Delhi Tribunal holds offshore services provided by the German entity are connected to its Indian PE, but exempt from tax in terms of Protocol to India-Germany tax treaty

This Tax Alert summarizes a recent Delhi Tribunal (Tribunal) decision in case of Fraport A.G. Frankfurt Airport Services Worldwide (Taxpayer) wherein the issue arose on the taxability of income earned by the Taxpayer in relation to services provided by it from Germany, under the India-Germany Direct Taxation Avoidance Agreement (tax treaty). In the facts of the case, the Taxpayer, a German corporate entity, was engaged in providing airport management and operation services to its customers in India, for which it had set-up a project office in India which constituted a permanent establishment (PE) of the Taxpayer. In this respect, certain consultancy services were provided directly by the Taxpayer from Germany (offshore services) which were inextricably connected to the overall services of management of the airport for Indian customers. Indian tax authority considered the income from offshore services as Fees for Technical Services (FTS), which is not effectively connected to Indian PE. Such offshore income was thus held taxable as FTS in India under the tax treaty as well as Indian tax laws (ITL). 

On appeal, accepting the claim of the Taxpayer, the Tribunal held that even though offshore services may be technical in nature so as to trigger taxation as FTS, such FTS is effectively connected to the PE due to its integral nature wherein the offshore services cannot be rendered without the involvement of the PE. Accordingly, such services are to be taxed under the provisions of the tax treaty as business income and not under a special article of FTS. Further, in terms of Paragraph 1(b) of the Protocol , income derived from planning, project, construction or research activities and income from technical services exercised in Germany needs to be excluded from being attributed to PE in India. Such services, hence, are neither chargeable as FTS nor as business income, thus rendering them tax free. Consequently, the Tribunal remanded the matter back to the tax authority to examine the nature of services and whether it falls under the scope of the Protocol.