2016 (9) TMI 650 - AAR - Income Tax

Indian Company's Program Fee Exempt from Tax under India-US DTAA

The Authority ruled in favor of the applicant, stating that the program fee received from the Indian company was exempt from tax under the India-US DTAA. ... Fees for included services - educational institution exemption - Article 12(5)(c) of DTAA - withholding tax under Section 195 - Permanent Establishment - Article 5 of DTAA - presence of visiting facultyFees for included services - educational institution exemption - Article 12(5)(c) of DTAA - withholding tax under Section 195 - Programme fee received by the applicant is not taxable in India as fees for included services when the services constitute teaching by an educational institution under Article 12(5)(c) of the India-US DTAA and therefore is not subject to withholding under Section 195. - HELD THAT: - The Authority examined whether the consideration paid to UC Berkeley Center for Executive Education (CEE) for delivery of short-duration executive teaching programmes in India falls within the exclusion in Article 12(5)(c) which provides that fees for included services do not include amounts for teaching in or by educational institutions. The applicant produced its certificate of incorporation showing an object of providing executive education and a US tax-exemption certificate under Section 501(c)(3), supporting its character as an educational/charitable institution. The Revenue's objections that CEE is only a facilitator and that the teaching faculty are provided by the University of California, Berkeley were considered and rejected: the Authority accepted that CEE is an educational institution (a creation/extension of the University) and that reliance on visiting faculty provided by the parent university does not change the character of the services as teaching by an educational institution. Prior Authority precedent in a materially identical factual matrix (Eruditus ruling) was regarded as directly on point. Applying Article 12(5)(c), the programme fees are excluded from taxation as fees for included services, and consequently no withholding under Section 195 is required. [Paras 12, 13, 14]Programme fees qualify for the Article 12(5)(c) exemption as teaching by an educational institution and are not taxable in India; no withholding under Section 195 is necessary.Permanent Establishment - Article 5 of DTAA - presence of visiting faculty - The activities undertaken by the applicant in India (short-term teaching modules, including faculty presence for limited days) do not constitute a Permanent Establishment in India under Article 5 of the India-US DTAA. - HELD THAT: - The Authority considered the Revenue's contention that accommodation of visiting professors and delivery of short-duration modules in India would create a Permanent Establishment of the non-resident applicant. Relying on the factual matrix and prior Authority reasoning in the Eruditus decision, the Authority found no basis to treat the temporary presence of faculty and short teaching engagements as creating a PE. The fact that faculty are provided by the parent university and that the contractual relationship with the Indian promoter was that of independent contractor reinforced that no PE arises from the described activities. Accordingly, the activities as described did not meet the criteria for a taxable presence under Article 5. [Paras 13, 14]No Permanent Establishment is constituted in India by the applicant's short-term teaching activities; therefore the applicant is not taxable in India on that basis.Final Conclusion: The Authority ruled that the programme fees paid to UC Berkeley Center for Executive Education are exempt from Indian tax under Article 12(5)(c) of the India-US DTAA as teaching by an educational institution (so no withholding under Section 195) and that the short-duration teaching activities do not create a Permanent Establishment in India; the application is disposed of. Issues: Taxability of program fee under India-US DTAA and establishment of Permanent Establishment in India.Analysis:1. Taxability of Program Fee under India-US DTAA:- The applicant, a California based non-profit public benefit corporation, entered into a Program Delivery Agreement with an Indian company to launch a management program for senior executives in India.- The applicant raised questions regarding the taxability of the program fee received under the agreement as per Article 12 of the India-US DTAA and Section 9(1)(vii) of the Income Tax Act.- The key contention was whether the program fee constituted fees for included services under Article 12(5) of the DTAA, which exempts fees spent on teaching in educational institutions from taxation.- The Revenue argued that the applicant was not an educational institution and lacked its own faculty for teaching, relying on the fact that the faculty was provided by the University of California, Berkeley.- The Authority referred to a previous ruling involving a similar scenario and held that the applicant qualified as an educational institution, and the fees for services provided were exempt from tax under the DTAA.- The Authority rejected the Revenue's objections, emphasizing the applicant's educational nature and its compliance with charitable and educational activities allowed by law.2. Establishment of Permanent Establishment in India:- The second issue revolved around whether the activities undertaken by the applicant in India, specifically teaching for five days, constituted a Permanent Establishment (PE) as per Article 5 of the India-US DTAA.- The Revenue contended that the faculty provided by Berkeley University created a PE for the applicant in India, but the Authority rejected this claim.- The Authority highlighted that the applicant being a child of Berkeley University and relying on its faculty did not establish a PE in India.- Referring to the earlier ruling, the Authority confirmed that even if the faculty was provided by a non-resident entity, it did not create a PE.- Consequently, the Authority concluded that there was no Permanent Establishment in India for the applicant based on the activities conducted.In conclusion, the Authority ruled in favor of the applicant, stating that the program fee received from the Indian company was exempt from tax under the India-US DTAA. Additionally, the Authority determined that the applicant did not have a Permanent Establishment in India based on the activities and faculty arrangements, thereby disposing of the application.