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Unravel the taxability of Fee for Technical Services (FTS). Navigate the complexities and understand the implications for informed financial decisions.

In the case of Treaties without FTS Clause

The FTS clause is generally there in treaties, barring a few such as Brazil, Thailand, Philippines, Greece, Mauritius and Zambia.

The key issues:-

(a) Whether a transaction gets covered under an Article dealing with ‘Business Profits’ or under the residuary Article ‘Other Income’? and/or

 (b) Whether the taxability needs to be evaluated under the Act?

Whether the taxability needs to be evaluated under Business Income or Other Income?

As a basic rule, specific provisions override general provisions. Hence, typically, in cases where a FTS clause is present in a treaty, the transaction is taxed under the specific FTS clause, unless FTS is effectively connected to the Permanent Establishment (‘PE’), in which case, it would be taxed as business profits under Article 7 of most of the treaties.

Typically, the ‘Business Profit’ covers profits earned by an enterprise in the source state through a PE in that state. The ‘Other Income’ Article covers income from any source that is not expressly dealt with by any other Article. Thus, if one considers the intent, ‘Business Profit’ is a specific provision compared to ‘Other Income’, which is residuary head.

Kolkata Tribunal in the case of Dy. CIT v. Andaman Sea Food (P.) Ltd  [2012] 22 400/ 52 SOT 562 (Kol.) While the evaluation was in the context of the treaty between India and Singapore having a narrow FTS definition, it is relevant in the current context:

  • When a treaty does not provide a right to the source state to tax a particular type of income, it cannot be taxed under the residuary head ‘Other Income’. If such income is taxed under the head ‘Other Income’, it will render allocation of taxing rights redundant.
  • Items of income such as alimony, gambling, lottery income etc. are to be taxed under the residuary head ‘Other Income’. If income arises from normal business operations, it ought to be taxed under the head ‘Business Profits’ itself.:
  •  Hence, income, which does not fall within the FTS clause or where there is no FTS clause in treaty, ought to be taxed only when the payee has a PE in India.

Whether the taxability under ‘other Income’ clause of DTA?

Lanka Hydrolic Institute Ltd. In re (2011) 337 ITR 47 (AAR)

Electrical Material Centre Co. Ltd v. DDIT TS-451-ITAT-2017 (Bang)

Whether the taxability needs to be evaluated under the Act?

As we know, all treaties entered into by India provide that any term not defined in the treaty shall have the same meaning as that of the domestic law of the source country in which taxes arise. Drawing an analogy from this, the Courts have questioned this part and the key issue that arises for consideration is whether the provisions of the Act will apply if there is no FTS clause in the treaty. The Madras Tribunal, in the case of Dy. CIT v. TVS Electronics [2012] 52 SOT 287/22 215 (Chennai)  , held that if a treaty is silent on a particular type of income, such income cannot be automatically construed as ‘Business Profits’ and reference should be made to the provisions of the Act.


Based on the judicial precedents and general rules of interpretation of the treaties, a view could be adopted that in the absence of a specific FTS clause, the income ought to be considered as ‘Business Profits’ or ‘Other Income’, depending on the nature of the transaction and its nexus with the activities of the business of the service provider. Furthermore, a view could be adopted that taxing such a transaction under the Act could be misplaced and against the intent of distribution rights agreed during the treaty negotiations. However, keeping in mind the inscrutable approach of the tax authorities, the possibility of litigation cannot be ruled out. One would expect to gain greater clarity and hopes that a uniform approach will be adopted by the tax authorities/judiciaries to alleviate tax payers from the uncertainty.

Other relevant – Tekniskil (Sendirian) Berhard v. CIT (1996) 222 ITR 551 (AAR); Bangkok Glass Industry Co. Ltd. v. ACIT [2013] 34 77/215 Taxman 116 (Mag.) (Mad.); McKinsey & Co. (Thailand) Co. Ltd. v. Dy. DIT (IT) (2013) 36 375 (Mum.); Channel Guide India Ltd v. Asstt. CIT [2012] 139 ITD 49/25 25 (Mum.)

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