As per Article 7 of the India-Australia DTAA income of a PE rendering technical services would be computed under the Act on gross basis having regard to provisions of 44D and 115A of the Act.

Facts
 Rio Tinto Technological Resources TY Limited („the taxpayer‟) was engaged by its Indian associated companies to provide services towards evaluation of iron ore quality testing, etc. The services involved undertaking certain tests, geological mapping, studies and drilling for tests to collect and collate the information and evaluation report. The taxpayer provided the services in India through its division Rio Tinto Technical Services, which constituted a Permanent Establishment (“PE”) in India for the taxpayer.
 The taxpayer for assessment years 1999-200,2000-01 and 2001-02 claimed that since it has a PE in India, the amounts earned by it from rendering the services in India be taxed on net basis under Article 7 of Double Taxation Avoidance Agreement between India-Australia (“DTAA”).
 In the assessment proceedings, the Assessing Office (“AO”) held that the payments received by the taxpayer were taxable as “Fees for Technical Services”(„FTS‟) under the Income-tax Act, 1961 (“the Act”) on gross basis at the rate of 20% and no expenses could be allowed in view of provisions of section 44D of the Act. The Commissioner of Income-tax (Appeals) [„CIT (A)‟] upheld the order of AO.
 On appeal, the Income Tax Appellate Tribunal (“ITAT”), reversed the order of CIT(A) and held-
– The taxpayer has opted to be taxed under the DTAA and as per Article 7; the PE is to be treated as an independent enterprise which is liable to tax in India.

The contracts are inclusive contracts of technical services and drilling and excavation, etc. and therefore the activities of the taxpayer were not of purely technical nature. The drilling, excavation, and testing cannot be de-linked from the evaluation and the feasibility studies and in view of composite activities Article 12 (Royalty and FTS) of the DTAA would not be applicable.
– Once income is held to be taxable in India under Article 7, then paragraph 3 of the said Article has to be given full effect to and accordingly deduction in respect of expenses in accordance with and subject to the law relating to tax in India will apply. Hence, the provisions relating to presumptive taxation under section 115A read with section 44D would not apply.
Issues before the Delhi High Court
 Whether the consideration for the services rendered can be considered as FTS within the definition of Article 12 of the DTAA?
 Whether Article 7 of the DTAA will be applicable and income has to be construed as business income?
 Whether provisions of Section 115A read with section 44D of the Act applies in the facts of the case?
Observations and Ruling of the Delhi High Court
 Article 12 (4) states that the gross basis of taxation as provided under Para 1 & Para 2 of Article 12 would not be applicable as the taxpayer has a PE in India. Hence, Article 7 of the DTAA would be applicable in the case of the taxpayer.
 Article 7(3) of the DTAA provides that in order to determine the profits of a PE, the taxpayer is to be allowed deduction of expenses in accordance with and subject to limitations in domestic tax law. In computing the business income, where a non-resident has a PE, the Article has given primacy to the provisions stipulated in the domestic tax legislation.
 Having regard to Article 7(3) the taxability of the profits of the PE has to be governed by the relevant provisions of section 44D read with section 115A, which deals with taxability of foreign company who has earned income by way of FTS. The limitation and conditions specified in section 44D of the Act with regard to deductions would apply and would not be diluted in view of Article 7(3).
 As per section 9(1)(vii) of the Act, the exclusion of consideration for any construction, assembly, mining or like project from the expression FTS is clarificatory in nature and does not seek to curtail the scope and ambit of managerial, technical or consultancy services, which would be taxable as FTS.
 The nature of services rendered by the taxpayer could be considered as a result of the knowledge, experience and expertise gained by it and the fact that the same is due to business or trading activity or tests, mapping etc. would not be relevant. The taxpayer had not undertaken any mining project or a construction project, which, falls within exclusion clause of the definition of fee for technical services.
 The consideration received by the taxpayer qualifies as fee for technical services.
 In view of PE in India, the taxability of the services revenues earned by the taxpayer shall be governed by provisions of section 44D of the Act and therefore, no deduction for expenses would be admissible.

Conclusion
 The services rendered by the taxpayer towards evaluation of resources comprising of geological mapping, drilling and editing programme and followed by iron ore quality testing and resource modeling constitute fee for technical services.
 Having regard to Article 7(3) of the DTAA, the fee for technical services is taxable on gross basis under section 115A of the Act and in view of the provisions of section 44D of the Act no deduction of expenses was admissible.
Source: RioTinto Technical Services .,ITA Nos. 486/2011, order dated 4 January 2012