23 November 2022
An Indian company provided a job work service (on an item) to a foreign company (Nepal), and foreign company deducted a withholding tax. In DTAA there is no specific provision to tax job work service. will it be covered under other article provision and it will be taxable in India only and foreign tax credit of all entire withholding tax will be allowed as relief u/s 90?
23 November 2022
thanks for your reply sir. will it be covered under other article provision and it will be taxable in India only? and entire credit will be allowed.
02 August 2024
In the context of the Double Taxation Avoidance Agreement (DTAA) between India and Nepal, job work services and their taxation require careful consideration. Here's how it generally works:
### 1. **DTAA and Job Work Services**
**No Specific Provision for Job Work:** - If the DTAA between India and Nepal does not have a specific provision for job work services, the taxation of such services would be covered under general provisions or residual articles of the DTAA.
**General Provision:** - **Article 7 - Business Profits:** If the DTAA does not specify the taxation of job work services, it typically falls under the article dealing with business profits. According to Article 7, business profits are taxable only in the country where the enterprise is resident unless the enterprise has a permanent establishment (PE) in the other country. - **Article 12 - Royalties and Fees for Technical Services:** In some cases, job work services may be treated as "Fees for Technical Services" (FTS). However, since there is no specific mention in your query that job work services fall under FTS, the general business profit article might apply.
### 2. **Taxation in India and Nepal**
**Taxability in India:** - **Taxable in India:** If the job work services are deemed to be provided by an Indian company and there is no PE of the foreign company in India, the income from job work services would generally be taxable only in India according to Indian tax laws.
**Foreign Tax Credit:** - **Withholding Tax Deducted:** If the foreign company (Nepal) deducted withholding tax on the job work service, and there is no specific provision in the DTAA, the Indian company would be liable to pay tax in India. - **Credit or Relief Under Section 90:** The Indian company can claim relief under Section 90 of the Income Tax Act for the tax withheld in Nepal. This is typically provided in the form of a foreign tax credit, which reduces the Indian tax liability by the amount of tax paid abroad, subject to specific rules and limits.
### 3. **Steps for Relief**
**1. Verify Taxability:** - Determine if the job work service falls under business profits or other categories in the absence of specific provisions. Check the general or residual article in the DTAA.
**2. Compute Tax Liability in India:** - Calculate the Indian tax liability on the job work income as per Indian tax laws.
**3. Claim Foreign Tax Credit:** - File for a foreign tax credit under Section 90. Ensure that you provide proof of tax payment in Nepal, such as the withholding tax certificate.
**4. Documentation:** - Maintain detailed documentation of the job work services, withholding tax deduction, and any communication with the foreign company regarding the tax.
### **Example Scenario**
- **Service Provided:** Indian company provides job work services to a foreign company in Nepal. - **Withholding Tax:** Nepalese company deducts withholding tax. - **Indian Taxation:** The Indian company would include the job work income in its taxable income and pay tax as per Indian tax laws. - **Foreign Tax Credit:** The Indian company can claim a credit for the tax deducted in Nepal against its Indian tax liability, subject to the provisions under Section 90.
### Conclusion
- **Taxation in India:** Generally, job work services would be taxed in India, and the foreign withholding tax would be covered under general provisions if not specifically addressed in the DTAA. - **Foreign Tax Credit:** The Indian company can claim a foreign tax credit for the withholding tax deducted by the Nepalese company under Section 90.
For precise guidance tailored to your specific situation, especially considering recent developments and detailed provisions of the DTAA and Indian tax laws, consulting with a tax professional or advisor is recommended.
CAclubindia
