Advisory on Withholding Tax

Statement of Facts:

XYZ Pvt. Ltd, the querist, has proposed to enter into an agreement with Mr. XXXX, an individual being tax resident of Vietnam/Australia, for providing professional services as an Expert Contributor on retainership basis.

As per the terms of proposed agreement, Mr. XXXX will be required to generate leads, story ideas, follow up on those leads, attend and participate in relevant fairs, write feature articles, news items as per the requirement of the Company. In addition, Mr. XXXX is also expected to keep XYZ Pvt. Ltd. appraised about business opportunities in Media and related sector for XYZ Group and shall render assistance to the Company, if required, in exploring such opportunities from time to time. The copyright and all other intellectual property rights arising out of and/or in connections with this arrangement will vest in XYZ Pvt. Ltd. and will be the property of A XYZ Pvt. Ltd.

In consideration of the services rendered, XYZ Pvt. Ltd. agrees to pay fixed retainership fee to Mr. XXXX subject to deduction of TDS, if applicable.

It has been informed to us by the Company that Mr. XXXX will be providing services from Vietnam and does not have any fixed base and a permanent establishment in India. Also, his period of stay in India during the subject financial year will be less than 183 days. Further, it has been assumed that Mr. XXXX is holding a professional degree in journalism and the services provided by Mr. XXXX will be utilized by XYZ Pvt. Ltd. for its business operations in India. It is presently not known that Mr. XXXX is tax resident of Australia or Vietnam.

Queries:

On the aforesaid facts, XYZ Pvt. Ltd. has raised the following queries for our opinion:

• Whether tax is required to be deducted from the payment made by XYZ Pvt. Ltd. to Mr. XXXX towards retainership charges under the provisions of the Income Tax Act, 1961 (“the Act”) or Double Taxation Avoidance Agreement (“DTAA”).
• If the answer to the above question is yes, what is the applicable tax rate?
• What are the documents required from the non resident service provider for invoking provisions of DTAA?
• Is there any statutory tax compliance requirement to be adhered by the Company before remitting the amount to the non resident service provider?

Executive Summary:

• a) Though the payment of retainership fee towards professional services rendered by Mr. XXXX may be construed as “Fees for Technical services” in terms of provisions of Section 9(1)(vii) of the Act, the same will not be taxable as per Article 14/15 of India Vietnam/Australia DTAA. Hence, there will not be any requirement to deduct TDS in terms of provisions of Section 195 of the Act.
• b) The withholding tax rate applicable on subject payment is summarized as under:
  

  Particulars	Non Resident has either PAN in India or submits TRC of his resident country	Non Resident does not have PAN in India nor submits TRC of his resident country
  Tax Rate as per provisions of Income Tax Act	10.3%	20%
  Tax Rate as per DTAA between India and Vietnam /Australia	Nil	Nil

• c) The provisions of DTAA can be invoked by the non resident retainer on submission of following documents:

• Tax Residency Certificate of Mr. XXXX in his country of residence
• Confirmation on the letterhead of Mr. XXXX that he does not have a fixed base and Permanent Establishment in India and his period of stay in India during the relevant financial year will be less than 183 days.
• Form 10F
• d) Before making remittance to Non Resident (Mr.XXXX), XYZ Pvt. Ltd. is required to furnish Form 15CA and 15CB electronically subject to certain exceptions.

 

Our Opinion:

4.1 Response to Query No. 1 – Taxability of payment made to Mr. XXXX/retainer in India:

Section 195 of the Income Tax Act contains provision for deduction of tax at source from payment to non-resident. It provides that any person responsible for paying to a non-resident any sum chargeable under the Act shall at the time of credit of such income deduct income-tax thereon at the rates in force. The relevant provisions of the section are given as under:

“Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in Section 194LB or Section 194LC or Section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force..”

Therefore, for application of Section 195, it is sine qua non that the payment to non-resident must have an element of income liable to be taxed under the Indian Income-tax Act, 1961. In other words, when no part of payment to non-resident constitutes an income taxable under the Act, tax withholding obligations under section 195 do not come into play at all.

The chargeability under Indian Income Tax Act is governed by Section 5 of Income Tax. The scope of total income of Non-resident is defined under section 5(2) of the Act as under:

“Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which —

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.”

Section 9 of the Act provides nature of incomes which are deemed to accrue or arise in India. As per Section 9 of the Act the following incomes shall be deemed to accrue or arise in India:

• All incomes accruing or arising, directly or indirectly through a business connection in India;
• Royalty Income; and
• Fee for technical services.

The provisions of the Act are, however, overridden by the provisions of the DTAA between India and the country of residence of the non-resident, to the extent more beneficial to the non-resident assessee, vide section 90(2) of the Act, which reads as under:

“Where the Central Government has entered into an Agreement with the Government of any country outside India under sub section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to the assessee…”

In order to determine whether tax is required to be withheld from various payments to be made, it will thus be relevant to first determine whether payment made by XYZ Pvt. Ltd. to the non-resident(s) is chargeable to tax in India or not under the provisions of the Act. In case, payment made to the non-residents is not chargeable to tax in India under the provisions of the Act, no tax shall be required to be deducted at source in terms of section 195 of the Act. However, in case such payment is chargeable to tax in India, it will then be relevant to determine whether such payment is taxable under the relevant provisions of the applicable DTAA. If the payment is not chargeable to tax as per the provisions of the relevant DTAA, no tax shall be required to be deducted under section 195 of the Act, notwithstanding that such payment may be liable to tax under the provisions of the Act.

In the aforesaid legal background, we will analyze the taxability of services provided by Mr. XXXX in terms of provisions of Income Tax Act and Double Taxation Avoidance Agreement.

Provisions of the Income Tax Act

Section 9(1)(vii) of the Act defines fees for technical services as under:

“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”.

Explanation to Section 9(2) of the Act (inserted by Finance Act 2010) further provides that:—
―For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section
(1) and shall be included in the total income of the non-resident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India..”

It may be mentioned here that services are technical in nature when special technical skills or knowledge are required for the services. Further, consultancy services means the act of offering expert or professional advice in a field. In the present case, the services provided by Mr. XXXX comprises of generating leads, story ideas, follow up on those leads, attend and participate in relevant fairs, write feature articles, news items as per the requirement of the Company. The said services require specialized knowledge and intellectual skill. In addition, Mr. XXXX is also expected to provide consultancy services to keep XYZ Pvt. Ltd. appraised about business opportunities in Media and related sector for XYZ Group and shall render assistance to the Company, if required, in exploring such opportunities from time to time. Thus, the aforesaid services, in our opinion, would be construed as fees for technical services as defined in Section 9 (i)(vii) of the Act.

Hence, the payments made to Mr. XXXX towards aforementioned professional services be income accruing in India and in terms of section 5(2) of the Act would be taxable under the provisions of the Act irrespective of the fact that such services are rendered from outside India.

Once it is clear that the subject payment may be construed as fees for technical services within the definition of Section 9(1)(vii) of the Act, let us examine whether it falls within the exemption clause given under Section 9(1)(vii)(b) of the Act. The said clause provides that fees for technical services may not be treated as income deemed to accrue or arise in India where it is 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. In the present case, we have assumed that the services provided by the non resident retainer will be utilized by XYZ Pvt. Ltd. for its business operations in India. Hence, the above exemption may not be available in the present case. However, in case it can be demonstrated that the services have actually been used by XYZ Pvt. Ltd. for generating a source of income outside India, a position may be taken that the said services would fall within the exemption clause and hence not subject to tax in India.

Provisions of Double Taxation Avoidance Agreement (DTAA)

Since the services provided by Mr. XXXX may qualify as fees for technical services in terms of provisions of Income Tax Act in India and hence subject to tax in India, it, therefore, now becomes relevant to determine the Status of taxation of the aforesaid payments under the DTAAs entered into by India with Australia and Vietnam.

Provisions of DTAA between India and Vietnam/Australia

Article 15 of the DTAA entered into with Vietnam, dealing with ‘Independent Personal Services’, is relevant, and is reproduced as under:-

“ARTICLE 15-Independent personal services

1. Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable only in that State except in the following circumstances when such income may also be taxed in the other Contracting State:

(a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing these activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or

(b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in the relevant fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State.

2. The term “professional services” includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants”.

In India-Australia DTAA, the above article is similarly worded, the relevant extract is given as under:
Article 14- Independent Personal Services:

1. Income derived by an individual or a firm of individuals (other than a company) who is a resident of one of the Contracting States in respect of professional services or other independent activities of a similar character shall be taxable only in that State unless :

(i) the individual or firm has a fixed base regularly available to the individual or firm in the other Contracting State for the purpose of performing the individual’s or the firm’s activities, in which case the income may be taxed in that other State but only so much of it as is attributable to activities exercised from that fixed base; or

(ii) the stay by the individual or, in the case of a firm, by one or more members of the firm (alone or together) in the other Contracting State is for a period or periods amounting to or exceeding 183 days in a year of income, in which case only so much of the income as is derived from the activities of the individual, that member or those members, as the case may be, in that other State may be taxed in that other State.

e) The term “professional services” includes services performed in the exercise of independent scientific, literary, artistic, educational or teaching activities as well as in the exercise of the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.

On a careful perusal of the aforesaid Article – Independent Personal Services of the DTAA with Vietnam and Australia, it is noticed that the same covers payments made for rendering professional services or other independent activities of a similar nature. An inclusive definition of the expression ‘professional services’ has been given in the said Article. The highlighted expression “other independent activities of a similar character”, is to be read ejusdem generis with the expression “professional services”.

The said Article of the DTAA, thus, in our opinion, cover (a) the services specifically mentioned in the inclusive definition of the expression “professional services”; (b) a service falling within the general definition and bearing the character of a ‘professional service’ though not specifically mentioned; and (c) any activity service even though not falling within the general scope and definition of professional service but is an activity/ service similar to being pursued or carried on as profession.

The definition of ‘professional services’, which are termed as independent personal services in the phraseology employed in tax treaties, is, however, not defined in tax treaties or even official commentaries on UN and OECD Model Conventions. The meaning of this term is illustrated by some examples of typical liberal professions, and this enumeration of professions has only an explanatory character.

‘The law Lexicon’ edited by Justice Y.V. Chandrachud (1997 Edition) defines ‘profession, inter alia, as involving the idea of an occupation requiring either purely intellectual skill or if any manual skill, as in painting and sculpture or surgery, skill controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities’. This definition, barring the words “as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities” is incidentally the same as assigned by Scrutton U in Inland Revenue Commissioner v. Maxse [1919] 1 KB 647 referred to in LB Curzon’s Law Dictionary. Referring to Hon’ble Bombay High Court’s judgment in the case of Sakharam Narayan Kherdekar v. City of Nagpur Corpn. AIR 1964 Born. 200, the Law Lexicon further states that ‘an activity to be profession must be one carried on by an individual by his personal skill, intelligence and dependent on individual characteristics’.

Black’s Law Dictionary (5th Edition) defines profession as ‘an occupation requiring special, usually advanced, education and skill e.g. in law and medicine’ and observes that ‘the labour and skill involved in a profession is predominantly mental or intellectual, rather than physical or manual’. The school of thought thus emerging from these deliberations is that, broadly speaking, a profession will imply any occupation carried on by an individual, or group of individuals, requiring predominantly intellectual skills, dependent on individual characteristics of the person(s) pursing that occupation, requiring specialized and advanced education or expertise.

In the light of the aforesaid, the services provided by Mr. XXXX to the Company would, in our opinion, fall within the scope and ambit of Article 15/14 of the DTAA with Vietnam and Australia.

In terms of the aforesaid Article of the DTAA’s with Vietnam/Australia, payments made to the retainer would be taxable only in the country of residence of the retainer, i.e. Vietnam/Australia, unless the exceptions listed in clauses (a) and (b) of paragraph (1) of that Article apply. The exceptions, we understand, do not apply in the present case since the stay of the non-resident retainer in India is not expected to exceed 183 days and since the non-resident does not have any fixed base in India. Therefore, no tax is, in our opinion, required to be deducted from the payments made by XYZ Pvt. Ltd. to a retainer from Vietnam/Australia in terms of DTAA between India and Vietnam.

Conclusion:

Though the payment of retainership fee towards professional services rendered by Mr. XXXX may be construed as “Fees for Technical services” in terms of provisions of Section 9(1)(vii) of the Act, the same will not be taxable as per Article 14/15 of India Vietnam/Australia DTAA. Hence, there will not be any requirement to deduct TDS in terms of provisions of Section 195 of the Act. The fact that Mr. XXXX is tax resident of Vietnam or Australia will not make any difference with regard to taxability of subject payment in India.

In case similar payment is made by the Company to an individual who is a tax resident of Sri Lanka or Bangladesh, the above position may be taken in all such cases also. The relevant Article of DTAA between India- Sri Lanka and India- Bangladesh is given as Annexure A of this opinion.

4.2 Response to Query No. 2 – Rate of Withholding tax rate:

As per the provisions of the Income Tax Act in India, the withholding tax rate for technical and consultancy services provided by Mr. XXXX to XYZ Pvt. Ltd. is 20% assuming the non resident (Mr. XXXX) does not have a PAN number in India or does not submit TRC of his resident country. However, in case the Non Resident (Mr. XXXX) submits Tax Residency certificate of his resident country or obtains PAN in India, the rate of withholding tax will be 10.3%.

On the other hand, as per the beneficial provisions of DTAA between India and Vietnam/Australia, a position may be taken that there is no withholding tax rate on subject payment in terms of Article 14/15 of the DTAA as discussed above in Sr. No. 4.1. But for invoking such provisions of DTAA and claiming the aforesaid exemption, non resident will have to mandatorily furnish certain documents (as discussed below in Query No. 3), in absence of which Treaty benefit cannot be given.

4.3 Response to Query No 3 – Documents required for claiming DTAA benefit:

Sub Section (4) and (5) of Section 90 of the Income Tax Act read with Rule 21AB of the Income Tax Rules has specified list of documents required for claiming benefit under DTAA. The said section provides as under:

“..(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.

(5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed…”

In light of the above provisions, the beneficial provisions of DTAA can be invoked by the non resident retainer only on submission of following documents:

1. Tax Residency Certificate (“TRC”) of Mr. XXXX in his country of residence – This documents basically contains a confirmation by Tax Department that person is tax resident in that respective Treaty Country. In this case, Mr. XXXX may submit the TRC issued by either Vietnam or Australia Tax office stating Mr. XXXX is a tax resident of Vietnam or Australia.

2. Confirmation on the letterhead of Mr. XXXX that he does not have a fixed base and Permanent Establishment in India. Further, his period of stay in India during the relevant financial year will be less than 183 days. The said confirmation should be duly signed by Mr. XXXX.

3. Form 10F – This is a document which contains some basic information like name, address and Tax Identification Number of person etc. This is to be signed by Mr.XXXX.

4.4 Response to Query No. 4 – Tax Compliances required for making any foreign remittance:

Section 195(6) of the Income Tax Act provides as under:

“…the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed…”

Rule 37BB of the Income Tax Rules provides following forms which are required to be furnished by the person making a remittance to a non resident in India:

(a) Form 15CA- The Company making a foreign remittance is required to furnish Form 15CA with the income tax authorities electronically subject to certain exceptions. In the present case, the services provided by Mr. XXXX does not fall in the exemption list, hence XYZ Pvt. Ltd. would be required to file Form 15CA irrespective of the fact whether the services provided by Mr. XXXX are subject to tax in India or not.

(b) Form 15CB- Form 15CB is a certificate issued by a Chartered Accountant stating whether the payment to a non resident is subject to tax in India or not and what is the rate of withholding tax applicable on said payment. The said certificate is required to be furnished only in respect of such payments made to non-residents which are chargeable to tax in India and the amount of payment during the year exceeds Rs. 5 lakh.

Disclaimer:

1. The above note has been based on the facts made available to us by the Company. Further, the note is based on understanding of facts and the legal position prevailing as on the date of issue of the note.

2. The conclusions reached and views expressed are matters of opinion based on our understanding of the related laws, rules, notifications, circulars, etc.

3. Any incorrect statement, or omission of any fact, or a change/amendment in law or any of the facts, assumptions or representations, which we have relied upon, may require modification of all or part of the note given above. We assume no responsibility to update the note for events and circumstances occurring after the date of this opinion, unless specifically requested.

4. KL Aggarwal Associates, its partners, associates, employees or staff shall not be held liable for any action/ consequence arising out of any contrary view(s) taken by any other party or statutory authority qua this note. Without our prior written consent, this note shall not be quoted in whole or in part or otherwise referred to in any document or delivered to any other person or entity.

Annexure A

India – Sri Lanka DTAA

Article 14- Independent Personal Service

1. Income derived by an individual who is a resident of a Contracting State from the performance of professional services or other independent activities of a similar character shall be taxable only in that State except in the following circumstances when such income may also be taxed in the other Contracting State:

(a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or

(b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State.

2. The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, surgeons, dentists and accountants.

India – Bangladesh DTAA

Article 14- Independent Personal Service

1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that Contracting State. However, such income may be taxed in the other Contracting State, if—

(a) he has a fixed base regularly available to him in the other Contracting State for the purposes of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or

(b) he is present in the other Contracting State for a period or periods exceeding in the aggregate 120 days in the previous year or income year concerned of that Contracting State.

2. The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.