Landmark Cases on International Taxation and DTAA

For technical services to be taxed under a tax treaty's "make available" clause, not only must the services be technical, but they must also result in the technology being made available to the recipient.

A tax treaty is to be interpreted as a whole, meaning its provisions must be construed in harmony with each other, not in isolation.

Where the expenses paid to a related entity were allowed as a deduction in computing the income of the taxpayer, the income attributable to a Permanent Establishment (PE) in India, if less than the remuneration paid, should be calculated accordingly, following Article 7 of the Double Taxation Avoidance Agreement (DTAA).

Transponder fees are taxable in India as royalty income. The ITAT decision in Viacom 18 Media Pvt Ltd. (2015) 153 ITD 384 (Mum.) has been cited to support this conclusion.

The consideration received for the sale of drawings and designs is not taxable in India if it does not accrue or arise in India, particularly in the absence of a Permanent Establishment (PE) in India, even when considering Double Taxation Avoidance Agreements (DTAA).

Payments received separately for drawings and documents related to electrical portions of a mill supply contract are considered fees for technical services when they are not linked to the supply contract.

Payment for licensing computer software is not royalty if it is for a copyrighted article and not the copyright itself, especially when the definition of royalty under a DTAA is more restrictive than under the Income Tax Act.

A permanent establishment (PE) exists if there is a fixed place of business through which an enterprise's business is wholly or partly carried on, reflecting the importance of PE concepts with globalized economic activity.

Payments for market surveys conducted for the purpose of procuring orders on a commission basis are not fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961, as they are incidental to the business activity and do not involve the 'make available' clause.

Fees paid for securing export orders or for procurement of machinery are not fees for technical or managerial services under section 9(1)(vii) of the Income-tax Act.

The Special Bench decision in ACIT vs. Clough Engineering Ltd. interprets treaty provisions and the expression 'in connection with PE' for taxability. It is not applicable when income is offered under domestic provisions and not disputed.

Reimbursement of salary of expatriates does not constitute 'Fee for Technical Service' (FTS) when it clearly reflects an employer-employee relationship, distinguishing it from situations involving manpower recruitment and supply services.

Branches of a company in foreign countries such as UAE and Qatar do not attract tax liability in India when they form a Permanent Establishment (PE), provided that the relevant tax treaties are applied. This principle has been upheld by the Supreme Court.

Profits arising from the sale of sub-assemblies and intermediary services should not be attributed to a Permanent Establishment (PE) at an ad-hoc rate if the facts of the appellant's case are different from those in Rolls Royce PLC. Attributing profits to a PE requires careful consideration of the specific transactions and activities.

Interest earned from the tax department is to be assessed in accordance with the Double Taxation Avoidance Agreement (DTAA).

The principle of non-discrimination requires that residents and non-residents receive the same treatment under the Income Tax Act and Double Taxation Avoidance Agreements (DTAA).

Payments for the use or right to use computer software are considered royalty income, taxable in India. Amendments to Section 9(1)(vi) with retrospective effect bring such payments within the scope of royalty.

A composite contract for supply, including services, should be treated as a single transaction, and payments for services cannot be severed and treated as business income if they are part of the sale consideration.

The language used in tax treaties and model conventions should be interpreted as 'international tax language,' drawing meaning from sources like the OECD Commentary, akin to contemporanea expositio.

Payments made for services that are utilized for earning income from outside India, where the customers are foreign-based companies, are not taxable in India as Fees for Technical Services, particularly when excluded by Section 9(1)(vii)(b) of the Income-tax Act.

Subscription fees paid for online access to a database, such as 'scifinder', are not considered royalty if the use does not involve the exploitation of copyright. Such payments are also not classified as fees for technical services if they do not meet the 'make available' clause requirement.

Project-specific drawings, layouts, plans, and designs are not considered fees for technical services (FTS) if the technology is not made available to the recipient for their commercial use as an owner.

The decision in CIT v. Shah Originals is distinguished where a gain arises from foreign exchange fluctuation during an export transaction, and such gains are considered for Section 10A purposes. The case was specifically rendered in the context of Section 80HHC deductions, not Section 10A.

Software installed in India granting access to an assessee's mainframe located outside India does not constitute a Permanent Establishment (PE) in India. Agents are not considered to have an agency PE if they are not economically dependent on the assessee and lack the authority to conclude contracts.

Receipts from internet bandwidth charges cannot be treated as royalty income if the treaty provision exempts them. The amended provisions of section 9(1)(vi) of the Act are considered in this context.

Interest received by an Indian branch from its head office is not taxable as it represents profit from oneself, and expenditure incurred by the head office for the branch is not deductible from the branch's income.

Payments for software as a product are treated as purchases, not royalties for the use or right to use software. This distinction is important for determining tax implications under Double Taxation Avoidance Agreements.

Receipts of a non-resident for technical services are not taxable in India if the services are not utilized in India, even after retrospective amendments to Section 9. The condition of utilization of services in India remains a prerequisite for taxing such income.

A fixed place of business (PE) is not established if the 'disposal test' for determining a permanent establishment is not met. The reliance on services, even if administrative or technical support, does not automatically create a PE if the ultimate disposal or control test is not satisfied.

The mere supply of skilled labour to work in a country does not, by itself, give rise to a Permanent Establishment (PE) for the company supplying that labour. A PE requires a more substantial connection, typically involving a fixed place of business at the disposal of the enterprise.

Income from royalties or fees for technical services paid to a non-resident is not taxable in India if it is for the purpose of earning income from outside India or for carrying on business outside India, aligning with the exclusionary clauses of Section 9(1)(vii)(b).

Where services may fall into the category of consultancy services, their taxability in the context of technical, managerial, and consultancy services can be examined, especially when such services may overlap.

A copyrighted article does not fall within the purview of 'Royalty' under the wording of a tax treaty. Amendments cannot be read into the treaty to change this interpretation.

Different components of a contract cannot be read in isolation when determining tax implications.

The onus is on the revenue to prove the existence of a Permanent Establishment (PE) in India.

Even if a buyer retains the right to examine and repudiate goods after property has passed upon handover of documents (as in a c.i.f. contract), this right does not negate that the property in the goods has passed.

Payment for software is not considered a payment for copyright per se, and therefore is not covered by the scope of payment for copyright.

Income received towards sales commission does not qualify as fees for technical services (FTS) under the Act if it is not in the nature of managerial, technical, or consultancy services.

Disallowance under Section 40(a)(i) for payments to a US resident is not permissible if it imposes harsher conditions than those applicable to payments made to an Indian resident, due to the non-discrimination clause in the India-US Double Taxation Avoidance Agreement (DTAA).

Management services involve the act of managing by direction, regulation, or superintendence, essentially controlling, directing, or administering a business.

This case is authority for the proposition that payments for services rendered in India are taxable in India, even if the recipient is a foreign entity, provided the services generate income in India and are not merely ancillary or preparatory.

When a tax treaty conflicts with the Income Tax Act, the treaty provisions apply to the extent they are beneficial to the assessee. However, if the treaty does not provide for a specific benefit, such as the set-off of losses, that benefit cannot be claimed under the Act.

A taxpayer can only be charged in accordance with Section 9. Explanation (a) to Section 9(1)(i) clarifies specific circumstances for chargeability.

Expenditure is liable for TDS under section 195 if the benefit derived from it is utilized in India, irrespective of where the services were rendered or if the non-resident has a Permanent Establishment in India.

The meaning of 'technical services' under Section 9(1)(vii) of the Income Tax Act, 1961, when not defined, can be ascertained using the principle of 'noscitur a sociis' by considering its placement alongside 'managerial' and 'consultancy' services. These services generally imply direct human involvement.

Activities carried out by a liaison office in India are considered auxiliary to the main business and therefore do not constitute a permanent establishment (PE) if they are merely supportive of the core income-generating activity, such as downloading data, preparing cheques, and dispatching them.

If a Double Taxation Avoidance Agreement (DTAA) provides for a lower tax rate than Section 206AA, tax at source must be deducted at the lower DTAA rate, even if the non-resident deductee fails to provide their PAN. Section 206AA does not override the beneficial provisions of a DTAA.

Consideration paid for the 'use' or 'right to use' equipment is taxable as royalty, even if there is no actual present use, as the right to use in the future triggers the royalty clause.

Each transaction can be considered a separate source of income, allowing taxpayers to choose between the Income-tax Act and a Double Taxation Avoidance Agreement (DTAA) for each transaction. Section 70(2) of the Act does not prescribe an order for setting off specific short-term capital losses against specific short-term capital gains, favouring the taxpayer in interpretation.

The mere presence of a company's operations across continents does not automatically imply that the process occurred in India. Income received by non-residents from payments made by Indian telecast operators is not considered royalty income under Explanation to section 9(1)(vi) if the income generated in India has already been taxed in India.