2016 (9) TMI 344 - AAR - Income Tax

Income chargeable to tax in India as fees for included services - Program Fee received - India-US DTAA - PE in India - Held that - The activity of the applicant cannot be said to be a business activity particularly because the applicant is registered in USA as a non-profit public benefit corporation formed for the purpose of providing education. This is not disputed by the Revenue. If the applicant is registered as a non-profit benefit corporation in USA then its activities i.e. providing education cannot be said to be business activity of the applicant. The reliance of Revenue, therefore, on Article 7 of the Treaty is completely uncalled for as Article 7 specifically deals with business income. Viewed from any angle there cannot be a PE as defined in Article 5 of the Treaty as indeed there is none in India. It is to be seen that every time the program is undertaken in India, it is Northwest which has arranged for the place for conducting the programs. Northwest need not every time arrange for a same place. It may happen that Northwest may arrange different location for conducting the program. On this ground also there cannot be any fixed place of business on the part of the applicant. Therefore, on both the counts namely on the question of business and on the question of PE, the contention of the Revenue is unacceptable to us. The program fee is held to be non-taxable as there is no Permanent Establishment of the applicant in India.

Summary

Issues:
1. Taxability of program fee received by the Applicant under the India-US Double Tax Avoidance Agreement.
2. Determining if the Applicant has a Permanent Establishment in India under Article 5 of the India-US Double Tax Avoidance Agreement.

Issue 1 - Taxability of Program Fee:
The Applicant, a non-profit public benefit corporation providing education, entered into an agreement with an Indian entity to conduct management programs in India. The Revenue contended that the income earned from these programs should be taxed as business income due to the existence of a Permanent Establishment (PE) in India. However, the Authority for Advance Rulings (AAR) analyzed previous rulings and held that the educational nature of the activities did not constitute fees for included services or royalty. The AAR emphasized that the Applicant's registration as a non-profit corporation in the USA meant its educational activities could not be classified as business income. Additionally, the AAR dismissed the Revenue's argument regarding the existence of a PE in India, stating that the activities did not create a fixed place of business for the Applicant. Consequently, the AAR ruled in favor of the Applicant, declaring the program fee as non-taxable under the India-US Double Tax Avoidance Agreement.

Issue 2 - Permanent Establishment Determination:
The AAR addressed whether the Applicant's teaching activities in India constituted a Permanent Establishment as per Article 5 of the tax treaty. The Revenue argued that the educational activities amounted to business income and created a PE. However, the AAR rejected this assertion, highlighting that the Applicant's non-profit status and the absence of a fixed place of business in India precluded the existence of a PE. By considering the nature of the Applicant's activities and the lack of a business motive, the AAR concluded that there was no Permanent Establishment in India. Therefore, the AAR ruled in favor of the Applicant, determining that there was no PE established in India based on the teaching activities conducted.

In conclusion, the AAR's judgment in this case clarified the taxability of the program fee received by the Applicant and the determination of a Permanent Establishment in India. By analyzing the educational nature of the activities, the non-profit status of the Applicant, and the absence of a fixed place of business, the AAR ruled in favor of the Applicant on both issues, holding the program fee as non-taxable and confirming the lack of a Permanent Establishment in India.