08 October 2018

Art. 12 and 14 of Indo-German and Indo-Swiss DTAAs – Beneficial Article to apply

The assessee, an Indian company, was making payments to a German individual resident which according to the Revenue fell under the category of ‘Fees for technical services’ as per Section 9(1)(vii) of the Income Tax Act and Article 12 of the Indo-German DTAA and thus, the assessee was under obligation to deduct tax at source as per Section 195.

The assessee’s contention was that the payment was in the nature of ‘independent scientific activity’ as per Article 14 of the DTAA and thus, there was no liability to deduct at source. The Tribunal was of the view that the payment made fell within both the categories provided by Articles 12 and 14 of the DTAA.

Therefore, the issue which arose in Poddar Pigments v. ACIT was which provision was to be applied. The Tribunal relied on the rules of interpretation of treaties to accept the assessee’s contentions and held that where both the Articles were applicable, Article 14 would take precedence over Article 12, because the former is a special provision while the latter is a general provision. The same is because Article 14 applies specifically to ‘professional services’ provided by ‘individual residents’, while Article 12 applies to all residents of a foreign country and is thus broader in scope and general in nature.

It also held that since the assessee’s case fell under the more beneficial provision i.e. Article 14, wherein no tax liability to deduct tax at source arose, the same was to be applied.

A similar issue also arose before the Tribunal involving the interpretation of Articles 12 and 14 of the Indo-Swiss DTAA, wherein payments of the nature mentioned above had been made to a Swiss resident. Therein, the Tribunal held that since Article 12(5) of the DTAA made a specific exclusion for payments made for services covered under Article 14, there was no obligation on the assessee to deduct tax at source.

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