Fees for technical services may be taxed as business profits

FOREIGN ENTERPRICE

The issue for consideration is whether to treat the income from technical services as "business profits" or "fee for technical services" (FTS). Whereas business profits of foreign companies are taxable at the rate of 40 per cent (plus surcharge and education cess), FTS is generally taxed at the rate of 10 per cent. Hence, prima-facie, it appears that the assessee would like to treat his income as FTS.

In this context, an important fact which must be considered is that FTS is taxed at the gross amount of revenue, but in case of business profits, expenses are allowed to be deducted from gross revenue. Due to this fact, sometimes it is more beneficial for the assessee to treat the receipts as business profits instead of FTS.

A simple arithmetical calculation will show that if the expenses of the enterprise are more than 75 per cent of the gross amount, then it would be beneficial for the assessee to treat the receipts as business profits instead of FTS.

A similar issue was raised before the Authority for Advance Ruling (AAR) in a recent case of Worley Parsons Services Pty. Ltd (2008) (170 Taxman 91). The assessee, an Australian company, was engaged in the business of providing professional services such as engineering, procurements and project management entered into a contract with Gas Authority of India Ltd (GAIL) to monitor a project undertaken by GAIL. Under the contract, the assessee had to carry out various responsibilities for a consideration. The work related to the contract was mostly performed in India through a permanent establishment (PE).

The issues for consideration before the AAR were as follows: Whether the receipts from the contract are in the nature of