In the absence of FTS clause in India-Thailand DTAA, consultancy services cannot be treated as ‘Other income’ – Mum ITAT

McKinsey & Company (Thailand) Co. Ltd. v DDIT IT APPEAL NO. 7624 (MUM.) OF 2010 (Mumbai ITAT)


The assessee is part of McKinsey group of entities, the primary business of which is to render strategic consultancy services to their clients. The receipts amounting to Rs. 79,99,272 in the instant year for such services rendered by the assessee to its Indian counterpart were claimed as having been performed outside India and since these were rendered in the ordinary course of business, the same qualified to be a ‘business receipt‘. In the absence of the assessee having any Permanent Establishment (PE) in India, it was argued that no incidence of tax arose in India on this account.

The AO treated this amount as ‘Fees for technical services’ and hence chargeable to tax under Article 12 of the DTAA. 

DRP’s Order:

The Dispute Resolution Panel (DRP), vide its direction dated 28-07-2010, echoed the A.O.’s action in treating the receipts as ‘Fees for technical services’ includible under Article 12 of the DTAA. In its order, the DRP also referred to Article 22 of the DTAA. 

Assessee’s contentions:

  • Article 12 of the DTAA provides that : ‘Royalties arising in a Contracting State and paid to a resident of the other Contacting State may be taxed in that other State’.
  • There is no reference to the “Fees for technical services” in Article 12 of the DTAA. 
  • There is no dispute on the fact that the assessee has no PE in India. It is clearly borne out from the facts recorded in the assessment order that the assessee is in the business of rendering strategic consultancy services to their clients.
  • Paras of Article 12 of the DTAA deal with the meaning of the term ‘Royalties’ and the rate at which such income is to be taxed. Obviously, there is no reference to the “Fees for technical services” in Article 12 of the DTAA. Thus it is evident that the fee for technical services does not fall within the purview of Article 12.
  • As the business of the assessee is admittedly of rendering such services and the present receipt arises on account of providing such services to the Indian branch, the income would initially fall under Article 7, being the ‘Business profits’
  • A bare perusal of Article 22 makes it abundantly clear that it deals with residual items of income which are not covered in any of the earlier Articles of the Treaty. To put it differently, if an income is covered under one of the Articles then application of Article 22 is ousted on such income.
  • Article 12 deals only with ‘Royalties’ and not ‘Fees for included services’. Obviously, the application of Article 12 is ruled out. In that view of the matter, such income would remain included under Article 7 and will not move in the lap of Article 22, which deals with items of income not expressly dealt with in the other Articles of the DTAA.
  • As the assessee is a tax resident of Thailand, the business profits can be taxed in India only if the enterprise carries on business in India through a Permanent Establishment (PE) situated in India.
  • The amount falls under Article 7 as ‘Business profits’ and is hence not chargeable to tax because of the absence of any PE in India.

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