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Confusion over tax on technical services persists


H P Agrawal  |  New Delhi 

Fees for technical services are taxed in India on a presumptive basis. Under the existing provision, a foreign company is liable to pay tax on the said income at the rate of 20 per cent of the gross amount.
However, the Finance Bill 2005 proposes to reduce the tax rate from 20 to 10 per cent in cases where the fees are to be received in pursuance of an agreement made on or after June 1, 2005.
Under Section 9 of the Income Tax Act, income by way of fees for technical services is taxed in India if the nature of services rendered by the foreign country is covered within the definition of fees for technical services as given in the section or in the tax treaty with the respective foreign country.
Such income becomes taxable merely on the ground that the said fee is paid by a person who is an Indian resident. The fee is taxed in India irrespective of the fact that the recipient is not located in India or that none of his business activities are carried out in India.
It has been recently clarified in a case reported in 230 ITR 206 that the statutory test for determining the place of accrual of the fees for technical services is not the place where the services are rendered, but the place where services are utilised.
Some confusion, however, still persists on whether any profit element is necessary while taxing the income by way of fees for technical services.
Example of such income without any profit element will be reimbursement of actual expenses. Section 9(1)(vii) of the IT Act, which creates the deeming fiction in respect of fees for technical services, also starts as "income by way of fees for technical services".
Likewise, Section 195, under which tax is deducted at source, also mandates deduction at the time of credit of "income" to the account of the payee.
The above controversy was placed before the Authority for Advance Rulings in Danfoss Industries Pvt. Ltd. case (268 ITR 1). In the case, an Indian company made certain payments to Danfoss, Singapore. It was pleaded that there was no element of profit in the payment because it represented only reimbursement of expenditure incurred by the Singapore company.
Therefore, the foreign company was not liable to pay tax in India. As such there was no obligation to deduct tax at source. It was, however, ruled that "it is important to remember that an element of profit is not an essential ingredient of a receipt to be taxable as an income".
The Supreme Court has also clarified in Transmission Corporation's case (239 ITR 587) that the provision of Section 195 is for tentative deduction of income tax subject to regular assessment, and by the deduction of income tax, the rights of the parties are not adversely affected.
Wherever, therefore, the payer or the payee has a doubt regarding the taxability of income in the hands of the non-resident payee, their rights are fully safeguarded under Section 195 (2), 195 (3) and 197 of the IT Act. These sections can be invoked for the permission to deduct no tax or a lower amount of tax.
If no such application is filed, income tax has to be deducted on the entire amount paid to the non resident even if there is no element of profit in the payment.

First Published: Mon, April 04 2005. 00:00 IST