Denso (Thailand) vs. ACIT: FTS Under the India-Thailand DTAA

Citation of the Case:

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

Issue Involved:

The issue was whether fees for technical services (FTS) paid by Denso (Thailand) Co. Ltd. to its Indian group companies could be taxed under Article 22 (Other Income) of the India-Thailand Double Taxation Avoidance Agreement (DTAA). The treaty has no separate FTS clause, unlike the India-Oman DTAA protocol.

Facts of the Case:

Denso (Thailand) Co. Ltd. is a company set up in Thailand, where it is also tax resident. It gave technical services to five Indian group companies and earned INR 16,60,43,718 in the Assessment Year 2020-21. Denso said this income should not be taxed in India. The India-Thailand DTAA has no separate FTS clause, so the firm argued the fees were business income. With no permanent establishment (PE) in India, that income would fall outside Indian tax.

The Assessing Officer (AO) accepted that the income was FTS. But he held that without an FTS clause in the DTAA, the income fell under Article 22 of the treaty and section 9(1)(vii) of the Income-tax Act, 1961. He taxed it at 10%.

Summary of Findings:

1. Legal Framework and Interpretation:

- The tribunal read the India-Thailand DTAA, in particular Article 7 (Business Income) and Article 22 (Other Income).

- The tribunal stressed that if the DTAA does not deal with FTS, that income does not fall to the residuary Article 22 by default.

2. Business Income vs. Other Income:

- Article 22 covers only income that the DTAA does not deal with elsewhere.

- The services Denso gave were business activity, so they fell under Article 7 and not Article 22.

3. Permanent Establishment:

- Denso had no PE in India. Treated as business income, the fees could not be taxed here under Article 7.

4. Documentary Evidence:

- The tribunal read the papers Denso filed: the Memorandum of Association, the service agreements and the invoices. They showed that the technical services were part of Denso's usual business.

Conclusion:

The tribunal held that the fees Denso (Thailand) Co. Ltd. charged its Indian group companies were business income under Article 7 of the DTAA. Denso had no PE in India, so the income could not be taxed in India. The tribunal allowed Denso's appeal and quashed the AO's order taxing the fees under Article 22.

Implications:

The ruling is a precedent for reading DTAAs that have no separate FTS clause (IMG case: FTS vs business profits). It holds that Article 7 (business income) comes before Article 22 (other income) when technical services income is classified. For a multinational group that gives technical services with no PE in India, the case is useful authority: the fees stay out of Indian tax rather than falling to the wider residuary clause.