2012 (4) TMI 351 - AAR - Income Tax

Classification of Payments under India-French DTAA: Tax Implications and Withholding Obligations

Mersen India Private Limited,

The court classified the payments under the 'Services Agreement' as 'fees for technical services' under Article 13(4) of the India-French DTAA. The tax ... Payments made for managerial services in terms of paragraph 4 of Article 13 of the DTAC between India and France - Applicant is a 100% subsidiary of a French company – service agreement on an automatic renewal of its terms for one year at a stretch – assessee contested that managerial services were not included in the concept of “included services” under the India–US Convention and the payments could be understood only as the business income of the French company and the payments to it could not be taxed in India in the absence of that company having a permanent establishment in this country – Held that:- managerial services, within the meaning of paragraph 13 of India- France DTAC, are provided by the French Company to the applicant for a consideration equivalent to the cost incurred by the French Company plus 5% thereof as mark up - services rendered on marketing, on strategy and the training provided to optimize sales techniques all would come within the purview of consultancy services – The services are enduring and they help in promoting the business of the applicant, knowledge and know-how are made available to the applicant. Hence the services agreement are held to be consultancy services are made available to the applicant - in terms of paragraph 2 of Article 13, the tax charged is not to exceed 10% of the gross amount of the fees and the deduction under section 195(1) of the I.T. Act has to be on that basis - contention of assessee on existence of a permanent establishment does not arise in view of the finding that the payments are liable to be taxed as fees for technical services - applicant is required to deduct tax at source under section 195(1) of the Income Tax Act - against assessee. Issues Involved:1. Classification of payment under the 'Services Agreement' as 'fees for technical services' under Article 13(4) of the India-French DTAA.2. Rate of tax deduction at source under Section 195(1) of the Income Tax Act, 1961.3. Nature of payment as business profits under Article 7 of the India-French DTAA.4. Taxability in India in the absence of a permanent establishment under Article 5 of the India-French DTAA.5. Requirement of tax deduction at source under Section 195(1) of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Classification of Payment as 'Fees for Technical Services'The applicant, a subsidiary of a French company, entered into a 'Services Agreement' with Mersen, France, for advisory services. The Revenue contended that payments under the agreement qualify as 'fees for technical services' under both the Income-tax Act and the India-French DTAA. The applicant argued that under the protocol to the DTAA, the scope should be limited to that in the India-US DTAA, which requires technical knowledge to be 'made available' to the applicant. However, the judgment concluded that the services provided, including managerial and consultancy services, fall under 'fees for technical services' as defined in Article 13(4) of the India-French DTAA, and thus are taxable in India.Issue 2: Rate of Tax Deduction at SourceIt was ruled that under paragraph 2 of Article 13 of the DTAA, the tax charged should not exceed 10% of the gross amount of the fees. Consequently, the applicant is required to deduct tax at source under Section 195(1) of the Income Tax Act, 1961, at this rate.Issue 3: Nature of Payment as Business ProfitsThe judgment clarified that the payments under the services agreement do not constitute business profits under Article 7 of the India-French DTAA. Therefore, the payments are not treated as business profits but as fees for technical services.Issue 4: Taxability in the Absence of a Permanent EstablishmentGiven the classification of the payments as fees for technical services, the question of whether Mersen, France, has a permanent establishment in India under Article 5 of the DTAA does not arise. The payments are taxable in India regardless of the presence of a permanent establishment.Issue 5: Requirement of Tax Deduction at SourceThe ruling affirmed that the applicant is required to deduct tax at source under Section 195(1) of the Income Tax Act, 1961, for the payments made to Mersen, France, under the services agreement.Conclusion:The judgment concluded that the payments made by the applicant to Mersen, France, under the services agreement are classified as 'fees for technical services' under Article 13(4) of the India-French DTAA. The applicable tax rate for deduction at source is 10% of the gross amount. The payments do not qualify as business profits and are taxable in India without considering the existence of a permanent establishment. The applicant is mandated to deduct tax at source under Section 195(1) of the Income Tax Act, 1961.