2009 (5) TMI 35 - AAR - Income Tax

Agreement with HMI, USA for transfer of knowledge and experience - Whether Tax is to be deducted by SREHT, India at source U/s. 195 on the payments made on account of annual contract fee and additional fee to HMI, USA, when both the parties are exempt from tax in their respective countries - a clear picture of the activity and payments does not emerge from the facts available - As the applicant makes lump sum payment for various services rendered by HMI, it is not possible for us to say what amount relates to which particular service - we cannot give ruling that the applicant is not at all liable to deduct any tax at source

Issues Involved:
1. Tax Deduction at Source (TDS) on payments made by SREHT to HMI.
2. Applicability of Article 12 of the DTAA between India and the USA.
3. Classification of the payments as "fees for included services" or for "teaching in or by educational institutions."

Detailed Analysis:

1. Tax Deduction at Source (TDS) on payments made by SREHT to HMI:

The primary question addressed was whether SREHT, India, is required to deduct tax at source under Section 195 of the Income-tax Act, 1961, on payments made to Harvard Medical International (HMI), USA, given that both entities are tax-exempt in their respective countries. SREHT argued that since HMI is not liable to tax in India and has no place of business in India, the payments should not be subject to TDS. However, the Revenue contended that HMI is not exempt under the Act and that the payments fall under section 9(1)(vii) of the Act, making them chargeable to tax.

2. Applicability of Article 12 of the DTAA between India and the USA:

The applicant relied on Article 12 of the DTAA, particularly para 5(c), which excludes amounts paid for teaching in or by educational institutions from the definition of "fees for included services." SREHT argued that the payments to HMI fall under this exclusion. The Revenue, however, argued that the payments, described as "annual alliance development and administrative/maintenance fee," are not purely for teaching and thus do not qualify for the exclusion under Article 12.5(c).

3. Classification of the payments as "fees for included services" or for "teaching in or by educational institutions":

The Authority examined the contractual arrangements and the nature of services provided by HMI. The agreement between SREHT and HMI included educational and teaching services, intellectual property rights, and administrative fees. The Authority noted that the invoices provided by SREHT did not break down the payments into specific services, making it difficult to determine the exact nature of each payment.

The Authority referred to examples 10 and 11 of the Memorandum of Understanding (MOU) appended to the DTAA, which clarified that tuition fees paid for teaching by an educational institution are excluded from "fees for included services." However, the Authority found that the facts presented by SREHT were insufficiently detailed to make a definitive ruling. They observed that workshops, seminars, teleconferencing, and e-learning activities could be considered teaching if they involve HMI faculty and benefit students pursuing courses at SREHT.

Conclusion:

The Authority concluded that it could not definitively rule that SREHT is not liable to deduct any tax at source for payments made to HMI. They suggested that SREHT should apply to the assessing officer under Section 195(2) of the Act to determine the appropriate portion of the payment chargeable to tax. The assessing officer would then decide the proportion of the payment subject to TDS based on further scrutiny and the observations made in the ruling.

Pronouncement:

The ruling was pronounced on May 29, 2009.

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