2004 (12) TMI 12 - AAR - Income Tax

Tax Authority: Fees to Timken-USA taxable in India under IT Act

The Authority ruled that the fees payable to Timken-USA are subject to tax in India. The applicant must withhold income tax at the appropriate rate under ... Applicant had agreement with Timken-USA, pursuant to which the said company agreed to render various services in favour of applicant in USA – held that sum of US $ 756,728.26 cannot be said to represent recovery or reimbursement of the costs or expenses actually incurred by Timken-USA while rendering the services by it and that the entire amount is liable to be taxed in India and accordingly, the applicant is obliged to withhold income-tax at the appropriate rate whichever is less u/s 195(1) Issues Involved1. Taxability of fees payable by the applicant to Timken-USA.2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.3. Determination of whether the fees contain any element of profit or income.4. Classification of fees as 'fees for technical services' under the Income Tax Act.5. Applicability of presumptive taxation principles.6. Refund of income tax deducted and deposited by the applicant.Issue-Wise Detailed Analysis1. Taxability of Fees Payable by the Applicant to Timken-USAThe applicant, Timken India Limited, entered into an agreement with Timken-USA for services rendered in the USA. The applicant contended that the fees of US$ 756,728.26 were merely reimbursements of expenses without any profit element, and thus not subject to tax in India. The Authority ruled that the entire amount is liable to be taxed in India and the applicant is obliged to withhold income tax at the appropriate rate under section 195(1) of the Income Tax Act, 1961.2. Applicability of the Double Taxation Avoidance Agreement (DTAA)The applicant argued that under the India-USA DTAA, the fees should not be subject to tax in India. The Authority concluded that as per Article 12 of the DTAA, the fees received by Timken-USA for services rendered in the USA are subject to tax in India. Therefore, the applicant must withhold income tax at the appropriate rate, whichever is lesser under the Act or the Treaty.3. Determination of Whether the Fees Contain Any Element of Profit or IncomeThe applicant claimed that the fees were purely reimbursements without any profit element. The Authority ruled that the sum of US$ 756,728.26 would be subject to tax in India irrespective of whether there was a profit or income in the hands of Timken-USA. Consequently, the applicant has to withhold income tax at the appropriate rate under section 195(1) of the Act.4. Classification of Fees as 'Fees for Technical Services'The Commissioner argued that the services provided by Timken-USA fall under 'fees for technical services' as per section 9(1)(vii) of the Act and Article 12(4) of the India-USA DTAA. The Authority agreed, stating that the fees are deemed to accrue or arise in India and are subject to tax at the rate of 20% on a gross basis under section 115A read with section 44D of the Act. No option for net basis computation is available.5. Applicability of Presumptive Taxation PrinciplesThe applicant cited the Supreme Court's decision in Union of India vs. A. Sanyasi Rao to argue for an option to compute income on a net basis. The Authority rejected this argument, stating that section 44D does not allow for deductions under sections 28 to 44C for foreign companies. The principle laid down in the Sanyasi Rao case does not apply to section 44D, which treats all foreign companies alike.6. Refund of Income Tax Deducted and Deposited by the ApplicantThe applicant initially sought a refund of Rs. 1,059,100 deducted and deposited as income tax on a part of the fees remitted. However, this question was not pressed during the hearing and was withdrawn.Additional Questionsa. Option for Net Basis ComputationThe additional question sought to apply the principles of presumptive taxation to compute income on a net basis. The Authority ruled that no such option exists under section 44D, and the applicant must withhold income tax on a gross basis.b. Computation of Net Income for Withholding TaxThis question was contingent on the previous one. Given the ruling on additional question (a), this question does not survive.ConclusionThe Authority ruled that the fees payable to Timken-USA are subject to tax in India, and the applicant must withhold income tax at the appropriate rate under section 195(1) of the Income Tax Act. The principles of presumptive taxation do not apply, and the fees are classified as 'fees for technical services' under the Act and the DTAA.