2008 (4) TMI 35 - AAR - Income Tax

The applicant is conducting and offering three certification programmes, namely, CPIM, CIRM and CSCP and other activities like corporate training, open public training, management consultancy, publishing and trading in educational material, etc under an agreement with a foreign non-profit company - The question raised about applicability of TDS on on examiniation fees remitted - Since the applicant can not be deemed permanent establishment (P/E), not required to deduct TDS on fees so remitted.

Issues Involved:
1. Taxability of examination fees collected by the applicant on behalf of APICS and AST&L.
2. Classification of the income from examination fees.
3. Obligation to deduct tax at source under the Income-tax Act, 1961.
4. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
5. Determination of whether the applicant constitutes a permanent establishment (PE) of APICS and AST&L in India.

Detailed Analysis:

1. Taxability of Examination Fees:
The applicant, KnoWerX Education (India) Private Limited, collects examination fees on behalf of two US-based non-profit organizations, APICS and AST&L, and remits these fees to them. The key question is whether these fees are liable to be treated as the income of APICS and AST&L and thus taxable in India. The ruling determined that the examination fees collected in India and remitted to the US entities are business income received in India. However, under the DTAA between India and the USA, this income is not taxable in India because APICS and AST&L are tax residents of the USA and are exempt from tax under section 501(c)(6) of the Internal Revenue Code (IRC).

2. Classification of Income:
The ruling clarified that the income in question is business income. This classification is significant because it determines the tax treatment under both Indian law and the DTAA. The examination fees collected by the applicant are considered business income, not royalty or fees for technical services.

3. Obligation to Deduct Tax at Source:
Under Section 195 of the Income-tax Act, 1961, any person making a payment to a foreign entity must deduct tax at source if the income is chargeable under the Act. Since the examination fees are not taxable in India due to the provisions of the DTAA, the applicant is not required to deduct tax at source on these payments.

4. Applicability of DTAA:
The DTAA between India and the USA plays a crucial role in this case. The DTAA provisions override the domestic tax laws, provided the entities are tax residents of the USA. The ruling confirmed that APICS and AST&L are tax residents of the USA and are exempt from federal income tax under section 501(c)(6) of the IRC. Therefore, the DTAA provisions apply, and the examination fees are not taxable in India.

5. Permanent Establishment (PE) Determination:
The Revenue argued that the applicant should be considered a permanent establishment of APICS and AST&L in India, which would make the examination fees taxable in India. However, the ruling concluded that the applicant does not constitute a PE of APICS or AST&L. The applicant does not have the authority to conclude contracts on behalf of these entities, does not maintain stock or secure orders for them, and operates independently. Therefore, the applicant is not a dependent agent and does not create a PE for APICS or AST&L in India.

Conclusion:
The ruling concluded that the applicant is not required to deduct or pay any income tax on the examination fees collected for APICS and AST&L and remitted to them. The income is classified as business income, but it is not taxable in India under the DTAA between India and the USA. The applicant does not constitute a permanent establishment of APICS or AST&L in India.

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