Recently, Delhi Income Tax Appellate Tribunal
("Tribunal") in the case of International Management
Group (UK) Ltd. ('the assessee') dealt with the issue of
taxability of income received by the assessee, which is not
attributable to its Permanent Establishment ('PE') in
India. The assessee had entered into a contract with the Board of
Cricket Control in India ('BCCI') for providing services
related to assistance in establishment, commercialization and
operation of the Indian Premier League ('IPL') events. The
assessee rendered services through its employees in India and,
thus, triggered a Service PE under the India-UK Double Taxation
Avoidance Agreement ("India-UK Treaty"). However, a part
of the services was rendered in South Africa, as certain IPL
matches were relocated to South Africa. The issue under
consideration was on taxability of the amount received from the
BCCI for furnishing of services in South Africa.
The Tribunal held that profits, only to the extent of the
activities carried on by the assessee through its Service PE, shall
be taxable as business profits under the India-UK treaty and the
balance activities, which are not at all connected with the
activities of the Service PE, shall be taxed as Fees for Technical
Services ("FTS") under the India-UK treaty. Under the
provisions of the Income-tax Act, 1961 ("the Act"), the
Tribunal ruled that the whole amount was taxable as FTS as the
services provided by the assessee were utilized by the BCCI for
carrying on business in India and the source of income of the BCCI
was in India. Accordingly, the services did not fall under the
source rule exclusion applicable to FTS under the Act.
This decision deals with the issues relating to taxation of FTS,
as also business profits taxation, and rules that in cases where
the income is effectively connected to a PE in India, it shall be
governed by the Business Profits Article and, hence, shall be
taxable on net basis (i.e., income less expenditure). However, the
balance amount which is not connected to the PE can continue to be
governed under the specific income Article i.e., FTS in the current
case, and can be taxable in India on a gross basis. This ruling
also provides that there is no difference between the terms
"effectively connected with" and "attributable
to" as these have been used interchangeably in India's
DTAA. Accordingly, if a particular receipt is not taxable under the
specific FTS Article of the DTAA on account of being effectively
connected with the PE, the same will be taxable under the Business
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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