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Deemed Income u/s 9

CA Prashant Gupta (DGM (F & A)) (14068 Points)

27 January 2010

A company in India has appointed one person in USA as marketing manager. He contact with a artist in Japan for some sample book design. These design will be used in India also. Artist made design and send to USA. The artist never went to USA or India. Company send him payment direct to Japan. Now please clear whether it is deemed income in India u/s 9. As Income Tax has withdrawl circular no 786 dt 7 Feb 2000 whether it is liable for TDS

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10 Replies

Amir (Learner) (4016 Points)
Replied 27 January 2010

Dear Prashant,

Well this is really tricky...

As far as my understanding goes -

From the facts mentioned it appears that the above transaction is that of "PURCHASE", since samples were not made on the specifications of Indian Company/Agent, and TDS is not applicable on "PURCHASES".

However, had the designs were made on the specifications of Indian Co / Agent & the fact that designs will be used in India as well would made it fall within the defination of Business Connections.

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Deepak Goel (Partner) (54 Points)
Replied 27 January 2010

Dear Prashant & Amir,

I think we need to look at the transaction from the charging section itself.

Since the Japanese Artist is a Non-resident in India, as per Section 5, only the income received or deemed to be received or accrues or deemed to accrue or arise in India, can be taxable in India. The income is not received in India as it is directly remitted abroad. For deemed to accrue or arise part we have to look at Section 9. Now this transaction cannot be covered under 9(1)(i) as the Japanese Artist does not seem to have any business connection in India. Also it does not seem to be covered under 9(1)(vi) and (vii) as it is not a payment for royalty or technical services.

Also as per Article 14 of the Tax treaty with Japan, Income derived by a resident of contacting state (here JAPAN) in respect of professional services or other activities of an independent character shall be taxable only in the contracting state (JAPAN) unless he has a fixed base available to him in the other contracting state (India) for the pupose of performing his activities or he is present there for a specified No. of days. Professional services include artistic services.

Therefore, in my opinion, i think there will be no TDS.....However, if the client agrees, we can go for certificate from Assessing Officer to be on safe side.

Also Amir, i think now there is a liability to deduct TDS on purchases also, if the receiver of the payment has a PE in India.

Please correct me whereever I am wrong.

Regards

Deepak Goel

Amir (Learner) (4016 Points)
Replied 27 January 2010

Dear Deepak Sir,

I am not arguing, i m just trying to support my answer, ur counter replies are welcome..

Firstly, If u say that the above transaction is not covered under business connections then what is the relevance of the word "DIRECT or INDIRECT" in the section which reads as follows

Sec 9(1) (i)

all income accruing or arising, whether directly or indirectly, through or from any business connection⁶⁰ in India, or through or from any property⁶⁰ in India, or through or from any asset or source of income in India, ⁶¹[* * *] or through the transfer of a capital asset situate in India.

Secondly, regarding TDS on purchase I couldn't find any such provision of PE.

Do you mean to say that if an Indian Company imports a Machinery of say Rs 10 Crores then it has to deduct TDS on this amount if the Vendor has any office in India??..

Deepak Goel (Partner) (54 Points)
Replied 27 January 2010

Dear Amir,

No offence meant really...This forum is for opinions only, and thats what i gave. :-)

As per AAR (Authority for advance rulings) in a recent case of Cushman & Wakefield and also in the case of Dun & Bradstreet Espana S.A. and also in the ITAT case of Pune in EPCOS AG, we can say with some conviction that in this case there is no business connection. Sometimes even subsidiary does not fall under the definition of business connection.

And the answer to your second query is YES. TDS applicablilty would be there even if you import an article or machinery if the foreign company has a PE in India. I know thats Sad, but thats Indian law for you. And the worst is that there is no mechanism to determine the rate of TDS in that case. (Here we are assuming that the PE has a role in getting the Order placed with the foriegn parent company)

Regards

Deepak Goel

Amir (Learner) (4016 Points)
Replied 27 January 2010

Dear Sir,

Can u plz elaborate that in the present case "Business Connection was there or not" is a question of Law or Fact. Because I am confused...

Secondly u said that there is no mechanism to determine rate of TDS..Can u plz share on what basis u r saying that TDS is to be deducted (I mean Sec, circular,etc)...

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Max Payne (employed) (2574 Points)
Replied 27 January 2010

Dear Amir,

Providing book designs would be a contract (wide interpretation of "any work")...

Providing technical designs falls within the ambit of technical services no..

so section 195 should be applicable anyhow... As long as the service provided is utilised in India, to the extent the benefit is derived in India, it would be income deemed to accrue or arise in india, whoever makes the payment..

so i think u have to deduct tax under sec 195 only.... i dont know what the DTAA says.

Amir (Learner) (4016 Points)
Replied 27 January 2010

Dear G.K.,

THE WORK IS DEFINED AS FOLLOWS, WOULD U STILL SAY IT WILL BE A CONTRACT U/S 194 C.

“work” shall include—

(a) advertising;

(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

(d) catering;

(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer,

but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer

RADHIKA JALAN (agarwal) (1521 Points)
Replied 27 January 2010

again i agree with amir.........

Max Payne (employed) (2574 Points)
Replied 27 January 2010

Dear Amir,

WORK does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer

That only shows that a contract of sale would be outside the scope of 194C no…

From my understanding, here it is not a sale, but a service has been rendered by the Japanese person by designing the books, in pursuance of a contract.. which, again is not technical in nature, so I think it will be covered u/s 194C…

Also services can be covered under section 194C.. I am quoting from a (famous) circular 715 of 1998,

It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case ofAssociated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”

Hence I am pretty sure that this is a transaction which is not one of sale, but of service, which is chargeable under the act, and which should be subject to TDS (not 194J/194C, but 195 since the Japanese is non resident)