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ITAT Ruling Clarifies Taxability of Technical Services Under India-Thailand DTAA

Prefatory Note

The Income Tax Appellate Tribunal (‘ITAT’), Delhi Bench, delivered a significant ruling on 31.05.2024 in the case of Denso (Thailand) Co. Ltd. v. Assistant Commissioner of Income Tax, Circle 1(2)(2), International Taxation, New Delhi.[i] The case involved the assessment of income for the assessment year 2020-21, focusing on the taxability of receipts categorised as fees for technical services (‘FTS’) in the context of the India-Thailand Double Taxation Avoidance Agreement (‘DTAA’).

Factual Matrix

  • Denso (Thailand) Co. Ltd., a company incorporated in Thailand and a tax resident thereof, functions as a regional service centre for the Denso Group in Asia and Oceania.

  • During the relevant assessment year, the company earned Rs. 16,60,43,718 from providing technical services to its five Indian group companies.

  • The company contended that these receipts should not be taxed under the FTS provisions in the absence of a specific FTS clause in the DTAA.

  • Instead, they argued that the income should be treated as business income and, in the absence of a permanent establishment (‘PE’) in India, should not be taxed in India.

  • The assessing officer (‘AO’) concluded that the receipts were in the nature of FTS and, due to the absence of an FTS clause in the DTAA, the income should fall under a. 22 (Other Income) and be taxed at 10% as per s. 9(1)(vii) of the Income-tax Act, 1961 (‘Act’).


The central issue was whether the receipts from technical services provided by Denso (Thailand) Co. Ltd. to its Indian affiliates should be categorised and taxed as FTS under the Act or as business income under the DTAA and whether these receipts should fall under the residual a. 22 or 7 of the DTAA which deals with business profits.

The Decision by the ITAT

  • The ITAT ruled in favour of Denso (Thailand) Co. Ltd., allowing the appeal and quashing the addition made by the AO. The ITAT held that the services provided by the appellant were part of its normal business activities and, in the absence of a PE in India, should be taxed as business income under a. 7 of the DTAA, not under the residual a. 22 of the DTAA.

  • The ITAT made the following analysis:

    • Nature of Services and Business Activity: The ITAT noted that Denso (Thailand) Co. Ltd.'s services included design, testing, evaluation, and technical support, which were integral to the company’s business operations. The evidence, including the memorandum of association (‘MOA’), service agreements, and invoices, supported that these activities were conducted in the ordinary course of business.

    • Applicability of DTAA Articles: The ITAT emphasised the importance of a. 7 of the DTAA, which pertains to business profits, over the residual a. 22. They cited precedents where, in the absence of a specific FTS clause in a DTAA, the income should be assessed as business income, subject to the existence of a PE. The ITAT referenced the decisions in cases such as Motorola Inc. v. DCIT[ii] and Bangkok Glass Industry Co. Ltd. v. ACIT[iii], which supported the view that business income should be taxed under Article 7 in the absence of a specific FTS provision.

    • Interpretation of S. 90 of the Act: The ITAT highlighted that s. 90 of the Act provides taxpayers the option to be governed by the provisions of the Act or the DTAA, whichever is more beneficial. In this case, the DTAA’s provisions were more favourable to the appellant.

    • Assessment of Business Activities: The ITAT critiqued the AO’s reliance on the company’s web portal to determine the nature of its business activities. They clarified that the MOA and other official documents accurately indicate a company’s business scope.

Our Analysis

The ruling relied heavily on judicial precedents that established the principle that in the absence of an FTS clause, income derived from technical services should be treated as business income under a. 7 of the DTAA, provided there is no PE in the source country.

The ITAT’s decision reinforces the principle that in the absence of specific provisions in a DTAA, income derived from business activities should be assessed under the relevant articles dealing with business profits, ensuring a fair and just application of international tax agreements. The ruling is a significant reference point for similar cases involving cross-border technical services and the interpretation of DTAA provisions.


End Notes

[i] [2024] 163 257 (Delhi - Trib.)[31-05-2024].

[ii] [2005] 95 ITD 269 (DELHI).

[iii] [2013] 34 77 (Madras).

Authored by Sanyam Aggarwal, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.


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