2010 (3) TMI 114 - AAR - Income Tax

Income from referral service - DTAA with UK - the nature of services to be provided by the applicant in India are stated to be two-fold; (i) recruitment services where the applicant would place a candidate with an Indian company and receives payment for providing such service from the Indian company; (ii) referral services where the applicant would refer potential Indian clients to a third party based in India (likely to be another Indian-based recruitment agency) for which the payment will be received by applicant from the third party in India. - Whether the payments received by the applicant for the proposed recruitment services and referral services from the Indian clients is liable to tax withholding under section 195 of the Income-tax Act, 1961 read with Double Taxation Avoidance Agreement between India and UK? Held that - If the payments received by the applicant are not in the nature of royalty or FTS then, they can be subjected to Indian income tax in terms of Art.7 of the Tax Treaty only if the income results from a business activity carried on through a permanent establishment situated in India. The term permanent establishment (PE) has been defined in Art.5. On the facts stated by the applicant, it cannot be said that the applicant operates through a permanent establishment in India. Catering to the function of referring the potential Indian candidates to the Indian based recruitment company without creating any commitment to recruit them does not, without anything more, give rise to an inference of PE. For rendering such services, a fixed place of business in India or dependent agent need not necessarily be there. The applicant has clarified that it has really no office or business place in New Delhi and that the address in New Delhi is basically a virtual office . Evidently, it means that the address and phone number is given so as to serve as a contact point and for some routine work of inconsequential nature. - the receipts in the nature of referral fee from the Indian based recruitment company cannot be subjected to tax as business profits in view of the provisions of the Treaty.

Summary

Issues:
Whether payments received by the applicant for recruitment and referral services from Indian clients are liable to tax withholding under section 195 of the Income-tax Act, 1961 read with the Double Taxation Avoidance Agreement between India and UK.

Analysis:
1. The applicant, a UK-based company, provides recruitment and referral services in India. The contention is that payments received for these services are not taxable in India due to the absence of a permanent establishment and the provisions of the India-UK Tax treaty.

2. The Commissioner argues that the applicant has not proven the absence of a permanent establishment in India. It is suggested that the applicant's database services constitute consultancy services, attracting fees for technical services under the tax treaty.

3. The applicant clarifies that it operates through a virtual office in India and confirms the absence of a physical presence, denying the existence of a permanent establishment.

4. The tax treaty defines 'fees for technical services' under Article 13.4, emphasizing the ancillary and subsidiary nature of such services. The Commissioner attempts to bring the applicant's income within this scope, but the Authority disagrees.

5. The Authority cites precedents and interpretations to explain that the applicant's services do not qualify as fees for technical services under the tax treaty. The sharing of candidates' experience for recruitment does not constitute making available technical knowledge or experience.

6. Referring to a previous ruling, the Authority concludes that the referral fees received by the applicant are not subject to tax withholding in India.

7. The ruling clarifies that the applicant's referral services do not create a permanent establishment in India, and thus, the income from these services is not taxable as business profits under the tax treaty.

8. However, the ruling does not extend to the recruitment services as the applicant did not provide sufficient details. The Authority declines to give a ruling on this aspect.

9. In summary, the Authority rules that the payments received by the applicant for referral services from Indian clients are not liable to tax withholding under section 195 of the Income-tax Act, 1961 read with the India-UK Tax treaty.

This comprehensive analysis covers the issues raised in the judgment, providing a detailed explanation of the Authority's decision regarding the tax implications of the applicant's services in India.