2016 (9) TMI 650 - AAR - Income Tax

TDS u/s 195 - Chargeability to tax in India as fees for included services - Taxability of the consideration paid by Northwest in favour of the applicant for the services which it provides or as agree to provide - India-US DTAA - exemption from taxation - P.E. in India Held that - The applicant has provided all certificates including the certificate of its incorporation and has filed them as Exhibit-1 before us. From the certificate, it is clear that it is an educational institution for carrying on charitable and educational activities allowed by law. These Articles of incorporation were in respect of Newco Executive Education institution which ultimately transformed into UC Berkeley Centre for Executive Education. We, therefore, do not have any doubt that the applicant is an educational institution. Shri Sachit Jolly the learned counsel appearing for the applicant also invited our attention to page No. 5, which has been issued by the Department of the Treasury Internal Revenue Service, Philadelphia PA-19255 which is the certificate issued showing that the applicant is an exempt organization under Section 501(C)(3) of US Internal Revenue Code, or a religious or apostolic organization under Section 501(d). The learned counsel points out that this will be clear to support his contention that the applicant is an educational cum charitable institution. These certificates are countered by the Revenue. The other objection of the Revenue was that all the faculties provided for educating is provided by Berkeley University and not by the applicant. The learned counsel points out that in fact the applicant is a child of Berkeley University and is created and owes its existence to that University but for which the faculty of the Berkeley University would not be available in India on its behalf. We are quite convinced by this argument and we would choose to reject the objections by the Revenue. The other insignificant objection by the Revenue was that these professors who come for a short period are well accommodated by Northwest India which creates a Permanent Establishment of the applicant in India. We have mentioned this objection only for being rejected. The Authority in its Ruling in Eruditus had also held that there not be a Permanent Establishment even if the Faculty is provided by the non-tax resident INSEAD. We would choose to go by that finding. Thus the programme fee received by the applicant from Northwest would be governed by Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA) and would be free from the taxability. There would, therefore, be no necessity to withhold the tax under Section 195 of the Income Tax Act, 1961. Also there would be no Permanent Establishment in India.

Summary

Issues: Taxability of program fee under India-US DTAA and establishment of Permanent Establishment in India.

Analysis:
1. Taxability of Program Fee under India-US DTAA:
- The applicant, a California based non-profit public benefit corporation, entered into a Program Delivery Agreement with an Indian company to launch a management program for senior executives in India.
- The applicant raised questions regarding the taxability of the program fee received under the agreement as per Article 12 of the India-US DTAA and Section 9(1)(vii) of the Income Tax Act.
- The key contention was whether the program fee constituted fees for included services under Article 12(5) of the DTAA, which exempts fees spent on teaching in educational institutions from taxation.
- The Revenue argued that the applicant was not an educational institution and lacked its own faculty for teaching, relying on the fact that the faculty was provided by the University of California, Berkeley.
- The Authority referred to a previous ruling involving a similar scenario and held that the applicant qualified as an educational institution, and the fees for services provided were exempt from tax under the DTAA.
- The Authority rejected the Revenue's objections, emphasizing the applicant's educational nature and its compliance with charitable and educational activities allowed by law.

2. Establishment of Permanent Establishment in India:
- The second issue revolved around whether the activities undertaken by the applicant in India, specifically teaching for five days, constituted a Permanent Establishment (PE) as per Article 5 of the India-US DTAA.
- The Revenue contended that the faculty provided by Berkeley University created a PE for the applicant in India, but the Authority rejected this claim.
- The Authority highlighted that the applicant being a child of Berkeley University and relying on its faculty did not establish a PE in India.
- Referring to the earlier ruling, the Authority confirmed that even if the faculty was provided by a non-resident entity, it did not create a PE.
- Consequently, the Authority concluded that there was no Permanent Establishment in India for the applicant based on the activities conducted.

In conclusion, the Authority ruled in favor of the applicant, stating that the program fee received from the Indian company was exempt from tax under the India-US DTAA. Additionally, the Authority determined that the applicant did not have a Permanent Establishment in India based on the activities and faculty arrangements, thereby disposing of the application.