2012 (8) TMI 781 - AAR - Income Tax

Overseas Subsidiary Income: Tax Treatment for Fees

The Authority held that the income of the overseas subsidiary arises in India, payments to the subsidiary are classified as fees for technical services, ... India and Australia DTAA - applicant acquired 100% equity of an Australian company - whether the payments made to Infosys Australia for the sub-contract work is chargeable to tax in India, OR under the DTAC - Held that:- The source of income of Infosys Australia has to be fixed as India as no services are performed in India by Infosys Australia the source could be the payer. It cannot be held under the circumstances, on the materials available, that Infosys Australia is making available any technical service to the applicant so as to satisfy the requirement of clause (g) of paragraph 3 of Article 12 of the DTAC. As what is paid by the applicant to Infosys Australia is fees for technical services, the question of the existence of a Permanent Establishment does not arise. What is paid to Infosys Australia is fees for technical services under section 9(1)(vii) of the Act, but it is not royalty in terms of Article 12 of the DTAC between India and Australia in terms of the requirements of paragraph 3(g) of the said Article. Payments to overseas subsidiary towards sub contracting charges will not be liable for deduction of tax at source u/s 195 as there is no income chargeable to tax in India. Issues:1. Taxability of payments made to overseas subsidiary for sub-contract work.2. Permanent Establishment status of the overseas subsidiary in India.3. Classification of payments as 'fees for technical services' under the Income-tax Act or the Double Taxation Avoidance Convention.4. Obligation for tax deduction at source on payments to the overseas subsidiary.5. Taxability of reimbursement of expenses to the overseas subsidiary.Analysis:Issue 1: Taxability of payments to overseas subsidiaryThe applicant sought a ruling on whether payments made to its Australian subsidiary for sub-contract work are chargeable to tax in India. The Authority considered the source of income and the nature of the services provided by the subsidiary. The applicant argued that since services are performed in Australia, the income should be taxable only in Australia. However, the Authority held that the income of the subsidiary arises in India based on the contractual arrangements and directions given by the applicant.Issue 2: Permanent Establishment statusThe Authority examined whether the overseas subsidiary had a Permanent Establishment in India under the Double Taxation Avoidance Convention. It was determined that the subsidiary's income, derived from work done in Australia, was not taxable in India as it lacked a Permanent Establishment in India. The ruling emphasized the legal independence of the subsidiary from the applicant.Issue 3: Classification of payments as 'fees for technical services'The Authority analyzed whether the payments to the overseas subsidiary constituted 'fees for technical services' under the Income-tax Act or the Treaty. It was concluded that the payments were fees for technical services under the Act, but not royalty under the Double Taxation Avoidance Convention between India and Australia. The ruling highlighted the contractual obligations and risk allocation between the applicant and the subsidiary.Issue 4: Obligation for tax deduction at sourceRegarding the obligation for tax deduction at source on payments to the overseas subsidiary, the Authority ruled in favor of the applicant, stating that no withholding of tax under section 195 of the Income Tax Act was necessary due to the non-taxability of the income in India.Issue 5: Taxability of reimbursement of expensesThe ruling addressed the question of whether reimbursement of expenses to the overseas subsidiary was liable for tax deduction at source. However, since the overall income was found not chargeable to tax in India, the Authority did not rule on this specific issue.In conclusion, the Authority ruled that the income of the overseas subsidiary arises from a source in India, the payments to the subsidiary are fees for technical services, and no withholding of tax under section 195 of the Act is required. The judgment clarified the tax implications of the transactions between the applicant and its overseas subsidiary, emphasizing the legal and contractual framework governing the business relationship.