Is TDS applicable to foreign consultant who renders service outside India (namely in USA). Foreign consultant is US based and does not have PE in India.

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· First point before us for consideration is to decide whether the Income of the International Software Consultant is taxable in India or not?

a. As per the recent amendment in section 9 of Income tax act 1961proposed by finance bill 2010, as passed by Loksabha on 29th April 2010;all payments made to a non-resident outside India shall be taxable in India regardless of the fact that whether the services have been rendered in India or not. It is the situs of the payer and situs of utilization of service which is relevant now and not the situs of rendering service.

The extract of amendment is as follows:

In section 9 of the Income-tax Act, for the Explanation occurring after sub-section (2), the following explanation shall be substituted and shall be deemed to have been substituted with effect from the 1st day of June, 1976, namely:—

“Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.”.

The payment being made by the company to the International Software Consultant Squarely falls within the ambit of above amendment since it is a payment for technical services as covered in explanation 2 to clause (vii) of sub-section (1) of section 9 of Income tax act.

The relevant extract of section 9 which talks about ‘Income deemed to accrue or arise in India’ is as follows:

“Explanation -For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".”

 

 

b. Another point to be noted here is that the DTAA provisions for the granting of relief to the non resident comes into picture, not at the time of deciding the taxability of non resident in India; but at the time of deciding the rates/relieves available to him. If the income is taxable as per the Indian Law, then the Non resident can opt for the provisions of the DTAA for extinction or marginalizing the liability so created

In view of the above discussion it is clear that the International Software Consultant is taxable in India and hence is liable for deduction of tax at source on all payments received by it. The implications of the above conclusion are as follows:

1. The international Software Consultant is required to file its Income tax return In India

b. It is required for the Indian company to take a certificate in form 15CB from a certified chartered accountant certifying the rates at which TDS on such payments has been deducted. Subsequently, it will have to upload a form 15CA online.The duly signed Form 15CA (undertaking) and Form 15CB (certificate), will be submitted in duplicate to the Reserve Bank of India / authorized dealer. The Reserve Bank of India / authorized dealer will in turn forward a copy the certificate and undertaking to the Assessing Officer concerned

· Second point to be considered is what should be the rate at which TDS needs to be deducted?

Section 195 of income tax act talks about the tax to be deducted at source on payments being made to non residents. It reads as follows:

“Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force”

The rates are to be decided in accordance with the provisions of DTAA. The rates as per Income tax act or as per DTAA; whichever is beneficial to the assessee shall prevail.

Now, as per the clauses of Indo-US DTAA, payments for professional/legal services are covered in Article 15 that reads as under:

 

 

 

“Article 12

ROYALTIES AND FEES FOR INCLUDED SERVICES

……....5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid :

………(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in article 15 (Independent Personal Services).

Article 15

INDEPENDENT PERSONAL SERVICES

1. Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State:

(a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities, in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State ; or

(b) if the person's stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year.

2. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.”

Where tax treaties define IPS to mean services rendered by a “resident”, the term could include, inter alia, individuals, corporate entities, etc. [MSEB v. DCIT 83 TTJ 325 (Bom)]

Since the International Software Consultant do not have a fixed base regularly available to it In India, nor its period of stay in India exceeds 90 days, there is no requirement to deduct TDS from payments made to it.

To have more understanding please refer the following case laws.

 

01.  Mumbai ITAT in the case of Ashapura Minichem Ltd V ADIT held that Utilisation of service in India is enough to attract taxability in India, however same has not been rendered in India and hence same is liable for TDS. Thus, utilisation of service is must in India. In the case of the assessee since the service had not been utilised in India and hence not liable for TDS in India.

 

02.  There are number on case laws on Commission where payment made to foreign agent is not taxable in India because service had not been served or utilised in India. Same basis must be utilised for the assessee .  Ref. Spahi Projects (P) Ltd., 26 DTR 303.

 

03.  Payment made by applicant to the UK company for providing international leg of the service in transmitting voice/data to places outside India using its international infrastructure and equipments is neither royalty nor fees for technical services: payment is in the nature of business profits and in the absence of PE of UK company in India, same is not taxable in India. Ref.  Cable & Wireless Networks India (P) Ltd 25 DTR 49 (AAR). Similarly, the foreign consultants use their international infrastructures to provide services on foreign projects of assessee and hence cannot be liable for  TDS in India.

 

04.  In the case of Linklaters LLP v ITO, 42 DTR (Mumbai) (Trib) 233., it was held that In view of Explanation to section 9 (1), as amended retrospectively by Finance Act, 2010, the fees for professional services earned by the assessee a UK based partnership firm, in connection with projects in India is taxable in India under the domestic law. Since, in the case of the assessee, the projects were outside India, same cannot be subject to TDS in India.