2012 (2) TMI 173 - AAR - Income Tax

Tax Authority Rules IT Agreement Services as 'Fees for Technical Services' under Income-tax Act

The Authority concluded that the services provided under the IT Agreement fall under the definition of 'fees for technical services' as per Section ... Indo-French DTAA – French Company entered into an IT Agreement with the applicant to provide support services in the area of IT - whether royalty or FTS – whether payment would fall under the provisions of Article 13 of the Indo France DTAA in view of the Fact that foreign company does not have a PE in India – assessee contending such payment to be reimbursement of expenses - Held that:- Services provided under the IT agreement are in the nature of Fees for Technical Services and taxable under the DTAA as well as under the Act. It is also clarified that payment under the proposed agreement does not represent reimbursement of cost and is taxable in India.Article 5 of India France DTAA states that even existence of a computer server amounts to existence of a PE within a jurisdiction. In such circumstances, Areva T&D SAS France has a PE in India, the payment to it would not fall under the provision of Article 13 of the DTAC. As the Applicant has a PE in India, the income by way of FTS will be taxed under Section 44DA and at the rate provided under the Finance Act for the relevant year and tax withheld accordingly. Issues Involved:1. Applicability of Section 9(1)(vi) or Section 9(1)(vii) of the Income-tax Act, 1961.2. Taxability and rate of withholding tax if the services fall under Section 9(1)(vi) or Section 9(1)(vii).3. Taxability if the services do not fall under Section 9(1)(vi) or Section 9(1)(vii).4. Applicability of Article 13 of the DTAA between India and France.5. Applicable rate of withholding tax under Section 195 if Article 13 of the DTAA applies.6. Withholding tax rate under DTAA if Article 13 does not apply.7. Taxability of reimbursement of costs.Issue-wise Detailed Analysis:1. Applicability of Section 9(1)(vi) or Section 9(1)(vii) of the Income-tax Act, 1961:The services under the proposed IT Agreement include WAN, Lotus Notes, License User Rights, and Application Support. The Applicant argued that these services are supportive and do not impart technical knowledge, thus not falling under the definition of 'royalty' or 'fees for technical services' (FTS). However, the Authority concluded that the services fall under the definition of Section 9(1)(vii) as they relate to technical support services.2. Taxability and Rate of Withholding Tax if the Services Fall Under Section 9(1)(vi) or Section 9(1)(vii):The Authority determined that the income-tax is to be charged on the income computed under Section 44DA of the Act, at the rate provided under the Finance Act for the relevant year. The Applicant is required to withhold tax accordingly.3. Taxability if the Services Do Not Fall Under Section 9(1)(vi) or Section 9(1)(vii):Given the conclusion that the services fall under Section 9(1)(vii), the income would be chargeable to tax in India as per the computation under Section 44DA.4. Applicability of Article 13 of the DTAA between India and France:The Authority held that since the French Company has a Permanent Establishment (PE) in India, the payment to it would not fall under the provision of Article 13 of the DTAA.5. Applicable Rate of Withholding Tax Under Section 195 if Article 13 of the DTAA Applies:As the services fall under Section 9(1)(vii) and the French Company has a PE in India, the withholding tax rate would be as per the computation under Section 44DA and the rate provided under the Finance Act.6. Withholding Tax Rate Under DTAA if Article 13 Does Not Apply:The withholding tax rate would still be as per the computation under Section 44DA and the rate provided under the Finance Act, as the services are taxable under Section 9(1)(vii).7. Taxability of Reimbursement of Costs:The Authority concluded that the consideration payable to the French Company does not represent mere reimbursement of costs and is taxable in India. The IT Agreement's preamble indicates that the French Company has the capacity and resources to provide and coordinate IT services, negating the argument of mere reimbursement.Conclusion:The Authority determined that the services provided under the IT Agreement fall under the definition of 'fees for technical services' as per Section 9(1)(vii) of the Income-tax Act. The income is chargeable to tax in India and must be computed under Section 44DA. The French Company has a PE in India, and the payments are not mere reimbursements but are taxable. The applicable withholding tax rate is as per the Finance Act for the relevant year.