H P Agrawal: Simplify fees for tech services

FOREIGN ENTERPRISES

Fees for technical services is taxed at the rate of 20 per cent of the gross amount. The term "fees for technical services" is defined in Section 9 of the Income Tax Act.

The definition of the term is very wide and almost every service rendered by the foreign enterprise, whether in India or outside India, may be caught in the net.

The situation is aggravated by the fact that the said fee is charged to tax on the gross amount without deduction of any expenses. Further, the income-tax department tries to rope in every service in the category of technical services.

In this connection it will be useful to refer to the observations of the Madras High Court in the Skycell Communications Ltd vs Deputy Commissioner of Income Tax case, 251 ITR 53.

"In the modern day world, almost every facet of one's life is linked to science and technology inasmuch as numerous things used or relied upon in every day life is the result of scientific and technological development. Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology. On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical services," the court observed.

The taxability of fees for technical service should be examined from another angle; that is, whether the provider of technical services is a resident of a country with which India has signed a tax treaty.

If not, then the definition of Section 9 will prevail. But in case of yes, the provision of the tax treaty will supersede the Indian Income-tax Act (see 263 ITR 706).

Wherever a tax treaty is involved, the term "technical service" should be carefully analysed from following angles:-

Where the rate of tax on fees for technical services prescribed in the tax treaty is lower than 20 per cent, the said lower rate shall be applicable. In many cases, the rate of tax on fees for technical services is only 10 per cent or 15 per cent as against 20 per cent provided in the Income Tax Act.

In several cases tax treaties do not contain any separate provision for fees for technical services. In such cases, the fee would be taxable under the head "business profits". Business profits of any foreign enterprise can be taxed in India only if the foreign enterprise has a permanent establishment in India. Therefore, in a case where there is no provision in the tax treaty and the foreign enterprise has no permanent establishment, then the fee for technical services may not be subjected to tax at all (see 237 ITR 142).

In several tax treaties the scope of technical services is narrower than the definition given in the Income Tax Act. For example, definition of technical services in the Indo-US tax treaty is considerably restricted compared to the Income Tax Act.

In certain cases a provision is made in the protocol annexed to the tax treaty that if a subsequent tax treaty gives a more favourable treatment to the taxability of fees for technical services, then the provision of subsequent tax treaty will apply. In such cases reference should be made to all such subsequent tax treaties, which contain a more favourable clause vis-a-vis fees for technical services. (see 86 ITD 791).

The rigour of tax on fees for technical services might be substantially mitigated if the term fees for technical services is analysed on the lines as discussed above.

agar@nda.vsnl.net.in