Framework for taxability of Fees for Technical services

Framework for taxability of Fees for Technical Services (FTS)

In evaluating the taxability of FTS in common parlance, the focal point is generally pivot on section 9(1)(vii) of Income Tax Act, 1961 and Article relating to FTS in DTAA, if any. However, there are other aspects in the domain, which has repercussion on taxability of FTS. In this article, attempt is done to analyse the framework for taxability of FTS which in turn is interplay of following crucial factors:-

1.       Nature of Service

a)      Basic services, other than mention at (b) below

b)      Supervisory services in connection with construction or assembly project.

2.       Place of rendition of FTS i.e. In India or Outside India.

3.       Duration of rendition of service in India.

4.       Existence of fixed place in India at the disposal of service provider.

The analysis of afore-said factors will lead to following conclusions

a)      Whether FTS is taxable in India?

b)      If Yes, whether FTS is taxable on Gross Basis or net Basis ?

In order to appraise the effects of afore-said factors on taxability of FTS, the necessary check points are as under:-

A)     Income Tax Act

i)                    Section 9(1)(viii)- Providing source rule for taxability of FTS in India

ii)                   Explanation 2 to Section 9(1)(vii)- Providing definition of FTS and excluding consideration from construction, assembly , mining or like project undertaken by recipient, from realm of FTS.

iii)                 Section 44DA:-

a)       Providing for taxability of FTS [as per explanation 2 to section 9(1)(vii)] on net basis, where Non-resident is carrying on business in India through Permanent Establishment (PE) or perform professional service through fixed place in India and contract in respect of which FTS paid is effectively connected with PE of fixed place.

b)      PE is defined to include fixed place of business through which business of enterprise is wholly or partly carried on.

c)       The PE is defined in inclusive manner.

d)      The question for consideration is whether the meaning of words Fixed place of business is to be drawn from the concept underlined in DTAA i.e fixed in term of Duration and fixed in term of place or even short duration of fixed place of business will render the same as PE.

e)      Since the concept of Permanent establishment is borrowed from DTAA, intention of legislature must be to lend the same meaning, as envisaged there; else it must have given different explanation to the said definition.

f)       Thus transient nature of place of business in India should not be amounting to existence of PE u/s 44DA.

iv)                 Section 115A- Providing for rates for taxability of FTS on Gross basis

B)      Double Taxation Avoidance agreement (UN Model)

i)                    Article 5(1)- Providing conditions for existence of fixed PE

ii)                   Article 5(3)(a)- Providing conditions for existence of Construction PE, which inter-alia provides that if supervisory services in connection with building site or construction, assembly, installation project in source state, is rendered for more than 6 months, there is construction PE.

iii)                 Article 5(3)(b) – Providing conditions for Service PE- Furnishing of service, including consultancy service, in source state for period of more than 183 days in 12 months period.

iv)                 Article 12 – Providing for taxability of FTS on GROSS BASIS. (UN model does not have specific article dealing with FTS, but most of the DTAA entered into by India have specific clause relating to FTS and for analysis purpose said articles number is taken at 12). Said Article also generally provides that if FTS is provided through PE, then Article 5 is applicable i.e FTS will be taxable at Net Basis.

(In our analysis it is assumed that services involved are satisfying the conditions of Article 12 like make available etc.)

Analysis is carried out in following sequence:-

A.      Basic Service

a)      Service are rendered from outside India and utilised in India.

b)      Service are rendered in India, but service provider does not have fixed place of business at his disposal:-

i)                    Duration of service  183 days or less in 12 month period.

ii)                   Duration of service is more than 183 days in 12 months period.

c)       Services are rendered in India from Fixed place in India.

i)                    Existence of fixed place of business is less than 6 months

ii)                   Existence of fixed place of Business is 6 months or more

B.      Supervisory Services in connection with construction or assembly in following scenarios

Existence of Fixed Place of Business	Supervisory Service
	For Construction/assembly project undertaken by Service provider	For construction/assembly project undertaken by other person
Service provider has no fixed place of business in India	Case 1	Case 2
Service provider has fixed place of Business in India	Case 3	Case 4

Each of above case will be further evaluated with reference to duration of service;-

i)                    6 month or less

ii)                   More than 6 months

Detailed Analysis

A(a)-  Basic services are rendered from outside India and utilised in India

S.No.	Check points	Satisfaction	Remarks
1.	Section 9(1)(vii)`	Yes	Source rule is satisfied, as the services are utilised in India
2.	44DA	No	Service provider does not have PE in India
3.	Article 5(3)(b)	Not Applicable	Service are not being rendered in India
4.	Article 12	Yes

Conclusion- FTS are taxable in India and taxable on GROSS BASIS at the rates provided u/s 115A or Article 12, whichever is lower.

A(b) - Service are rendered in India, but service provider does not have fixed place of business at his disposal

S.No	Check points	Satisfaction		Remarks
		183 days or less.	More than 183 days
1.	Section 9(1)(vii)	Yes	Yes	Source rule is satisfied, as the services are utilised in India.
2.	44DA	No	No	Fixed place of Business used in section 44DA must be interpreted to mean place of business at the disposal of service provider, which is not satisfied in the instant case
3.	Article 5(3)(b)	No	Yes
4.	Article 12	Yes	No	If FTS are attributable to PE, then Article 5 take precedence over article 12

Conclusion-

a)      For Duration of 183 days or less - FTS are taxable in India and taxable on GROSS BASIS at the rates provided u/s 115A or Article 12, whichever is lower.

b)      For Duration of more than 183 days -FTS are taxable in India and taxable on NET BASIS (net basis to be computed as per Article 7 relating to profit attributable to PE) or GROSS BASIS at a rate provided u/s 115, whichever is more beneficial

A(c) – Services are rendered from Fixed Place in India

S.No	Check points	Satisfaction		Remarks
		Less than 6 months	6 months or more
1.	Section 9(1)(vii)	Yes	Yes	Source rule is satisfied, as the services are utilised in India
2.	44DA	No	Yes	Existence of PE u/s Section 44DA is doubtful, where existence of place of business is than 6 months
3.	Article 5(1)	No	Yes	Existence of PE under Article 5(1) is doubtful, where existence of place of business is than 6 months
4.	Article 5(3)(b)	No	No	Article 5(3) has no application when Article 5(1) is applicable.
5.	Article 12	Yes	No	If FTS are attributable to PE, then Article 5 take precedence over article 12

Conclusion

i)        Existence of Fixed Place is India is less than 6 months

FTS are taxable in India and taxable on GROSS BASIS at the rates provided u/s 115A or Article 12, whichever is lower

iii)                                Existence of fixed place in India is more than 6 months.

FTS are taxable in India and taxable on NET BASIS, net basis to be computed as per Article 7 relating to profit attributable to PE or as per computation methodology prescribed u/s 44DA, whichever is more beneficial.

B)     Supervisory services in connection with construction and assembly project

CASE 1

i)                    Service provider do not have fixed place of business in India.

ii)                   Construction/assembly project undertaken by service provider.

S.No	Check points	Satisfaction		Remarks
		6 month or less	More than 6 months
1.	Section 9(1)(vii)	No	No	Explanation 2 to section 9(1)(vii) excludes consideration for construction or assembly project from FTS.
2.	Section 9(1)(i)	Yes	Yes	Having business connection in India
3.	44DA	No	No	Amount received is not FTS & no fixed place in India, hence Section 44DA not applicable.
4.	Article 5(3)(a)	No	Yes
5.	Article 12	No	No	If DTAA contains special clause relating to supervisory service under Artiicle 5(3)(a), the general clause of Article 12 relating to FTS may not be applicable. Refer below stated case law.

Case Law: Birla Corporation Ltd Vs ACIT (TDS), ITA No. 251 and 252/JAB/13, ITAT, Jabalpur

Conclusion

a)      6 months or less- FTS not taxable, since under DTAA same is not taxable under applicable articles. FTS is taxable u/s 9(1)(i) if there is no DTAA on net basis, net basis to be computed as per normal provision of Income Tax Act.

b)      More than 6 months – FTS taxable on net basis, net basis to be computed as per Article 7 relating to profit attributable to PE or as per computation methodology prescribed under normal provision of Income Tax Act, whichever is more beneficial.

CASE 2

i)                    Service provider do not have fixed place of business in India.

ii)                   Construction/assemble project undertaken by other person.

S.No	Check points	Satisfaction		Remarks
		6 month or less	More than 6 months
1.	Section 9(1)(vii)	Yes	Yes	Exclusion of FTS under explanation 2 is doubtful, where construction or assembly project is not undertaken by service provider. Refer below states case laws.
2.	Section 9(1)(i)	No	No	If specific section 9(1)(vii) is applicable, then general clause of section 9(1)(i) may not be applicable
3.	44DA	No	No	No fixed place in India, hence Section 44DA not applicable.
4.	Article 5(3)(a)	No	Yes	Applicability of Article 5(3)(a) is dependent duration of supervisory service, irrespective of who has undertaken construction or assembly project.
5.	Article 12	No	No	If DTAA contains special clause relating to supervisory service under Article 5(3)(a), the general clause of Article 12 relating to FTS may not be applicable

Case Laws

i)                    Income-tax Officer Vs. SMS Schloemann Siemag Aktiengesellschaft Dusseldorf  57 ITD 254 (Hyd.)

ii)                   Joint Stock Company Zangas v ADIT (International Taxation) 47 SOT175 (URO)(Ahd).

Conclusion

a)      6 months or less- FTS not taxable, since under DTAA same is not taxable under applicable articles. FTS is taxable u/s 9(1)(vii) if there is no DTAA on Gross basis at the rates provided u/s 115A..

b)      More than 6 months – FTS are taxable in India and taxable on NET BASIS (net basis to be computed as per Article 7 relating to profit attributable to PE) or GROSS BASIS at a rate provided u/s 115, whichever is more beneficial.

CASE 3

i)                    Service provider has fixed place of business in India.

ii)                   Construction/assembly project undertaken by service provider.

S.No	Check points	Satisfaction		Remarks
		6 month or less	More than 6 months
1.	Section 9(1)(vii)	No	No	Explanation 2 to section 9(1)(vii) excludes consideration for construction or assembly project from FTS.
2.	Section 9(1)(i)	Yes	Yes	Having business connection in India
3.	44DA	No	No	Section 44DA not applicable, since consideration is not FTS.
4.	Article 5(1)	No	Yes	For less than 6 months, fixed place of business test may not be satisfied
5.	Article 5(3)(a)	No	No	For less than 6 months- Article 5(3)(a)- Not applicable For 6 months or more- When Article 5(1) is applicable, Article 5(3)(a) is not applicable.
6.	Article 12	No	No	If DTAA contains special clause relating to supervisory service under Article 5(3)(a), the general clause of Article 12 relating to FTS may not be applicable Further Article 5 takes precedence over Article 12.

Conclusion

a)      6 months or less- FTS not taxable, since under DTAA same is not taxable under applicable articles. FTS is taxable u/s 9(1)(i) if there is no DTAA on net basis, net basis to be computed as per normal provision of Income Tax Act.

b)      More than 6 months – FTS taxable on net basis, net basis to be computed as per Article 7 relating to profit attributable to PE or as per computation methodology prescribed under normal provision of Income Tax Act, whichever is more beneficial

CASE 4

iii)                 Service provider has fixed place of business in India

iv)                 Construction/assemble project undertaken by other person

S.No	Check points	Satisfaction		Remarks
		6 month or less	More than 6 months
1.	Section 9(1)(vii)	Yes	Yes	Exclusion of FTS under explanation 2 is doubtful, where construction or assembly project is not undertaken by service provider.
2.	Section 9(1)(i)	No	No	If specific section 9(1)(vii) is applicable, then general clause of section 9(1)(i) may not be applicable
3.	44DA	No	Yes	Existence of PE u/s Section 44DA is doubtful, where existence of place of business is than 6 months
4.	Article 5(1)	No	Yes	Same as in case 3
5.	Article 5(3)(a)	No	No	Same as in case 3
6.	Article 12	No	No	Same as in case 3

Conclusion

a)      6 months or less- FTS not taxable, since under DTAA same is not taxable under applicable articles. FTS is taxable u/s 9(1)(vii) if there is no DTAA on Gross basis, at the rates provided u/s 115A..

b)      More than 6 months – FTS are taxable in India on net basis,  net basis to be computed as per Article 7 relating to profit attributable to PE or as per computation methodology prescribed u/s 44DA, whichever is more beneficial.