2015 (10) TMI 954 - AAR - Income Tax

Taxability of Service Fee from Indian Company under India-China Tax Treaty

The service fee received by the applicant from an Indian company for providing consultancy services is held taxable in India as 'fees for technical ... Taxability of income - amount of service fee received/receivable by the applicant from Usha International Limited in terms of Agreement dated 16.11.2012 for providing services in connection with procurement of goods by Usha International Limited from vendors in China and other related services provided in China - whether is taxable in India and the applicant is liable to pay tax thereon in India? - Double Taxation Avoidance Agreement between Government of India and People‟s Republic of China - whether the payment received by the applicant from the Indian company for services rendered in China is taxable in India under Article 12(4) of DTAA between India and China? - contrast with China-Pakistan tax Treaty - Held that:- Since the applicant's counsel has sought to make a distinction between India-China DTAA and Pakistan-China DTAA, we notice that Pakistan-China DTAA refers to”provision of rendering of any managerial, technical or consultancy services‟ whereas India-China DTAA refers to”provision of services of managerial, technical or consultancy nature‟. The distinction between these two DTAAs clearly points out that the scope of”provision of services‟ as in India-China Treaty is much wider than scope of”provision of rendering of services‟ as in Pakistan-China Treaty. Based on this distinction this Authority had held in the case of Inspectorate (Shanghai) Limited that”provision of services‟ will cover the services even when these are not rendered in the other contracting state (i.e. India in this case) as long as these services are used in the other contracting state (i.e. India in this case). The ITAT Mumbai Bench in the case of Ashapura Minichem [2010 (5) TMI 523 - ITAT, MUMBAI ] had also reached at the same conclusion saying that if at all the contrast with China-Pakistan tax Treaty shows something, this contrast shows that the India-China tax Treaty intends to follow the source rule, while China-Pakistan tax Treaty gives up the source rule for fee for technical services. Appendix A to the service agreement in this case makes it very clear that the applicant had the skill, acumen and knowledge in the specialized field of evaluation of credit, organization, finance and production facility of an organization, in conducting market research, in giving expert advice for improvement of high quality of standards, advising on new development in China with regard to technology/product/process up gradation. The UIL asks for advice from the applicant and refer to the source of information provided by the applicant. The nature of these services in a specialized field mentioned in Appendix A would surely come within the ambit of the term ”consultancy services'. The amount of service fees received by the applicant from UIL for providing consultancy services are taxable in India. The service fee received by the applicant is chargeable to tax to the extent of full amount received by it. Service fee received by the applicant chargeable to tax in India - whether same is chargeable to the extent of full amount received by it or only to the extent of mark up received @ 10% over and above the actual cost incurred by it in providing services in China? - Held that:- Similar issue had come up before the Authority in the case of DANFOSS Industries Private Limited (2004 (5) TMI 58 - AUTHORITY FOR ADVANCE RULINGS) wherein the thrust of the argument of the applicant was that there was no income element in the service fee and that it was only reimbursement of the cost. It was held therein by this Authority that the entire sum will be chargeable to tax and can be assessed to tax under the Act and that such sum might be income or income hidden or otherwise embedded therein and that the scheme of tax deduction by source applied not only to amount paid which would wholly bear income character such as salaries, dividends, interest on securities etc. but also to gross sums, the whole of which might not be income or profit of the recipient, such as payments to contractors and sub-contractors and the payment of insurance commission. In the case of Timken India Limited (2004 (12) TMI 12 - AUTHORITY FOR ADVANCE RULINGS ) also it was decided that entire amount was liable to be taxed in India and accordingly the applicant was obliged to withhold Income-tax at appropriate rate. We respectfully follow the same ruling in this case also. The rate of tax is 10% on the gross amount under the DTAA. Issues Involved:1. Taxability of service fee received by the applicant from Usha International Limited (UIL) under the Income Tax Act and Double Taxation Avoidance Agreement (DTAA) between India and China.2. Extent of chargeability of the service fee received by the applicant.3. Nature and rate of tax applicable to the service fee received by the applicant.Analysis:Issue 1: Taxability of Service FeeThe applicant, a company registered in China, provides services to UIL, an Indian company, under an agreement dated 16.11.2012. The services include identifying products, evaluating manufacturers, conducting market research, and other related activities. The applicant contended that the income from these services should not be taxable in India as the services are rendered entirely in China, and the income does not accrue or arise in India under section 5 of the Income Tax Act. They also argued that the payment does not qualify as 'fees for technical services' under Article 12(4) of the DTAA since no services are rendered in India.The Revenue argued that the services provided by the applicant are of a consultancy and managerial nature, which fall under the definition of 'fees for technical services' as per section 9(1)(vii) of the Income Tax Act and Article 12 of the DTAA. They emphasized that the place of provision of services should be considered as India since the recipient (UIL) is located in India.The Authority for Advance Rulings (AAR) concluded that the expression 'provision of services' in the India-China DTAA is broader than 'rendering of services' and includes services utilized in India. Thus, the service fee received by the applicant is taxable in India as it falls under the definition of 'fees for technical services' in Article 12(4) of the DTAA.Issue 2: Extent of ChargeabilityThe applicant argued that if the service fee is deemed taxable in India, only the markup (10%) over the actual cost incurred should be taxable, not the entire amount. They cited various case laws to support their claim that only the profit element should be taxed.The Revenue contended that the entire service fee should be taxed as 'fees for technical services' under section 115A(1)(b)(B) read with section 44D of the Income Tax Act, which provides for taxation on the gross amount without any deductions for expenses incurred.The AAR agreed with the Revenue, stating that the entire service fee is chargeable to tax in India. The ruling emphasized that the scheme of tax deduction at source applies to gross sums, which might include embedded income.Issue 3: Nature and Rate of TaxThe applicant's counsel argued that the service fee should not be considered as 'fees for technical services' under Article 12(4) of the DTAA. However, the AAR concluded that the services provided by the applicant, such as market research, product evaluation, and consultancy, fall within the ambit of 'consultancy services' as defined in the DTAA. Therefore, the service fee is taxable in India as 'fees for technical services.'The rate of tax applicable to the service fee is 10% on the gross amount as per the DTAA between India and China.Conclusion:A. The service fee received by the applicant from UIL for providing consultancy services is taxable in India.B. The service fee is chargeable to tax to the extent of the full amount received by the applicant.C. The service fee is taxable in India as 'fees for technical services' at the rate of 10% of the gross amount.