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.

Nangia's Take

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 Income Article.

Source: [TS-545-ITAT-2016]

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