AUTHORITY FOR ADVANCE RULINGS, NEW DELHI

Worley Parsons Services Pty. Ltd., In re

Justice P. V. Reddi, Chairman

A. Sinha and Rao Ranvijay Singh, Members

A.A.R. No. 750 of 2007

April 30, 2008

Section 90 of the Income-tax Act, 1961, read with articles 7 and 12 of the Double Taxation Avoidance Agreement between India and Australia - Double taxation relief - Where agreement exists - Assessment year 2004-05 - Assessee-company was incorporated in and was a tax resident of Australia - It was engaged in business of providing professional services such as engineering, procurements and project management - During relevant assessment year, assessee entered into a contract with an Indian company to monitor and supervise a project being undertaken by said Indian company as project monitoring consultant for a consideration - Dispute arose with regard to taxability of payments received by assessee under said contract - As per revenue, said payment constituted royalty income within meaning of article 12 of Indo-Australia DTAA - On other hand, assessee submitted that same were not in nature of royalty, that most of activities under contract were carried on in India for more than 6 months, that its employees were also present in India for 165 days during relevant previous year, that it had and must be deemed to have a Permanent Establishment (PE) in India and, thus, receipts attributable to said PE were taxable in India as business profits in accordance with Article 7 of DTAA - Whether since on account of rendering services under contract, no technical knowledge, experience, skill or know-how was made available to Indian company, payment in question did not constitute royalty income under article 12 - Held, yes - Whether in absence of any other article in DTAA dealing with fees for technical services, impugned payments were taxable as business profits and as admittedly, assessee carried on its business through a PE, in terms with article 7 of DTAA, only profits attributable to PE in India were liable to be taxed - Held, yes

FACTS

The assessee-company was incorporated in and was a tax resident of Australia. It was engaged in the business of providing professional services such as engineering, procurements and project management. During the assessment year 2004-05, the assessee entered into a contract with the Gas Authority of India Ltd. (GAIL) to monitor a project being undertaken by GAIL as project monitoring consultant. Under the contract, the assessee had to carry out various responsibilities for a consideration.

The assessee sought advance ruling on the issue as to whether the receipts from the contract entered into with GAIL were in the nature of ‘royalties’ as defined in article 12 of the DTAA between India and Australia, or whether such receipts were to be treated as business profits under article 7 of the DTAA liable to be taxed in India and if so, to what extent?

HELD

There was no serious debate on the point that the payments received by the assessee under the contract with GAIL did not constitute ‘royalty’ income. In the Indo-Australian Treaty (DTAA), royalties and fees for technical services are combined in one article, i.e., article 12. The term ‘royalty’ as defined in article 12.3 includes certain categories of services also. [Para 4]

The relevant clause was clause (g) of article 12.3. It had no application in the instant case inasmuch as no technical knowledge, experience, skill or know-how was ‘made available’ to GAIL on account of rendering the services. Mere rendering of services is not sufficient to attract clause (g), but those services should result in technical knowledge, etc., being made available to the other contracting party. Monitoring and supervision of project work with a view to ensure its timely completion within the approved cost did not amount to making available to GAIL the technical knowledge, experience, etc. which could be made use of by GAIL subsequently on its own. [Para 5]

The revenue, in its written comments, had taken the stand that the receipts from the contract in question was in the nature of fee for technical services [which was deemed to be income under section 9(1)(vii)(b)]. Even then, it could not be subjected to tax under the Act in derogation of the treaty provisions. As the income in question could be brought within the purview of article 7 of DTAA which deals with business profits, that provision alone came into play. In fact, the applicability of article 7(1) to the instant case was admitted by the revenue in reply to some questions. In the course of arguments also the same stand was maintained. [Para 6]

Article 7(7) clarifies that where the profits include items of income which are dealt with separately in other articles of the DTAA, then the provisions of those articles shall not be affected by the provisions of this article. It had already been noticed that the fees or payment received by the assessee for carrying out the responsibilities under the contract did not fall within the scope of article 12 as the services were not of such a nature as contemplated by article 12(3)(g). In absence of any other article in the DTAA which deals with the fees for technical services other than those coming within the purview of Article 12, the payments received by the assessee in connection with the contract would be taxable as business profits and as the assessee, admittedly, carried on its business through a Permanent Establishment (PE) so much of the profits of the enterprise attributable to the PE were liable to be taxed in India in terms of article 7. The assessee itself stated that very little work was done outside India and about 90 per cent or more of the activities were carried out in India by setting up a permanent establishment. [Para 7]

As regards the existence of PE, as rightly pointed out by the assessee, the specific clause (k) of article 5.2 governed its case. Article 5.2 of the DTAA contains the inclusive definition of the term ‘permanent establishment’. The assessee stated that the activities under the GAIL contract were predominantly carried on in India for more than six months during the financial year 2003-04. The employees of the assessee were also present in India for 165 days. The details of visits and stay of the employees in connection with this contract were also furnished by the assessee. Hence, the assessee’s unrebutted case that it had for the purpose of carrying out the contractual obligations had to be accepted. [Para 8]

In the light of the said discussion, it was to be held that the receipts under the contract with GAIL were not in the nature of royalties as defined in article 12 of the DTAA between India and Australia, and the income from such receipts were liable to be taxed as business profits in India in view of article 7 of DTAA and only the profits attributable to the PE in India were liable to be taxed as per the provisions of the Act. [Para 9]