We are pleased to
release a Tax Alert which summarizes a recent ruling of the Supreme Court (SC),
in the case of GVK Industries Ltd. (Taxpayer), wherein the issue before
the SC was whether success fee charged on fund-raising services by a
nonresident entity is taxable as fees for technical services (FTS) under the
Indian Tax Laws (ITL). The SC ruled that the phrase “FTS” has been
defined under the ITL to mean managerial, technical or consultancy services.
The term “consultancy” is generally understood to mean an advice/opinion.
As the nonresident entity possessed skill, acumen and knowledge for providing
an advice/opinion, the specialized services fall within the ambit of
“consultancy” services and, thus, are FTS in nature.
Indian companies frequently raise funds from abroad owing to regulatory ease and tax incentives. It is a common practice to avail services of a nonresident loan facilitator/investment banker to liaison with lenders and other agencies.
The definition of FTS under the ITL has been the subject of scrutiny by various Courts in India. This SC decision clarifies the meaning of the term “consultancy” to mean an advice/opinion. As the meaning ascribed to the term “consultancy” is from the highest Court in India, the same is binding on the lower Courts/Tax Authority.
This SC decision was restricted to the provisions of the ITL. In an appropriate case, it may also be useful to refer to the definition of FTS under relevant tax treaties. Generally, the definition of FTS under many tax treaties of India is similar to the definition under the ITL. However, certain additional conditions such as “make available” etc., are incorporated in certain tax treaties, which are required to be satisfied in order to allow India the right to tax as a source country. Also, some tax treaties may not have reference to consultancy services. Where such additional conditions are not met, even if the payment satisfies the test of being managerial / technical / consultancy, the payment should not be taxable in India as FTS
Indian companies frequently raise funds from abroad owing to regulatory ease and tax incentives. It is a common practice to avail services of a nonresident loan facilitator/investment banker to liaison with lenders and other agencies.
The definition of FTS under the ITL has been the subject of scrutiny by various Courts in India. This SC decision clarifies the meaning of the term “consultancy” to mean an advice/opinion. As the meaning ascribed to the term “consultancy” is from the highest Court in India, the same is binding on the lower Courts/Tax Authority.
This SC decision was restricted to the provisions of the ITL. In an appropriate case, it may also be useful to refer to the definition of FTS under relevant tax treaties. Generally, the definition of FTS under many tax treaties of India is similar to the definition under the ITL. However, certain additional conditions such as “make available” etc., are incorporated in certain tax treaties, which are required to be satisfied in order to allow India the right to tax as a source country. Also, some tax treaties may not have reference to consultancy services. Where such additional conditions are not met, even if the payment satisfies the test of being managerial / technical / consultancy, the payment should not be taxable in India as FTS
No comments:
Post a Comment