TaxTMI 
TaxTMI 
2009 (5) TMI 35
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....of the Act and HMI was a tax exempt entity in USA. In the light of these facts, the applicant sought ruling of this Authority on the following question: "Whether Tax is to be deducted by SREHT, India on the payments made on account of annual contract fee and additional fee to HMI, USA, when both the parties are exempt from tax in their respective countries." 2. Initially by an order dated 20.2.2006, this Authority rejected the application at the stage of admission having regard to clause(i) of proviso to sub-section(2) of section 245R of the Act. Later, on a petition filed under Rule 19 of AAR (Procedure) Rules, 1996, the application was restored and the case has been heard on merits. 3. The question as reframed by the applicant after the restoration is as follows:- "Whether, on the facts and circumstances of the case and having regard to the provisions of Article 12 para 5 of the Treaty for Avoidance of Double Taxation of Income and Prevention of Fiscal Evasion between India and the USA, the applicant is required to deduct tax at source U/s. 195 of the Annual Fees payable to Harvard Medical International, USA, especially when both the payer and payee are not liable to ....
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....p;Section 195 requires that any person who is paying any sum chargeable under the Act, inter alia, to a foreign company, shall at the time of making payment deduct income tax thereon at the applicable rates. It is well settled that taxes are deductible at source from income chargeable under the Act. Where the income is not chargeable to tax, the question of any deduction at source would not arise. 6. We may first look into the contractual arrangement between the applicant and HMI. The two entered into an agreement initially on 11.2.97 for inter-institutional alliance with a validity period upto 31.3.2002. On the expiry of the said agreement, another agreement, namely the First Amended and Restated Memorandum of Agreement, was entered into on 14.3.2002 which also expired on 31.3.2005. Thereupon, the parties entered into the Second Amended and Restated Memorandum of Agreement on 1.10.2005 with a validity period of five years. As this agreement is said to be in force, its provisions are relevant for the present consideration. 7. As per article 1 of the agreement, HMI is to render educational and teaching services to the applicant. The specific services to be rendered durin....
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....reement has been given. This list is captioned 'Report of activities of Harvard Liaison Committee'. We observe that the activities that took place during the said period are broadly classifiable into three categories, namely, CME Programmes, Faculty-Student Exchanges and Telemedicine. Under 'CME Programme' the following events took place - * Two day programme titled "Practimed-2004" held on 13 & 14 March, 2004. This event was organized in association with HMI, New England Journal of Medicine and Association of Physicians of India. * Two day workshop on Leaders in Medical Education (LME) held on 25 & 26 January, 2005. This was attended by 40 participants from various medical colleges across India including deans and curricular chairs across the nation. Course directors were teachers in HMI. * Three day Faculty Development Workshop held on 28-30 January, 2005. 40 medical teachers from all over India attended the workshop. Course directors were teachers from HMI. * One day CME Programme on Advances in Prevention of HIV/AIDS held in January, 2005. The speakers were from various U.S. Universities. * Three day programme for Teaching and Learning Clinical Competency held on....
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.... Revenue says that paragraph 5(c) of article would not be attracted, as 'annual alliance development and administrative/maintenance' fee is not purely for teaching in or by an educational institution. 10. ….. 10.1 The relevant provisions of article 12 of DTAA are given below: "ARTICLE 12 - Royalties and fees for included services - 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] : (i) during the first five taxable years for which this Convention has effect, (a) 15 per cent of the gross amount of the royalties or fees for inclu....
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.... "fees for included services" does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ; (c) for teaching in or by educational institutions ; (d) for services for the personal use of the individual or individuals making the payments ; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services). 6 to 8 xx xx xx xx xx xx xx" Article 12 deals with 'Royalties and fees for included services'. 'Fee for included services' has been defined in paragraph 4 of this article to mean payments made in lieu of technical or consultancy services. Paragraph 5 excludes certain items from the purview of 'fee for included services'. The amounts paid for teaching in or by educational institution is on....
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.... Analysis : The tuition fee is clearly intended to acquire a technical service for the firm. However, the fee paid is for teaching by an educational institution, and is, therefore, under paragraph 5(c), not an included service. It is irrelevant for this purpose whether MIT conducts the course on its campus or at some other location. Example 11 Facts : As in example 10, the automobile manufacturer wishes to expand into the manufacturer of helicopters. It approaches an Indian university about establishing a course of study in aeronautical engineering. The university contracts with a U.S. helicopter manufacturer to send an engineer to be a visiting professor of aeronautical engineering on its faculty for a year. Are the amounts paid by the university for these teaching services fees for included services? Analysis : The fees are for teaching in an educational institution. As such, pursuant to paragraph 5(c), they are not fees for included services. In example 10, the engineers are sent to a 2 year course in aeronautical engineering conducted by Massachusetts Institutes of Technology (MIT). The tuition fee paid is regarded as fee paid for teaching in MIT and fall....