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.
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