No Tax in India on Professional Service Receipts of German Resident: ITAT Mumbai on Article 14 of India–Germany DTAA

1. Background and Core Issue

The Mumbai Bench of the Income Tax Appellate Tribunal in Raj Ajudhianath Kaul Vs ITO examined whether consideration received by a German-resident individual for providing consultancy, managerial and business development services to Indian companies is:

  • taxable in India as Fees for Technical Services (FTS) under Article 12 of the India–Germany DTAA and Section 9(1)(vii) of the Income Tax Act 1961, or
  • exempt from tax in India as independent personal / professional services under Article 14 of the India–Germany DTAA, in the absence of a fixed base or sufficient days of stay in India.

The Tribunal concluded that the receipts in question represented independent professional services within the scope of Article 14, and hence were taxable only in Germany, not in India, as the conditions for source-based taxation in India were not satisfied.

2. Facts of the Case

2.1 Status of the assessee

  • The assessee is an individual, non-resident in India and tax resident of Germany.
  • He filed his Indian return of income for A.Y. 2018-19 on 19/06/2018 declaring income of Rs. 1,98,940.
  • For A.Y. 2019-20, reassessment proceedings were also initiated on similar facts.

2.2 Nature of services and payers

The assessee rendered services to multiple Indian entities, primarily:

  • M/s PI Industries Ltd.
  • M/s Sajjan India Ltd.

The work performed broadly included:

  • managerial and strategic inputs for business growth
  • consultancy in relation to business expansion and new product initiatives
  • support in identifying commercial opportunities abroad
  • marketing and business development assistance, including export-related market support
  • facilitating business connections and representation in Germany

Key features:

  • All substantive services were performed outside India, primarily in Germany.
  • Consideration was received directly in Germany.
  • The assessee disclosed such income to German tax authorities and paid tax there.

2.3 Amounts involved

For A.Y. 2018-19:

  • From M/s PI Industries Ltd. – Rs. 1,84,96,014 (on which TDS @ 10% was deducted treating it as FTS).
  • From M/s Sajjan India Ltd. – Rs. 98,87,500 (no TDS deducted; treated by assessee as export-related commission / market support).

For A.Y. 2019-20:

  • Disputed receipts from M/s Sajjan India Ltd. – Rs. 19,26,245.
  • There were also references to receipts from M/s PI Industries Ltd. and M/s Tagros Chemicals India Ltd. which, according to the assessee, pertained to earlier years and on which tax had already been deducted at source.

3. Assessment and Reassessment Proceedings

3.1 Reopening based on Insight Portal data

For A.Y. 2018-19:

  • The case was reopened based on information from the Insight Portal that M/s Sajjan India Ltd. had made remittances of Rs. 98,87,500 to the assessee against “consultancy services” without deducting tax at source.
  • AO noted that in proceedings under Section 201(1) and Section 201(1A) in the case of M/s Sajjan India Ltd., such payments were already treated as FTS.

For A.Y. 2019-20:

  • Notice under Section 148 was issued on 10-05-2023 on alleged escapement of income of Rs. 19,26,245.
  • The assessee challenged limitation under Section 149 and the validity of sanction under Section 151, contending that Pr. CIT Delhi had no jurisdiction as the assessee was assessed in Mumbai.

These jurisdictional/time-bar challenges were raised as grounds, though the Tribunal’s ultimate decision on core taxability under the DTAA made several of these issues academic.

3.2 Stand of the assessee before AO

The assessee broadly contended:

  1. Nature of income

    • Receipts from M/s Sajjan India Ltd. represented business support / market support services, akin to export commission, rendered entirely from Germany.
    • Receipts from M/s PI Industries Ltd. were for consultancy conducted from Germany, with income earned and received there.

  2. Not FTS under domestic law or treaty

    • The services did not involve “technical”, “managerial” or “consultancy” services in the sense contemplated in Section 9(1)(vii) and Article 12 of the DTAA.
    • No transfer of technical know-how, specialised technology, or technical training was involved.

  3. Source outside India

    • The activity and performance of services were situated outside India.
    • Income was offered and taxed in Germany based on residence and source principles.

  4. Treaty protection – Article 14

    • The assessee, being a German resident individual, performed independent professional services using his personal expertise, business knowledge and experience.
    • Under Article 14 of the India–Germany DTAA, income from such professional services is taxable only in the State of residence (Germany) unless:
      • there is a fixed base in the other State (India), or
      • the individual’s stay in the other State reaches or exceeds 120 days in the fiscal year.
    • In the present case:
      • no fixed base in India;
      • presence in India during the relevant year was only about 35 days.