H P Agrawal: No tax on feasibility study

FOREIGN ENTERPRISES

Payment received by a foreign company for conducting a feasibility study for a project in India may not be liable to tax in India, if the payment for the study is made by another foreign company outside India.

In a recent case brought before the Authority for Advance Rulings, the Airport Authority of India (AAI) entered into an agreement with an American company for conducting feasibility study for its air traffic management requirement in India.

The US government had agreed to entirely fund the cost of the feasibility study through a grant, which was directly to be disbursed by the US government to the American company engaged for conducting the study.

The department argued that though the grant may not have reached the Airport Authority of India's bank account in India, so far as the American company is concerned, the payer is only the Airport Authority of India.

Therefore, payment made to the American company will be considered as taxable under Section 5 of the Income-Tax Act, because the income is actually accruing and arising to the American company from India, though the mode of payment is such that the money is received by the American company in the US.

It was further argued that payment to the American company will also be taxable as 'royalty' or 'fees for technical services' because the said feasibility study will result in the Airport Authority of India receiving information in respect of scientific experience and know-how from the American company.

Provision of Section 9, which defines the terms 'royalty' and 'fees for technical services' are broad enough to cover such consultancy also.

On behalf of the Airport Authority of India it was contended that the payment for feasibility study could not be covered under the definition of 'royalty' or 'fees for technical services', and further that the payment could not be taxed as 'business profit' as well, because the American company admittedly does not have any permanent establishment in India.

As for the applicability of Section 9, it was also contended that the activities of the American company will be totally out of the purview of Section 9, because no part of the income can be reasonably attributed to the Indian operations of the American Company.

Even otherwise, payments received by the American company cannot be taxed as 'royalty' or 'fees for technical services' as the same have not been made by an Indian resident.

The authority ruled that in the case of the Airports Authority of India, it is limited to the approval of invoices submitted by the American company and thereafter, the funds will be disbursed by the US government agency directly to the American company in the US.

So far, as the work of preparation of feasibility report is concerned, it will be done in the US. Since the American company does not have any office or establishment in India, under the circumstances aforesaid, no part of income can be said to have been received or deemed to be received or to have accrued or arising in India under Section 5 of the Act.

The Authority further observed that the provisions relating to 'royalty' or 'fees for technical services' can be invoked only if the consideration is paid by an Indian resident.

The Authority, therefore, stated that "the first question for consideration, therefore, is that the royalty or fees for technical services is payable by whom?" On the facts of the case, in substance, the amount is not payable by the Airports Authority of India at all.

Since the amount is not payable by the Airports Authority of India, it was held that no income can be deemed to accrue or arise in India under Section 9 (1)(vi) or 9 )1)(vii).