2012 (3) TMI 242 - AAR - Income Tax

Taxability of Inspection Services & Administrative Costs under Section 9(1)(vii)

XYZ Ltd.

The ruling determined that payments for Inspection, Verification, Testing, and Certification (IVTC) services are taxable as 'fees for technical services' ... FTS - IVTC services - Whether payment received by the applicant in connection with transactions undertaken in relation to the Inspection, Verification, Testing and Certification (IVTC) services are chargeable to tax in India as “FTS” u/s 9(1)(vii)(b) - applicant being tax resident of Hong Kong belonging to X group of companies engaged in the business of IVTC services – services to Indian customers provided through X India - Held that:- It is observed that reports are highly technical in nature and are cargo activity specific. These are admittedly customized services and not routine commercial services. Thus, the technical services provided to the customers/X India is covered under the term “fee for technical services” u/s 9(1)(vii). The exception provided u/s 9(1)(vii)(b) of the Act is not available to the applicant.Whether payments received in connection with costs incurred for and on behalf of X India / recovery of administrative cost are chargeable to tax in India – Held that:- Such payments are also chargeable to tax as FTS u/s 9(1)(vii).Withholding of tax – Held that:- As the applicant has tax presence in India, X India / Indian customers are required to withhold taxes u/s 195 at the rate in force mentioned in the Finance Act for the relevant year.Requirement of filing of return u/s 139 – Held that:- As the applicant has taxable income in India, it is required to file tax return under the provision of section 139. Issues Involved:1. Taxability of payments received for Inspection, Verification, Testing, and Certification (IVTC) services as 'fees for technical services' (FTS) under Section 9(1)(vii)(b) of the Act.2. Taxability of payments received for costs incurred on behalf of X India.3. Taxability of recovery of administrative costs incurred for X India.4. Obligation of X India/Indian customers to withhold taxes under Section 195 of the Act.5. Requirement for the applicant to file a tax return in India under Section 139 of the Act.Issue-wise Detailed Analysis:1. Taxability of Payments for IVTC Services:The applicant, a Hong Kong tax resident, provides IVTC services to Indian customers either directly or through X India. The services include scientific and internationally accepted techniques for inspection, verification, testing, and certification of products. The applicant contends that these services are routine commercial services and not technical services, arguing that no technical knowledge or skill is transferred to the Indian customers. However, the ruling concludes that the services rendered are technical in nature, involving specialized knowledge and expertise. Hence, the payments received for IVTC services are taxable as FTS under Section 9(1)(vii) of the Act. The exception under Section 9(1)(vii)(b) does not apply as the services are utilized in India.2. Taxability of Payments for Costs Incurred on Behalf of X India:The applicant argues that the expenses recovered from X India, such as procurement of goods, travel expenses, and other out-of-pocket expenses, do not involve any income element and should not be taxable. However, the ruling states that these expenses are in connection with the provision of IVTC services and hence bear the same character as FTS. Therefore, payments received for these costs are chargeable to tax under Section 9(1)(vii) of the Act.3. Taxability of Recovery of Administrative Costs:Similar to the costs incurred on behalf of X India, the recovery of administrative costs is also considered to be in connection with the provision of IVTC services. The ruling holds that these payments are taxable as FTS under Section 9(1)(vii) of the Act.4. Obligation to Withhold Taxes under Section 195:Since the applicant has a tax presence in India due to the nature of the services provided, X India and Indian customers are required to withhold taxes under Section 195 of the Act. The withholding should be at the rate specified in the Finance Act for the relevant year.5. Requirement to File Tax Return under Section 139:Given that the applicant has taxable income in India, it is required to file a tax return under Section 139 of the Act. The ruling mandates compliance with this requirement.Conclusion:The ruling concludes that the payments received by the applicant for IVTC services, costs incurred on behalf of X India, and recovery of administrative costs are taxable as FTS under Section 9(1)(vii) of the Act. The exceptions under Section 9(1)(vii)(b) do not apply. Consequently, X India and Indian customers must withhold taxes under Section 195, and the applicant is required to file a tax return in India.