Position of Law
Analysis of the following provisions in the Indian Income Tax Act, 1961 along with DTAA between India and UK:
- Analysis of Section 5,
- Analysis of Section 9,
- Analysis of Section 115A,
- Analysis of Section 195,
- Analysis of Section 206AA,
- Analysis of Article 15 of DTAA between India and UK,
- Amendments in DTAA between India and the UK SIGNED IN London on 30 October 2012, entered into force on 27 December 2013.
- Analysis of Fees for Technical Services
Income Tax Act, 1961
Section 5 Scope of Total Income
Quote
"The total income of any previous year, in case of Non- resident, includes all income from whatever source derived which –
1. Is deemed to be received in India in such year by or on behalf of that person
2. Accrue or arise or is deemed to accrue or arise to him in India during such year."
Section 9 Income deemed to accrue or arise in India
Quote
"As per Clause (vii) of subsection (1) of Section 9 of the Income Tax Act, 1961 Income by way of fees for technical services payable by –
(a)…………..
(b) A person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c)……………………
Explanation 2: For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries"."
"The Explanation incorporated in section 9(2) declares that 'where the income is deemed to accrue or arise in India under clauses (v), (vi), (vii) of sub-section (1) of section 9, such income shall be included in the total income of the non-resident; whether or not -
1. the resident has a residence or place of business or business connection in India.'
2. The services have been rendered in India
Un Quote
The Intention is to cover all Consultancy/Professional/Technical services under Clause (vii) of subsection (1) of Section 9, whether provided by Individuals or firms of Individuals. There appears to be a distinction between the terms "profession", "professional" "professional activity" and "professional services". In sum, although only an individual can be a "professional" under existing law, it does not follow that a Professional cannot provide Technical/Consultancy Services. Lawyers are capable of rendering "Technical/Consultancy services in the course of carrying on the Legal profession".
FEES FOR TECHNICAL SERVICES - CLAUSE (vii) OF SUB-SECTION (1)
From a combined reading of clause (vii) (b) of section 9(1) and Explanation 2 it becomes clear that any consideration, whether lump sum or otherwise, paid by a person, who is a resident in India, to a non-resident for running any managerial or technical or consultancy service, would be income by way of fees for technical service and, would, therefore, be within the ambit of 'income deemed to accrue or arise in India'. -
G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564 (AP).
Section 115A(1)(b)
Quote
115A. [(1) Where the total income of -
(a) a non-resident (not being a company) or of a foreign company, includes any income by way of—
Royalty or Fees for Technical Services
[(BB) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of ten per cent if such fees for technical services are received in pursuance of an agreement made on or after the 1st day of June, 2005; and]
Explanation. - For the purposes of this section, -
(a) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 ;
Un Quote
Section 115A of the Act provides for special rates of tax in respect of fees for technical services (FTS) earned by a foreign company or a non resident (not being a company) which is taxable in India. Under the said Section, FTS would be liable to tax in India @ 10% if the agreement /contract under which fees is payable by the Indian company is made after 1st June 2005 and, is either
1. approved by the Central Government of India; or
2. it relates to a matter included in the Industrial Policy of India in force and is in accordance with that policy.
Section 195
Quote
Any person responsible for paying to a non resident non non-corporate person or to a foreign company any sum chargeable under this act shall deduct income tax thereon at the rates in force. The rates in force are defined under Second Part of First Schedule of Finance Act which are same as provided in Section 115A viz. 10% as mentioned above.
ARTICLE 15 - Independent Personal Services
1. Income derived by an individual, whether in his own capacity or as a member of a partnership, who is a resident of a Contracting State in respect of professional services or other independent activities of a similar character may be taxed in that State.
Such income may also be taxed in the other Contracting State if such services are performed in that other State and if:
(a) he is present in that other State for a period or periods aggregating to 90 days in the relevant fiscal year ; or
(b) he, or the partnership, has a fixed base regularly available to him, or it, in that other State for the purpose of performing his activities ;
but in each case only so much of the income as is attributable to those services.
2. For the purposes of paragraph 1 of this Article an individual who is a member of a partnership shall be regarded as being present in the other State during days on which, although he is not present, another individual member of the partnership is so present and performs professional services or other independent activities of a similar character in that State.
3. The term professional services includes independent, scientific, literary, artistic, educational or teaching activities as well as the independent activities or physicians, surgeons, lawyers, engineers, architects, dentists and accountants."
Unquote
As the Article 15 does not mention the rates, The rates mentioned is Section 115A will be considered.
The rates in Second Part of the First Schedule of Finance Act are the same as provided in Section 115A viz. 10% on Fees for Technical Services.
Amendments in DTAA between India and UK SIGNED IN London on 30 October 2012, entered into force on 27 December 2013.
Sub-paragraph (f) of paragraph 1 of Article 3 shall be deleted and replaced by the following: "(f) the term "person" includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States;"
Earlier Para reads as "(f) the term "person" includes an individual, a company and any other entity which is
treated as a taxable unit under the taxation laws in force in the respective Contracting States, but, subject to
paragraph (2) of this Article, does not include a partnership; "
Paragraph 1 of Article 4 (Fiscal domicile) shall be deleted and replaced by the following:
"1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that:
(a) this term does not include any person who is liable to tax in that State in respect only of income from
sources in that State; and
(b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries."
Earlier Para reads as "For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature."
Un-Quote
UK LLP has to be a person and also a resident to be able to claim the DTAA benefit. A UK LLP is characterized as body Corporate under the LLP Act of UK. Even though the UK LLP is fiscally transparent for income tax purposes in UK, It would be legal to call UK LLP as person since it is a body corporate under the UK LLP Act.
Once the test of "person" is satisfied, test of residency has to be satisfied. Article 4(1)(b) clearly states that partners/beneficiaries of LLP will be treated as residents.
Section 206AA
Quote
"Requirement to furnish Permanent Account Number.—
(1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—
(i) at the rate specified in the relevant provision of this Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of twenty per cent."
Summary Quotes/UnQuotes
The provision of Section 5 clearly states that total income of non-resident shall be taxable in India if it is accrues or arises or deemed to accrue or arise in India.
Section 9(1)(vii) states that fees from technical services shall be considered as deemed to accrue or arise in India irrespective of the fact that such services has been rendered in India. Explanation 2 of section 9 also defined the Technical Services which includes consultancy services/Managerial Services.
There appears to be a distinction between the terms "profession", "professional" "professional activity" and "professional services". In sum, although only an individual can be a "professional" under existing law, it does not follow that Professional firms cannot provide Technical/Consultancy Services. Lawyers are capable of rendering "Technical/Consultancy services in the course of carrying on the Legal profession as an Individual and as firm as well ".
Section 115A provides the special rates of taxes of 10% in respect of Fees for Technical services paid to non-residents non-corporate persons.
As per the provisions of section 195 any payment made to non-resident shall be liable to TDS at the rates in force.
The rates in force are defined under Second Part of First Schedule of Finance Act which are same as provided in Section 115A viz. 10% as mentioned above.
Section 206AA of the Act states in case the tax payer does not hold the PAN the tax rates should be higher of following:-
(i) at the rate specified in the relevant provision of this Act = 10%
(ii) at the rate or rates in force = 10% (as specified u/s 195)
(iii) at the rate of twenty per cent.
Section 206AA has overriding effect on all the sections of the Act. Therefore, tax rates provided in this section shall apply for the purpose of TDS, if at all Income is taxable in India. Article 15 of India and UK DTAA is applicable on Individuals or as member of partnership. Article 3 clearly includes LLP as person and Article 4(1)(b) states that partners/beneficiaries of LLP will be treated as residents.
Also as per OECD clarification PARA 8.4 of OECD commentary, It was concluded that whenever a fiscally transparent partnership loses entitlement to benefits under the Convention, the individual partners would be eligible to claim benefits in respect of the share of their partnership income that is liable to tax owing to such transparency, and such income would retain the nature and source that it had in the hands of the partnership for tax purposes.The most important conclusion arrived at in the report is that transparency for tax purposes is to be decided by the country of residence and the source country must adhere to such determination. The Report emphasises that the source State, in applying the Convention where partnerships are involved, should take into account the way in which an item of income is treated in the resident State of the taxpayer claiming the benefit of the convention i.e. the Source State should take into account whether the resident State treats the partnership as transparent or opaque.
CAclubindia
