Income characterization is one of the most important tax treaty aspects. If income is characterized as ‘business profits’, then Art. 7 (business profits) would apply. In that case, a foreign enterprise’s income would be taxable in the Source State only if and to the extent it is attributable to a permanent establishment (PE) there. But, if the income is characterized as ‘fees for technical services’ or ‘fees for included services’, then it may be taxable in the Source State in accordance with Art. 12 (Royalties and fees for technical/ included services) even in absence of a PE.

Service-providers are often required to possess, and apply, technical expertise in course of their regular businesses. Could that, per se, lead to characterization of their income as ‘fees for technical/ included services’ under relevant tax treaties? The Indian Income Tax Appellate Tribunal has recently examined this issue in the case of...