Thursday, 5 July 2012

Consultancy fee, brokerage, intermediation fee and commission payment- Singapore Treaty

In the case of Andaman Sea Food Private Limited in appeal No. 1412/2011 dated 19th June 2012 the assessee is given to have made payment of consultancy charges @ 1% of the total transacted volume of forex derivatives. The AO disallowed such sum u/s 40(a)(i) because the assessee has not deducted any tax at source from such payments. The assessee’s version was that the services were rendered outside India which argument did not impress the AO who held the view that the retrospective amendment w.e.f. 1st June 1976 introduced by the Finance Act 2010 no longer necessitate rendering of services in India to be liable under the head fees for technical services u/s 9 (1) (vii). On the other hand the AO s impression was that consideration received for rendering any financial analysis related consultancy services, rating agency advisory services, risk based capital analysis etc.

In appeal the assessee’s argument was that the consultancy fees paid by the assessee is not covered by the scope of the expression ‘fees for technical services’ under Article 12 of the India Singapore tax treaty and further in the absence of any PE in India it would not chargeable to any tax in India. The bench of Kolkata Tribunal from their understanding of the standard process of the transaction found that the services were simply consultancy services which did not involve any transfer of technology so the same could not be taxed as ‘fees for technical services and further in the absence of any PE neither can same be taxed as business profits.

Further following the ratio of the decision of Delhi High Court in Guy Carpenter case the Kolkata bench held unless there is a transfer of technology involved in technical services extended by Singapore company, the ‘make available’ clause is not satisfied and, accordingly, the consideration for such services cannot be taxed under Article 12(4) of India Singapore tax treaty. In Guy Carpenter case (supra) the assessee earned reinsurance brokerage/commission which was paid by Insurance Companies operating in India.

Further on when the DR alternatively aimed to cover such income under ‘ other income’ article 23 in the treaty the bench held that such article does not apply to items of income which can be classified under article 6-22 whether or not taxable under those articles, and the income from consultancy charges is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied and when it cannot be taxed under either of the three articles for want of meeting with conditions therein the same cannot be taxed under article 23 either.

Negating all contentions of the revenue the bench observed that a tax treaty assigns taxing rights of various types of income to the source state upon fulfilment of conditions laid down in respective clauses of the treaty. When these conditions are satisfied, the source state gets the right to tax the same, but when those conditions are not satisfied, the source state does not have the taxing right in respect of the said income. When a tax treaty does not assign taxability rights of a particular kind of income to the source state under the treaty provision dealing with that particular kind of income, such taxability cannot also be invoked under the residuary provisions of Article 23 either.

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