The Indian Income Tax Appellate Tribunal (ITAT) delivered a ruling dated 4 July 2008 in the case of Assistant Director of Income Tax v. Chiron Behring Gmbh & Co. (2008-TIOL-419-ITAT-MUM) on whether a German limited partnership firm would be eligible to apply the beneficial provisions of the India-Germany tax treaty (the Tax Treaty) for taxability of income earned in India.
(a) Facts. The Taxpayer (i.e. Chiron Behring Gmbh & Co.) was a German limited partnership firm. The Taxpayer received royalty and fees for technical services (FTS) from an Indian company and filed a tax return in India declaring the income. The Taxpayer also submitted that it was chargeable to "trade tax" in Germany which was a tax covered under Art. 2 of the Tax Treaty. The Taxpayer also produced a German tax residency certificate and claimed that the lower rate of tax (i.e. 10% as contained in Art. 12 of the Tax Treaty should be applied to the royalty income and FTS.
However, the tax authorities took the view that the Taxpayer was not entitled to the lower rate of tax under Art. 12 of the Tax Treaty as it was not a resident of Germany since the "trade tax" paid by it was in the nature of tax on turnover and not tax on income, and that limited partnerships are not liable to tax in Germany. The tax authorities relied on the Commentary to the OECD Model Convention which indicated that tax on limited partnerships was the liability of the partners and not of the firm and therefore only the partners and not the firm would be entitled to tax treaty benefits. Therefore, the provisions of the Tax Treaty would not apply and its taxability will be governed by domestic tax laws of India as contained in Indian Income Tax Act 1961 (ITA).
On appeal, the Commissioner of Income Tax (Appeals) accepted the Taxpayer's claim and held that it was entitled to the benefit of the Tax Treaty as it was a resident of Germany. The Commissioner of Income Tax (Appeals) relied on the translated version of Arts. 6 to 11 of the German Trade Tax Act and further held that the "trade tax" was not a turnover tax but was computed on the profits of the business. The tax authorities then appealed to the ITAT.
(b) Issue. The issue before the ITAT was whether the lower tax rate of 10% on royalty and FTS as contained in the Tax Treaty should be applied to the Taxpayer.
(c) Decision. The ITAT held that the Taxpayer was entitled to apply the beneficial provisions of the Tax Treaty in respect of income earned in India. The ITAT observed that:
| - | the Taxpayer was a "person" covered in Art. 3(d) of the Tax Treaty as "any other entity" and was a resident of Germany as a limited partnership firm. The "trade tax" paid in Germany would fall under Art. 2(3)(a) of the Tax Treaty which states the taxes to which the treaty applies; | |
| - | Art. 6 of the German Trade Tax Act states that trade tax is a tax on income from business and not tax on turnover as (wrongly) held by the tax authorities; and |
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| - | with respect to reliance placed by the tax authorities on Commentary to the OECD Model Convention, the ITAT held that when the language of a tax treaty is clear and unambiguous, there is no need to refer to any external source of interpretation like Commentaries and foreign decisions. They only have a persuasive value and cannot override the specific provisions of a tax treaty. |
Accordingly, the ITAT concluded that the Taxpayer was entitled to the benefits of the Tax Treaty and could apply the tax rate of 10% on royalty and FTS earned in India.