2012 (4) TMI 74 - AAR - Income Tax

DTAA - No PEs - Fees for technical services - Whether, on the facts and circumstances of the case, the payments received/receivable in connection with following costs incurred/proposed to be incurred for and on behalf of X India, are chargeable to tax in India - the payment received/receivable by the applicants in connection with the IVTC services are in the nature of technical services and taxable as FTS under section 9(1)(vii) of the Income-tax Act and that the exception provided in section 9(1)(vii)(b) is not available to the applicants - applicants have opted for and are entitled to avail the beneficial provision of the DTAA entered into by India with the respective countries of their residences - Technical services rendered by the affiliates do not make available technical knowledge, experience, skill, know-how or process while preparing these reports for their clients, X India / Indian customers - Held that The payments received / receivable by the applicants in connection with IVTC Services are chargeable to tax as FTS under section 9(1)(vii) of the Act, but not under the provisions of Article on Royalties and fees for technical services under the respective DTAAs or when the said Article is read with the MFN clause, which has to be taken as part of the Convention In the absence of a provision on FTS, the amount received by the applicants would be taxable as business income under Article 7 of the DTAA. As the applicants do not have a PE in India, the amount received would not be taxable as business income - FTS shall be governed by Article 22 of the Tax Treaty and not as per Article 7 of the Tax Treaty that deals with taxation of business profits - Rulings are given

Issues Involved:
1. Taxability of payments received/receivable for IVTC services as "fees for technical services" (FTS) or "royalty" under the DTAA.
2. Applicability of Section 9(1)(vii)(b) exception of the Income-tax Act.
3. Taxability of payments received/receivable for services provided.
4. Taxability of payments received/receivable for costs incurred on behalf of X India.
5. Taxability of recovery of administrative costs incurred for and on behalf of X India.
6. Obligation of X India/Indian customers to withhold taxes under Section 195.
7. Obligation of the applicants to file a tax return in India under Section 139.

Detailed Analysis:

Issue 1: Taxability of Payments for IVTC Services
The applicants sought an advance ruling on whether payments for Inspection, Verification, Testing, and Certification (IVTC) services are taxable in India as FTS or "royalty" under the DTAA. The ruling determined that these payments are taxable as FTS under Section 9(1)(vii) of the Income-tax Act. However, under the DTAA, the term "fees for technical services" means payments for rendering technical or consultancy services that make available technical knowledge, experience, skill, know-how, or processes. The ruling concluded that the services provided did not "make available" technical knowledge, thus not taxable under the DTAA.

Issue 2: Applicability of Section 9(1)(vii)(b) Exception
The ruling referenced a previous decision (AAR 928 of 2010) and concluded that the exception provided in Section 9(1)(vii)(b) of the Act is not available to the applicants. This section generally exempts certain payments from being taxed as FTS if the services are utilized for business or profession outside India or for earning income from a source outside India.

Issue 3: Taxability of Payments for Services Provided
The ruling reiterated that payments received/receivable for IVTC services are taxable as FTS under Section 9(1)(vii) of the Act. The services do not "make available" technical knowledge or skill to X India/Indian customers, thus not taxable under the DTAA.

Issue 4: Taxability of Payments for Costs Incurred on Behalf of X India
The ruling held that payments received/receivable for costs incurred on behalf of X India are taxable as FTS under Section 9(1)(vii) of the Act. However, these payments are not taxable under the DTAA, given the absence of a "make available" clause.

Issue 5: Taxability of Recovery of Administrative Costs
The recovery of reasonable administrative costs incurred for and on behalf of X India by the applicants is chargeable to tax as FTS under Section 9(1)(vii) of the Act. Similar to other payments, these are not taxable under the DTAA due to the "make available" clause.

Issue 6: Obligation to Withhold Taxes Under Section 195
Since the applicants do not have a tax presence in India, X India/Indian customers are not required to withhold taxes under Section 195 of the Act. The ruling emphasized that the applicants' tax presence is crucial for determining the withholding tax obligations.

Issue 7: Obligation to File a Tax Return in India
The ruling stated that applicants are required to file tax returns in India under Section 139 of the Act, as they would have been taxable under Section 9(1)(vii) but for the intervention of the respective DTAA.

Separate Judgments:
- A.A.R. Nos. 886 to 892, 899 to 903 of 2010: Payments for IVTC services are taxable as FTS under Section 9(1)(vii) but not under the DTAA.
- A.A.R. Nos. 893 to 898, 904, 907 to 910, 921 of 2010: The "make available" clause in the Protocols of the DTAA applies, and thus, the services are not taxable under the DTAA.
- A.A.R. Nos. 913 to 920 of 2010: In the absence of a specific FTS provision in the DTAA, payments are taxable as business income under Article 7, but not as FTS.
- A.A.R. Nos. 905, 906, 911, 922 to 924, 927, 929, and 930 of 2010: Payments for IVTC services are taxable as FTS under Section 9(1)(vii) and under the DTAA.

Conclusion:
The ruling concluded that while the payments for IVTC services are taxable under Section 9(1)(vii) of the Income-tax Act, they are not taxable under the DTAA due to the "make available" clause. The applicants are required to file tax returns in India, and X India/Indian customers are not obligated to withhold taxes under Section 195.

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