Dear Bansal,
My understanding of the facts of the case is as follows.
a. US company is providing architectural service to a company in India. to provide these services, it has subcontracted the work to a local company in India.
b. US Company will Invoice its Indian Client on one hand and pays to the subcontractor, for his service on the other.
On the first question (TDS applicability on payment made by Indian Client to US Co)
1. Providing of Architectural service has to be treated as Business Profits of US entity (Article 7 of DTAA Between India and US)
2. Business profits of foreign entities are taxable in India only if such foreign entities have Permanent Establishment (PE) in India (Article 5 of the treaty- DTAA)
3. In terms of para 5 of Article 5, Indian Subcontractor cannot be treated as Permanent Establishment of US Entity, if he is acting as a Independent Agent, and performs the subcontracting service, in his ordinary course of Business.
Para 5 of Article 5 reads as follows:
5. An enterprise (US entity in this case) of a Contracting State (US in this case) shall not be deemed to have a permanent establishment in the other Contracting State (India in this case) merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status (Indian Subcontractor in our case), provided that such persons (Indian Subcontractor)are acting in the ordinary course of their business. However, when the activities of such an agent (Indian Subcontractor) are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent (Indian Subcontractor) and the enterprise (US entity) are not made under arm’s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.
Therefore, it is my humble opinion that, if US entity does not have a direct PE in India and Indian Subcontractor satisfies the conditions mentioned in para 5 of Article 5, Indian Client need not deduct Tax (TDS/WHT) from the remittance made by it to US Entity.
On the second question ( Whether US entity to deduct tax from remittance made by it to Indian Subcontractor)
Since DTAA (Double Taxation Avoidance Agreement) is equally applicable for Indian and US entities, in terms of Article 7 r/w Article 5, US entity has to deduct tax only if Indian Subcontractor has a Permanent Establishment in US
Conclusion
Since interpretation of international taxation laws are complex, they are to be interpreted on case to case basis.
If any of the users of CACLUBINDIA have different opinion, i humbly request them to take it forward and share with us.
CA Vishwas Aradhya | +91 959131 18000
itsvishwas @ gmail.com
Bangalore
CAclubindia
