Taxpayer (Metso Outotec OYJ[1]), a tax resident of Finland, had provided information technology related (IT) services and corporate guarantee to its Indian affiliate entities. The IT services were performed through its offices in Finland and none of its employees visited India for performing such services. Taxpayer argued that the performance-based rule[2] under Article 12(5) of India-Finland tax treaty deems FTS to accrue or arise within the state in which the technical services are performed. In the given case, the Taxpayer did not have a permanent establishment (PE) in India and the services were performed outside India (i.e., in Finland). Hence, the consideration received for such services shall be deemed to arise in Finland and, accordingly, swill be taxable in Finland and not in India. The tax authority contended that that the service can be treated as performed only when the beneficiary is able to use it for its purpose and hence was taxable in India in the present case.
The Tribunal, by following its earlier decision in Taxpayer’s own case[3], held that, even though the Taxpayer did not have PE in India and the services were also rendered outside India, since the services were used in India the same was taxable in India. In its earlier judgement, the performance-based rule of Article 12(5) was held as not applicable due to following reasons:
- The payment was made for test results which were used in India.
- Even though the Taxpayer may have conducted process of testing outside India, the Indian entity had made payment not for use of the process but for the results of testing, which were used by Indian entity in India.
Further, on the receipt of guarantee fees by the Taxpayer from its subsidiary company, Tribunal observed that the main business of the Taxpayer was to carry on, by itself or through its subsidiary, the design, manufacture, and construction of trade machinery, devices etc. Providing guarantee was a routine activity only to safeguard the business interest of a subsidiary and it was more like a shareholder obligation. Further, providing guarantee was not Taxpayer’s regular business activity, as except for its subsidiary, the Taxpayer had not given guarantee to anyone else. Accordingly, Tribunal held that the guarantee fees income arose in India and hence taxable in India as Other Income under Article 21 of India-Finland treaty.
[1] [2023] 153 taxmann.com 723 (Kolkata - Trib.), Assessment Years 2018-19 and 2020-21
[2] Article 12(5) – “Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is ……a resident of that State. Where, however, …. the fees for technical services relate to services performed, within a Contracting State, then such …. fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed. ……”.
[3] Outotec (Finland) Oy v. DCIT [2019] 109 taxmann.com 69 (Kol.-Trib.)
