view that the services rendered by the assessee are such that they donot satsify the criterion under article 12(4) inasmuch as while article 12(4) deals only with the “payments of any kind to any person in consideration for rendering of any managerial, technical or consultancy services, including the provision of such services by technical or other personnel”, so far as these services are concerned, “the role of the assessee is akin to buying and selling of services”. The Assessing Officer has held that the assessee had, on account of rendition of these services in India, a permanent establishment in India under article 5(2)(l) of the Indo Swiss tax treaty, i.e. service PE, that the expenses are allowable, on an estimate basis, @ 40% of total revenues, and that the remainder amount is taxable at the normal income tax rates applicable to the foreign companies. Aggrieved by the stand so taken by the Assessing Officer, the assessee raised objections before the DRP but without any success. The assessee is not satisfied and is in appeal before us. [4] We have heard the rival contentions, perused the material on record, and duly considered facts of the case in the light of the applicable legal position. [5] The case of the Assessing Officer, in brief, is that the assessee had a PE in India inasmuch as the services rendered by the assessee were not of such a nature as to be covered by the definition of “fees for technical services” under article 12, the relevant portion of which, for ready reference, is reproduced below: ARTICLE 12-ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services. 3. …………………

ITA No. 7465/Mum/18 Assessment year: 2015-16 Page 3 of 5 4. For purposes of this Article the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any managerial, technical or consultancy services, including the provision of services by technical or other personnel. 5. Notwithstanding paragraph 4, "fees for technical services" does not include amounts paid: (a) for teaching in or by educational institutions; (b) for services covered by Article 14 or Article 15, as the case may be. ………………………… …………………………..

[6] As regards the service PE, i.e. a permanent establishment on account of rendition of service by the foreign enterprise, the related provision under article 5(2)(l), which is what the Assessing Officer has specifically invoked, are as follows:

Article 5: Permanent Establishment 1. ………….. 2. The term "permanent establishment" shall include especially …………………….. …………………….. (l) the furnishing of technical services, other than services as defined in Article 12, within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve month period; or (ii) the services are performed within that State for a related enterprise (within the meaning of paragraph 1 of Article 9) for a period or periods aggregating more than 30 days within any twelve-month period.

[7] The fundamental question, however, that we need to examine is whether an income, offered to tax under article 12(2) as „fees for technical services‟ being taxed as an income attributable to a service PE under article 5(2)(l) can place the assessee to a disadvantageous position so far as his tax liability is concerned. The answer, in our humble understanding, is in negative.

ITA No. 7465/Mum/18 Assessment year: 2015-16 Page 4 of 5 [8] As learned counsel for the assessee rightly contends, so far as the permanent establishments under article 5(2)(l) of Indo Swiss tax treaty are concerned, i.e. service PEs, the assessee has a choice to be taxed on gross basis at the rates provided under article 12(2) or on net basis under article 7. It is clear from the following protocol provisions in the Indo Swiss tax treaty:

With reference to Article 5 [2] It is understood that the remuneration for furnishing of services covered by sub-paragraph (l) of paragraph 2 shall be taxed according to Article 7 or, on request of the enterprise, according to the rates provided for in paragraph 2 of Article 12 [As we proceed further in the matter, we may mention that the expression “subparagraph (l)” has been printed as “subparagraph (1) of paragraph 2” in 214 ITR (Stat) 223 @ page 245, as “subparagraph (i) of paragraph 2” in IBFD database on treaties, (https://research.ibfd.org/#/doc?url=/linkresolver/static/tt_in-ch_01_eng_1994_tt), and as “subparagraph (1) of paragraph 2” in Treatise on Double Taxation Avoidance Agreements (ISBN: 978-81-8159-453-2) @ 3.1187. However, since this expression is preceded by the words “the remuneration for furnishing of services covered by”, and since the only clause in article 5(2) dealing with such a situation is in sub clause „l‟, i.e. under service PE, we have proceeded on the basis that it deals with clause „l‟ and not subparagraph „1‟ (which does not exists anyway) or subparagraph (i) (which deals with „a mine, a quarry, an oil or gas well, or any other place of extraction of natural resources‟ and does not cover the rendition of services simplictor anyway). We have thus proceeded on the basis, and that is the only way we could rationalize the protocol provision that it refers to subparagraph „l‟ dealing the service PE] [8] A combined reading of the above provision of article 5(2)(l) read with related protocol clause clearly shows is that the service PE being triggered on account of rendition of services by a Swiss entity in India, or vice versa, can never make the assessee worse off so far as the tax liability in source jurisdiction is concerned. Unless the assessee has a lower tax liability on taxability of PE on net basis under article 7 vis-à-vis taxability of FTS on gross basis under article 12(2), the PE being triggered is in fact tax neutral. Nothing, therefore, turns in favour of the income tax department on account of service PE being triggered by the rendition of services. Of course, the words “at the request of the enterprise” appear in the above protocol provision but when the assessee is all along pleading for taxability under article 12(2), it‟s implicit in the contention that the assessee wants to be taxed at that rate. [9] Learned counsel‟s plea is thus indeed well taken, and we approve the same. The Assessing Officer is, accordingly, directed to tax the assessee, in respect of the receipts as fees for technical services- i.e. Rs 1,00,14,582, @ 10% on gross basis and under article 12(2) of the Indo Swiss tax treaty.

ITA No. 7465/Mum/18 Assessment year: 2015-16 Page 5 of 5 [10] As we have decided the appeal on the short point of scheme of profit attribution to the service PE, all other issues raised by the assessee are rendered academic on the facts of this case. We, therefore, see no need to address ourselves to those legal and factual issues at this stage. [11] In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on the 31st day of January, 2020.

Sd/- Sd/- Amarjit Singh Pramod Kumar (Judicial Member) (Vice President) Mumbai, Dated the 31st day of January, 2020

Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File

By order

Assistant Registrar Income Tax Appellate Tribunal Mumbai benches, Mumbai