Understanding TDS on International Foreign Technical Service fees paid.

As per section 195 any sum paid to non- resident by any asseseee is subject to TDS if such income is taxable in India .  Out of all the payments, Fees for technical services (FTS) is the most complex one. The Indian payer in most of the cases is required to borne the cost of TDS as foreign service services provided not agree with India TDS obligation on them. Thus TDS on

FTS is a cost to Indian business and further it a question whether the FTS is taxable or not and if taxable then at what rate.

FTS has been defined under section 9 of the Income tax act, 1961- lets summaries the same below first before the discussion.

Income deemed to accrue or arise in India.

                (vii)  income by way of fees for technical services payable⁵⁷ by—

     (a)  the Government; or

     (b)  a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

      (c)  a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:

                ⁵⁸[Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.]

                ⁵⁹[Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.]

                Explanation ⁶⁰[2].—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 construction⁶¹, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.]

(2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India.

From a combined reading of clause (vii)(b) of section 9(1) and Explanation 2 it becomes clear that any consideration, whether lump sum or otherwise, paid by a person, who is a resident in India, to a non-resident for running any managerial or technical or consultancy service, would be income by way of fees for technical service and, would, therefore, be within the ambit of ‘income deemed to accrue or arise in India’. - G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564 (AP).

Thus from the above it is known that FTS paid to international services provider are subject to TDS in India under section  195. The anwer of next question is in respect of rate of tax. The rate of tax is 25% in case to international services provider does not have India PAN and his own country tax residency certificate (TRC). In case they have both, then Indian payer can take the benefit available in DTAA.

Now let us read few important case laws whose judgement passed recently.

ITAT Mumbai in the case of Ashapura Minichem vs. ADIT decided that Fees for Technical service eventhough rendered outside India, deemed to accrued in India, if the service is received in India and hence taxable.

            In the case of Jindal Thermal Power Co, 182 Taxmann 252, it was held that The deductor of TDS (i.e. the payer) is entitled to question the imposition of tax liability on the payee. In order to impose liability on a non-resident assessee for income from services rendered to an Indian party, u/s. 9 of the Act, it is imperative that services are rendered in India and are also utilised in India- the twin conditions have to be To this extent, the newly inserted Explanation to s. 9 does not disturb the ratio of the Supreme Court’s decision in Isshikawa Jima Harima.

            Purchase of technical know how by foreign company, was business receipt. As there was no permanent establishment in India, the same was not liable to be taxed in India, though the same was treated as ‘royalty’. Refer, Vesil SPA Italy vs. Jt. CIT.

            Canadian company providing consultancy services to Indian Government organisation . Technical drawings furnished by canadian company and fees received were fees for included services within the meaning of article 12(4) of DTAA and hence Fees not assessable under section 9. Refer, DIT v SNC lavalin International INC, 332 ITR 314.

            Assessee is engaged in the manufacture of steel wheels for commercial vehicles, passenger cars ,utility vehicles , earth moving construction equipment , agricultural tractors and defence vehicles. Assessee developed the new process of manufacturing steel wheels for trucks etc, however it did not have requisite know how for designing the machine capable of manufacturing the product as patented process. Assessee approached the two US Companies which had the required knowledge. Assessee made advance payment in respect of entire services under the agreement were rendered outside India and hence no income chargeable to tax in India. The Tribunal held that in terms of Article 12(4) of India US tax treaty, payment made to US company for ‘developing tooling’ and ‘validating new process for manufacture’ of wheels for commercial vehicles is ‘fees for included services’. Refer, Wheels India Ltd. vs ITO, ITA No. 1792/Mds./2006, dt.19‐04‐2011, A.Y. 2005 – 2006, Chennai ITAT.

            In the case of Lanka Hydraulic Institute Ltd, 337 ITR 47, it was held that Services involving field data collection, desk study and mathematical model study and technology transfer involving transfer of software is FTS and hence taxable under DTAA

Delhi High court in the case of DIT v. Guy Carpenter & Co Ltd held that Income deemed to accrue or arise in India-Fees for technical services- Make available- DTAA-India-UK- To “make available” technical knowledge, mere provision of service is not enough; the payer must be enabled to perform the service himself.

The assessee is a foreign company located in Singapore providing services to various clients all over the world for development of Balance Score Card (BSC) project. The AO held that the receipts to be divided into two parts : charging one as royalty for sale of software and other as professional fees from rendering the said services. On appeal before Tribunal it was held that the software used by assessee cannot be considered independent, but part of services rendered by assessee to client. It was held that the fees for designing of BSC was Fees for Technical services as per provisions of Article 12 of India- Singapore DTAA as the assessee made available the knowledge for using BSC for their business purposes for meeting their long term targets and benefit ran into future. (A.Y. 2007-08). Refer, Organisation Development Pte. Ltd. v. Dy. DIT, 50 SOT 421 (Chennai).

In the case of Spectrum Geo Limited , In re, 346 ITR 422, it was held that, providing technical personal covered under FTS.

However, in the case of Assistant CIT v. Viceroy Hotels Ltd., it was held that Consultancy agreements with non-resident companies for making interior and exterior changes is not a transfer of technology and hence not assessable for tax in India.

The assessee was a US company specialized in providing highly qualified technocrats and technology relating to telecom sector and higher solutions in telecom engineering services. The assessee entered into an agreement with an Indian company for providing qualified technocrats for its project in India. It was held that as it was clear from various clauses of agreement that it was a contract for providing technical experts and making available expertise of assessee in this field, hence the service rendered assessee clearly fell within purview of clause 4(b) of Art 12 of Indo- US DTAA, and thus amount received in respect of said services was taxable in India as fees for included services. (A.Y. 2003-04). Refer, Avion Systems Inc. v. DDIT, 138 ITD 57 (Mum.) (Trib.).

Where consultancy charges were paid by the Indian Company to non-resident consultants rendering services on Indian Company’s offshore projects, source rule exclusion carved out u/s 9(1)(vii)(b) is applicable even though the payments are made from India. (A.Y. 2008-09). Refer, Ajappa Integrated Project. V. ACIT, ITA No.349/Mds./2012, Dt.25-06-2012, BCAJ Pg. 38, Vol. 44-A Part 5, August, 2012. (Chennai)(Ttib.). 

Assessee, tax resident of Japan, executed offshore design contract awarded by Indian companies in India. Since assessee had rendered services which were technical in nature, revenue earned by assessee was in nature of fees for technical services. On facts, fees for technical services were payable by persons who were resident in India, income of fees for technical services in question was taxable in India as per section 9. however, since lower authorities had not considered article 12 of DTAA in light of terms and conditions of contract to arrive at finding that income in question was taxable even under Indo-Japan DTAA, this issue was to be remitted to record of AO. Rendering of service is not a precondition for attracting section 9(1)(vii) when fees for technical services are payable by a person who is resident in India.

Assessee made use of assistance rendered by foreign company in its decision making process for management. Foreign company was also giving training to assessee's employees. Held, service falls under definition of technical services and tax was deductible at source. 

Non-resident --Wholly owned foreign subsidiary of Indian company--Contracts procured by Indian company and subsidiary carrying out work for Indian company--Payment by Indian company to subsidiary is fees for technical services--No technical knowledge made available to Indian company--Payment not taxable in India--Income-tax Act, 1961, ss. 9(1)(i), (vii), 195--Double Taxation Avoidance Agreement between India and Australia, art. 12(3)(g)—

The assessee had entered into a master clinical services agreement with its Associate Enterprise for clinical trials and the assessee had arrangement with CSPL to provide information on clinical trial test. The Assessee applied for Certificate for non deduction of holding tax for remittances to CSPL. The A.O. held that the payment was in the nature of royalty and was liable to be taxed. The CIT(A) decided in the favour of the assessee and the Tribunal upheld the order of the CIT(A). The Tribunal held that the assessee is making remittance for procurement of commercial information for onward transmission to the principal, it is viewed that the remittance is not for availing technical services and does not amount to royalty and is not liable for withholding taxes as held by the A.O

Merely providing employees or assisting the assessee in the business and in the area of consultancy, management, etc. would not constitute making available the services of any technical or consultancy nature. Fees for technical services means payment of any kind to any person in consideration for service or services of technical nature if such services make available technical knowledge, experience, skill know-how or process which enables the person acquiring the services to apply technology contained therein. Thus, expatriation of employee under a secondment agreement without transfer of technology would not fall under the term make available under Article 13(4)(c) of the DTAA.

Non-resident--Taxability in India--Deduction of tax at source--Fees for technical services--U. K. consultant to deliver fabric designs for cotton shirting to assessee--Consultant required to make available all documents and reports and to provide detailed quantity report in writing to assessee with specific or new designs developed by consultant--Design supplied by consultant becoming property of assessee--Payment is fees for technical service--Assessee liable to deduct tax at source

After reading the above tax rulings followings can be summarised.

1.    FTS taxable in India if services received in India.

2.    Definition of business income and FTS / Royalty provided in DTAA prevails over definitions provided in section 9.

3.     In some DTAA (i.e US) FTS is only taxable when there is make available. Make available means transfer of technology. 

4.    Refer article 12 of the DTAA

Hope the above small summary will help Indian entrepreneurs to decide about taxation of their foreign tax payment.  You can ask your tax query to me at taxbymanish@yahoo.com

Thank you.