2011 (5) TMI 256 - AAR - Income Tax

Determination of taxable income - The salaries are paid out of the income of GTE-OC - The total income of GTE-OC may be the sum total of receipts under different heads of income, for example business, royalties, fees for included services, house property, interest, dividends etc. but the expenditure incurred by way of salaries to the employees cannot ipso facto determine the nature of the income which is to be brought to tax either under the Act or under the DTAA in the hands of GTE-OC - Hence, the amounts paid by the applicant to GTE-OC represent income in the hands of GTE-OC - Accordingly charged to tax within the provision of section 195 of the Act. Fees for Included Services (FIS) -the memorandum of understanding of the DTAA it is clear that the services which are not in the nature of technical services, the make available clause would not apply - As the services provided by GTE-OC are in the nature of managerial services, the payments made by the applicant are covered under fees for included services under Article 12 (4) of the DTAA - As the services are managerial in nature, the payments are also covered under fees for technical services as defined under Explanation 2 to section 9(1)(vii) of the Act - Held that Fees for Included Services (FIS) is taxable at the rate of 20% as provided under Article 12(4)(b) of the DTAA.

Issues Involved:
1. Whether the amounts reimbursed by the applicant to GTE-OC are "income" accruing to GTE-OC and liable for tax deduction under section 195 of the Indian Income Tax Act, 1961.
2. Whether the amounts reimbursed qualify as "Fees for Included Services (FIS)" under the Act and the India-USA Double Taxation Avoidance Agreement (DTAA).
3. Whether GTE-OC has a Permanent Establishment (PE) in India under the DTAA and if the amounts received are "business profits" attributable to such PE.
4. If GTE-OC has a PE, whether the taxable income is NIL since the reimbursements are at actuals.
5. The applicable rate of tax deduction at source if the amounts are considered income.

Detailed Analysis:

Issue 1: Income Accruing to GTE-OC and Tax Deduction under Section 195
The applicant, VDSI, reimburses GTE-OC for salary and expenses paid to expatriate employees seconded to India. The applicant argued that these payments are mere reimbursements and should not be subject to tax withholding under section 195, as they do not constitute income for GTE-OC. However, the ruling determined that the amounts reimbursed by the applicant represent income accruing to GTE-OC. The reasoning is that the seconded employees remain employees of GTE-OC, and their salaries are paid out of GTE-OC's income. The nature of the payments, despite being labeled as reimbursements, constitutes income for services rendered by GTE-OC to the applicant. Thus, the amounts are subject to tax deduction under section 195. The question was answered in the affirmative.

Issue 2: Qualification as "Fees for Included Services (FIS)"
The applicant contended that the services provided by the seconded employees were managerial and not technical, thus not qualifying as FIS under the DTAA. However, the ruling found that the managerial services rendered by GTE-OC through its employees fall under "fees for included services" as defined in Article 12(4) of the DTAA. The services provided involve managerial control and direction, which are considered consultancy services under the DTAA. The ruling clarified that the make available clause does not apply to managerial services, and thus, the payments are taxable as FIS. The question was answered in the affirmative.

Issue 3 and 4: Permanent Establishment and Business Profits
Since the amounts reimbursed are taxable as FIS, the questions regarding the existence of a Permanent Establishment (PE) of GTE-OC in India and whether the amounts received are business profits attributable to such PE became academic. Therefore, no detailed analysis was provided for these issues.

Issue 5: Rate of Tax Deduction at Source
The ruling determined that "Fees for Included Services (FIS)" under Article 12(4)(b) of the DTAA are taxable at the rate of 20%. This rate applies to the amounts reimbursed by the applicant to GTE-OC for the services rendered by the seconded employees. The question was answered by specifying the applicable tax rate.

Conclusion:
The ruling concluded that the amounts reimbursed by the applicant to GTE-OC are considered income and are taxable under section 195 of the Act. These amounts qualify as "Fees for Included Services" under the DTAA and are subject to a 20% tax rate. The questions regarding the Permanent Establishment and business profits were deemed academic due to the determination that the payments are taxable as FIS.

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