CHAPTER 1
1.8
1.10 Resident and Ordinarily Resident in India (ROR)
1.11 Scope of total income - Section 5
1.11-1 Scope of total income of resident 19
1.11-2 Scope of total income of RNOR (includes person who is ‘Deemed Resident’)
1.11-3 Scope of total income of NR
1.12 Section 9 - Income deemed to accrue or arise in India 22
1.12-1 This Section lays down the guidelines and rules on how to determine when income falling under various categories is deemed to accrue or arise in India 22
1.12-2 Business and other income of an NR in India 22
1.12-3 Exclusions from BC and activities of NR which do not attract taxation in India under the IT Act 25
1.12-4 Expansion of Source Rule under section 9(1)(i) of the IT Act for taxing income of NR in India [Refer to separate Chapter on “Taxation of Indirect Transfer of Indian Asset”] 26
1.12-5 Salary income - Section 9(1)(ii)
1.12-6 Interest, Royalty and Fees for Technical Services - Section 9(1)(v), (vi) and (vii)
1.13 NR, IT Act and DTAA
1.14 NR tax rates in India - Foreign companies
CHAPTER 2
TAX TREATIES
2.1 Scope of this chapter
2.2 Purpose of DTAA and TIEAs
2.3 Models of DTAAs
2.4 Authority to enter into Bilateral tax agreements
2.5 How to read a DTAA for its application
2.5-1 Steps to follow to apply DTAA
2.5-2 The following chart explains the process of determining taxability of NR under the provisions of applicable DTAA or the IT Act 40
2.6 The following table lists the article number of the DTAA and brie y describes the topic or the income that the said article covers 42
2.7 Examples of MFN clauses 49
2.7-1 The India-Belgium DTAA contains the following language in the Protocol 49
2.7-2 The Protocol in the India-Philippines DTAA 49
2.8 DTAA rates are nal rates, no addition of surcharge or cess to those rates 50
CHAPTER 3
SETTING UP A BUSINESS IN INDIA
3.1 Scope of this chapter 52
3.1-1 Basic compliance requirements under Indian taxation law 52
3.2 Income Tax Registrations 52
3.2-1 PAN 52
3.2-2 TAN 58
3.3 Directors’ IT registration 58
3.4 Valuation requirements - Anti-Avoidance measures 59
3.4-1 Share premium for investment in closely held company needs to be justi ed by valuation 59
3.4-2 Minimum acquisition price of asset 63
3.4-3 Determination of FMV of Quoted shares 63
3.4-4 Determination of FMV of Unquoted Equity Shares 64
3.4-5 Determination of FMV of non-equity shares and securities in unlisted companies 65
3.4-6 Table summarising the Valuation Rules and when required 65
3.5 Related party transactions 66
3.5-1 Associated Enterprise 67
3.5-2 Methods for determining Arms’ Length Price (“ALP”) 67
4.1
4.2
3.5-3
3.5-4
3.5-5
3.5-6
CHAPTER 4
CLASSIFICATION OF INCOME
4.2-1
4.2-2
4.2-3
4.2-4
4.3
4.3-1
4.3-3
4.3-4
4.3-5
4.3-6
4.4
4.5
4.6
CHAPTER 5
DETERMINING ELIGIBILITY TO CLAIM BENEFITS OF DTAA
5.1
5.2 Factors that determine eligibility to
5.3 Whether surcharge & cess should be added to DTAA rates
5.4 Whether Equalisation Levy-2 on E-Commerce Operators (“EL-2”) is part of taxes covered under DTAA?
5.5 Consequences of PE, GAAR and Failing Principal Purpose Test under MLI
5.5-1 PE
5.5-2 GAAR 101
5.5-3 Principal Purpose Test (PPT) under Article 7 of MLI 102
5.6 Judicial determinations on application of DTAA 103
5.6-1 Delhi ITAT - Holds that the DTAA rate applies to DDT in case of Giesecke & Devrient (India) (P.) Ltd. 103
5.6-2 Mumbai ITAT does not permit DTAA rate to apply to DDT in case of Total Oil India (P.) Ltd. 104
CHAPTER 6
TAXATION OF RENTAL INCOME
6.1 Scope of this chapter
6.2 Income from house property 107
6.3 Case of NR for Taxability of Income from House Property 107
6.4 Article 6 on income from immovable property in several DTAAs 108
6.4-1 India-Australia DTAA
6.4-2 India-US DTAA
6.4-3 India-Singapore DTAA
6.5 Taxability under the IT Act
6.5-1 Computation of Income from House Property 110
6.5-2 Pro ts and gains from business or profession in case of a person in the business of real estate 114
6.6 Taxability under the DTAA 118
6.7 Tax Rate 118
6.8 Case Study 119
CHAPTER 7
TAXATION OF BUSINESS INCOME
7.1 Scope of this chapter 121
7.2 Relevant provisions under the DTAA 122
7.2-1 Business income taxable if NR has Permanent Establishment in Source State
7.3 Implications of PE in India
7.3-1 Article 7 of a DTAA lays down the principles of allocation of pro t to a PE
7.3-2 Force of Attraction 141
7.3-3 Preventing Arti cial Avoidance of Permanent Establishment Status, Action 7 of the BEPS - 2015 Final Report 143
7.3-4 Taxable income and applicable tax rate to PE
7.4 ‘Business connection’ under the IT Act
7.4-1 Business connection due to an agent of the NR in India
7.4-2 ‘Signi cant Economic Presence’
7.4-3 Determination of BC of NR in India
7.5 Computing of business income under the IT Act
7.5-1 Computation as per normal provisions
7.5-2 Provisions of the IT Act for determining income
7.5-3 Deduction for Depreciation
7.6 Other Relevant Provisions
7.6-1 Carry forward & Set-off of Losses
7.6-2 Special Provisions in case of certain businesses
7.6-3 Conversion of branch of foreign bank into subsidiary
7.6-4 Taxation when POEM of NR in India
7.7 Tax rate applicable to NRs
CHAPTER 8
TAXATION OF DIVIDEND INCOME
8.1 Scope of this chapter
8.2 Meaning of Dividend
8.2-1 Under the IT Act
8.2-2 Base Erosion and Pro t Shifting Action Plan 6Principal purpose and GAAR
CONTENTS
8.2-3 Compliance with withholding tax 177
8.2-4 Claiming deduction of expenses against dividends 183
CHAPTER 9
TAXATION OF INTEREST INCOME
9.1 Scope of this chapter 184
9.2 Meaning of Interest 184
9.2-1 Under the IT Act 184
9.2-2 Taxability of interest under the IT Act 185
9.2-3 Taxability of interest under the DTAA 190
9.2-4 Base Erosion and Pro t Shifting Action Plan 6Principal purpose and GAAR 194
9.2-5 Compliance with withholding tax 194
9.3 Claiming bene t of MFN clause in respect of interest 194
9.3-1 CBDT Circular issued on 3 February, 2022 in respect of application of MFN Clause - Circular No. 3/2022 195
9.4 Taxability of interest received by a resident from outside India 196
CHAPTER 10
TAXATION OF ROYALTY INCOME
10.1 Scope of this chapter 197
10.2 Meaning of Royalty and Taxability under IT Act 198
10.3 Meaning and Taxation of Royalty under DTAA 208
10.4 Controversies in relation to royalty and some Judicial Precedents 214
10.5 Income in relation to shipping and air transport 220
CHAPTER 11
TAXATION OF INCOME FROM FEES
FOR TECHNICAL SERVICES
11.1 Scope of this chapter 226 I-25
11.2 Fees for technical services under the IT Act, Section 9(1)(vii)
11.2-1 Included in the meaning of FTS
11.2-2 Excluded from the meaning of FTS
11.2-3 When is it accrued or arisen in India in the hands of resident or NR?
11.2-4 When is it not accrued or arisen in India in the hands of NR under the IT Act?
11.2-5 Nexus approach for taxability in India
11.3 Taxability of fees for technical services under the IT Act 230
11.3-1 Foreign companies with PE, receiving fees for technical services - sections 44D & 44DA 230
11.3-2 Taxation of fees for technical services under section 115A - on Gross basis 230
11.3-3 Withholding tax provisions under the IT Act 231
11.3-4 Consequences of not complying with withholding tax requirement 232
11.4 Fees for technical services under DTAA
11.4-1 FTS under the UN MC Article 12A
11.4-2 FTS under the OECD MC
11.4-3 FTS under India-USA DTAA
11.4-4 FTS under India-Germany DTAA
11.5 Analysis of the text of FTS article under the MCs, and the DTAAs 238
11.5-1 No Article in OECD for taxation of Fees for technical services 238
11.5-2 Protocol under India-US DTAA
11.6 Some useful recent judicial precedents 247
11.6-1 In GE India Technology Centre (P.) Ltd. v. CIT
11.6-2 CIT v. Toshoku Ltd.
11.6-3 Principal CIT v. Gopakumaran Nair
11.6-4 Regen Powertech (P.) Ltd. v. Dy. CIT (IT)
11.6-5 Infosys BPO Ltd v. Dy. CIT (IT)
11.6-6 IT Of cer (International Taxation) v. Cadila Healthcare Ltd. 249
CHAPTER 12
TAXATION OF CAPITAL GAINS
12.1 Scope of this Chapter 252
12.2 Capital Gains 252
12.3 Expansion of Source Rule under section 9(1)(i) of the IT Act for taxing Income of NR in India - Indirect transfer of Indian Assets 262
12.3-1 Section 9(1)(i) pertaining to taxation of indirect transfer of Indian asset 262
12.3-2 Analysis and Explanation of Taxation of Capital Gains from Indirect Transfer of Indian asset 266
12.3-3 Valuation Rules for computing tax under Explanation 5 of section 9(1)(i) of the IT Act 267
12.4 Tax rates under the IT Act 273
12.4-1 De nitions of short-term and long-term capital asset 273
12.4-2 De nition of short-term and long-term capital Gain 277
12.4-3 Summary of period of holding to qualify as longterm capital gain for different assets 278
12.4-4 Tax on short-term capital gain from speci ed listed securities 278
12.4-5 In case of FPIs or speci ed category-III AIFs 278
12.4-6 Tax rates on long-term capital gain 279
12.5 Taxability under the DTAA 281
12.5-1 India-US DTAA 281
12.5-2 India-France DTAA (MLI synthesized text as available on the Indian income tax department’s website) 282
12.5-3 India-Netherlands DTAA (MLI synthesized text as available on the Indian income tax department’s website) 283
12.5-4 India-Singapore DTAA (MLI synthesized text as available on the Indian income tax department’s website) 285
12.5-5 India-Mauritius DTAA 286
12.5-6 Multiple Factors Determine Treatment of Capital Gains Under DTAA
12.6 Some Judicial Precedents
12.6-1 Sano Pasteur Holding SA v. Department of Revenue, Ministry of Finance 288
12.6-2 Director of Income-tax (International Taxation), Hyderabad v. Vanenberg Facilities BV 289
12.6-3 Indostar Capital v. Assistant Commissioner of Income-tax, (International Taxation) 2(2)(1) 289
12.7 Case Study 289
12.7-1 Example of indirect transfer of Indian assets
CHAPTER 13
TAXATION OF EMPLOYMENT INCOME
13.1 Scope of this chapter 292
13.2 Provisions of IT Act pertaining to salary and its taxability 293
13.2-1 De nition of ‘income’ 293
13.2-2 De nition of ‘salary’
13.2-3 Deductions available against salary income 296
13.2-4 New Default Tax Regime for individuals, HUFs, AOPs and BOIs
13.2-5 Timing of taxation of salary income
13.2-6 Accrual of Salary
13.2-7 Taxability of individuals coming to India for employment purposes
13.3 Taxability of employment income under DTAA
13.3-1 India-Australia DTAA 303
13.4 Taxability of ESOP 306
13.4-1 Under the IT Act and the DTAA 306
13.4-2 Taxability of ESOP for globally mobile employees 309
13.4-3 Reporting of foreign assets held by the Indian resident employee 313
13.5 Tax Equalisation - Meaning and taxability in India
13.5-1 What is Tax Equalisation
13.5-2 Computation of salary under tax Equalisation 314
13.6 An ordinarily resident Indian earning salary outside India 315
CHAPTER 14
TAXATION OF NON-RESIDENT INDIAN
14.1 De nition of NRI
14.2 Applicability
14.2-1 Section 115E
14.2-2 De nitions of some important terms
14.2-3 Tax rates
14.2-4 Applicability is optional
14.3 Exemption
14.3-1 Amount of exemption
14.3-2 Withdrawal of exemption
14.4 Exemption from ling Tax Return
14.5 Applicability post becoming Resident of India
14.6 Case Study 322
CHAPTER 15
TAXATION OF FOREIGN PORTFOLIO INVESTORS
15.1 Scope of the Chapter 325
15.2 Taxation of FPIs in India
15.2-1 Income categories 326
15.2-2 Income of FPI/FII from securities is not business income 329
15.3 Income of FPI/FII other than from securities and set-off or carry forward of losses 329
15.4 Some interesting judicial decision 330
CHAPTER 16
TAXATION
OF AIFs, REITs, InvITs, SECURITISATION
TRUST
16.1 Scope of this chapter
16.2 AIF
16.2-1 De nition of AIFs under the IT Act
16.2-2 Taxability of AIFs
16.3 REITs & InvITs - Business Trusts
16.3-1 De nition of ‘business trusts’ ( i.e. REITs and InvITs)
16.3-2 Taxability of business trusts
16.4 Securitisation trusts
16.4-1 De nition of ‘Securitisation trusts’
Taxability of Securitisation trusts
CHAPTER 17
TRANSACTIONS ATTRACTING TRANSFER PRICING REGULATIONS
17.1 Scope of the chapter
17.2 Provisions of Chapter X of the IT Act Pertaining to Anti Avoidance - Transfer Pricing Regulations (“TP Regulations”)
17.2-1 Section 92 - Basic Framework of Transfer Pricing
17.2-2 Section 92A - Associated Enterprise
17.2-3 Section 92B - Meaning of International transaction
17.2-4 Section 92BA - Meaning of ‘Speci ed Domestic Transaction’
17.2-5 Section 92C - Determination of ALP
17.2-6 Section 92CB - Safe Harbour Rules
17.2-7 Section 92CC - Advance Pricing Agreements 370
17.2-8 Rollback Provisions for APA under section 92CC(9A) 373
17.2-9 Section 92CD - Giving Effect to Advance Pricing Agreements
17.2-10 Section 92CE - Secondary Adjustment
17.2-11 Section 92D - Maintenance of documents where ALP is to be determined 376
17.2-12 Section 92E - Filing of a report by a Chartered Accountant 378
17.2-13 Section 92F - Certain de nitions relevant to transfer pricing regulations 378
CHAPTER 18 BUSINESS REORGANISATIONS
18.1 Scope of this chapter 380
18.2 Share sale 380
18.2-1 Types of share sale 380
18.2-2 Impact of share transfer 381
18.3 Merger (called amalgamation under the IT Act) 382
18.3-1 De nition of amalgamation 382
18.3-2 Conditions for tax neutral mergers 383
18.3-3 Exemptions from Capital Gains Tax to transfer under Amalgamation (Merger) 384
18.3-4 Losses in case of Amalgamation 389
18.3-5 Conditions for set-off and carry forward of losses in case of amalgamation 390
18.3-6 Consequences if conditions are violated 391
18.4 Demerger related Provisions 392
18.4-1 Meaning of demerger analysed 394
18.4-2 Meaning of undertaking 394
18.4-3 Meaning of liabilities 395
18.4-4 Exemption from Capital Gains Tax in case of demergers 395
18.4-5 Demerger of an Indian Company 396
18.4-6 Demerger between two foreign companies 397
18.4-7 Treatment of losses and unabsorbed depreciation in Demerger - Availability of set-off or carry forward 398
18.5 Amortisation of expenses incurred for amalgamation or demerger 398
18.6 Demerger and tax saving - Judicial precedent Vodafone ESSAR judgment 398
18.7 Tax assessment of amalgamating company 399
CHAPTER 19
DISCONTINUANCE OF BUSINESS AND DISSOLUTION OF INDIAN COMPANY
19.1 Scope of the chapter 401
19.2 Taxation of discontinued business 401
19.2-1 Section 176 - Discontinued business taxed at rates prevalent in the FY of closure of business 401
19.2-2 Section 177 - Discontinuance of business of AOP 402
19.2-3 Section 178 - Company in Liquidation 403
19.2-4 Section 179 - Liability of directors of private company 404
19.3 Tax implication on shareholders of private company in liquidation 405
19.4 Cost of acquisition of the assets received upon liquidation for future 407
CHAPTER 20
FOREIGN TAX CREDIT
20.1 Scope of this chapter 408
20.2 Different methods of providing FTC
20.3 India’s DTAAs
20.4 Procedure under the IT Act and IT Rules
20.4-1 Guidelines for claiming FTC
20.4-2 Rule 128 - Credit allowed in the year of recognition of income 415
20.4-3 Credit only allowed for income-tax 415
20.4-4 No credit for disputed tax liability 417
20.4-5 Credit available in Indian Rupees 417
20.4-6 Credit available against MAT and AMT liability 418
20.4-7 Supporting documents to be furnished for claiming FTC 418
CHAPTER 21
MAKING PAYMENTS TO NRs & OBTAINING LOWER WITHHOLDING TAX CERTIFICATE
21.1 Scope of the chapter 420
21.2 Payments subject to withholding tax : Sections Attracted 423
21.2-1 Section 195 - General section requiring all payments comprising ‘sum chargeable to tax’ in India to be subject to withholding tax 423
21.2-2 Income of NRs in respect of Global Depository Receipts 429
21.2-3 List of sections and Rules for TDS on payment to NRs 432
21.3 Payments to residents where NR is also liable to deduct tax at source (includes section 194Q) 437
21.3-1 List of sections with description, rate and when such obligation arises 437
21.4 Section 195A - Income Payable “Net of Tax” 440
21.5
21.5-1 TCS Obligations
Annexure 21.1 : Speci ed list
CHAPTER 22
ASSESSMENTS, APPEALS AND DISPUTE RESOLUTION
22.0 Scope of this chapter
22.1 Summary Assessment
22.1-1 Procedure
22.1-2 No adjustments without notice to taxpayer
22.1-3 Computation of tax, interest and fee
22.1-4 Issuance of refund
22.1-5 Time limit
22.2 Scrutiny Assessment 448
22.2-1 Mandatory faceless assessment 448
22.2-2 Time limit for scrutiny assessment notice 459
22.2-3 Cases not covered under the faceless assessment scheme 459
22.2-4 Opportunity of being heard 459
22.2-5 Time limit for completion of assessment 460
22.3 Best judgment assessment 460
22.3-1 Cases covered under best judgment assessment
22.3-2
22.4 Reassessment 461
22.4-1
22.4-2 Issuance of notice 461
22.4-3 Relevant provisions pertaining to reassessment 462
22.4-4 Procedure for issuing notice under new section 148 463
22.4-5 Time limit for issuing notice for reassessment 464
22.4-6 Time limit for completing reassessment 465
22.4-7 Controversy on whether notice for reassessment could be issued under old section 148 post 1st April 2021 465
22.5 Directions by the Commissioner/Joint Commissioner 468
22.5-1 Section 144A - Examination of records by Joint Commissioner 468
22.5-2 Section 263 - Examination of records by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner 469
22.6 Reference to the Dispute Resolution Panel (“DRP”) 469
22.6-1 Applicability 469
22.6-2 Composition 470
22.6-3 Procedure 470
22.6-4 Aspects to be considered by DRP 470
22.6-5 Time limit 471
I-35
CONTENTS
22.7 Appeals before the Commissioner of Income-tax (Appeals) (“CIT(A)”) 471
22.7-1 Section 246A - Appeal ling 471
22.7-2 Due date for ling appeal 474
22.7-3 Manner of ling appeal 474
22.7-4 Centres for implementation of Faceless Appeal Scheme, 2021 475
22.7-5 Composition of Appeal Units 475
22.7-6 Simultaneous application for grant of Stay of Demand 476
22.8 Appeals before the Income Tax Appellate Tribunal (“ITAT”) 476
22.8-1 Section 253 - ITAT Appeal 476
22.8-2 Due date for ling appeal before the ITAT 479
22.8-3 Time line for passing order by the ITAT 479
22.8-4 Appeal from ITAT order 479
22.9 Appeal before the High Court (“HC”) 479
22.9-1 Due date for ling appeal 480
22.9-2 Scope of HC appeal 481
22.9-3 Appeal from HC order 481
22.10 Appeals before the SC 481
22.11 The Direct Tax Vivad Se Vishwas Scheme, 2024 481
CHAPTER 23
GENERAL ANTI AVOIDANCE RULES
23.1 Scope of the chapter 487
23.2 GAAR Provisions 487
23.2-1 Applicability of GAAR 487
23.2-2 Impermissible Avoidance Arrangement 488
23.2-3 Arrangement deemed to lack commercial substance 489
23.2-4 Factors relevant but not suf cient for determining whether or not an arrangement lacks commercial substance 490
23.2-5 Consequences of declaring an arrangement as IAA 490
23.2-6 Section 99 - Actions by the tax authorities 491
23.3 De nitions 492
23.4 Approving panel and process of Invocation of GAAR 494
23.4-1 Reference by Assessing Of cer to the Principal Commissioner or Commissioner 494
23.4-2 Process to be followed by the Principal Commissioner or Commissioner 494
23.4-3 Constitution of the Approving Panel 495
23.4-4 Procedure before the Approving Panel 495
23.4-5 Completion of proceedings by Assessing Of cer 496
23.5 Relevant rules under the IT Rules 496
23.5-1 Rule 10U - Inapplicability of GAAR 496
23.5-2 Rule 10UA - Consequences 497
23.5-3 Rule 10UC - Miscellaneous 498
23.6 FAQs on GAAR 498
23.7 Judicial Precedents 502
23.7-1 Ajanta Pharma Limited’s scheme of amalgamation and arrangement 502
23.7-2 Panasonic India (P.) Ltd.’s scheme of amalgamation and arrangement 504
23.8 GAAR invocation not a routine 509
CHAPTER 24
MISCELLANEOUS
24.1 Section 1 - Equalisation Levy 511
24.1-1 Introduction 511
24.1-2 EL on ‘speci ed services’ (Section 165) 511
24.1-3 EL on e-commerce operators (Section 165A) introduced by Finance Act, 2020 513
24.1-4 Furnishing of statement (Section 167) 515
24.1-5 Interest on delayed payment of EL (Section 170) 515
24.1-6 Penalty for failure to deduct or pay EL (Section 171) 516
24.1-7 Penalty for failure to furnish statement (Section 172) 516
24.1-8 Miscellaneous Provisions for EL 516
24.1-9 Some judicial precedents on EL 517
24.2 Section 2 - Authority for Advance Rulings (“AAR”) 518
24.2-1 De nitions (Section 245N) 519
24.2-2 Constitution of AAR 520
24.2-3 Application for advance ruling (Section 245Q) 520
24.2-4 Procedure on receipt of application (Section 245R) 522
24.2-5 Appellate authority not to proceed in certain cases (Section 245RR) 522
24.2-6 Advance ruling to be void (Section 245T) 523
24.2-7 Appeal (Section 245W) 523
24.2-8 Analysis of an AAR decision in case of Tiger Global International II Holdings 523
24.3 Section 3 - Mutual Agreements Procedure (“MAP”) 526
24.3-1 Coverage 526
24.3-2 What is MAP 527
24.3-3 Mutual Agreement Procedure 528
24.3-4 Making a MAP Application in India 530
24.3-5 MAP Process 531
24.3-6 Timeframe for resolving and implementing MAP cases 532
24.3-7 Access to MAP 533
24.3-8 Denial of Access to MAP 535
24.3-9 Technical issues 537
24.3-10 Implementation of MAP Outcomes 540
24.3-11 Applicant’s responsibilities 541
24.3-12 In the end 541
24.4 Section 4 - Promotion of International Financial Services Centre (IFSC) 542
24.5 Presumptive tax regime for domestic cruise services 547
Annexure 24.1 : Form No. 34F 549
CHAPTER 25
CASE STUDY TO DETERMINE TAXABILITY OF NR, UNDER IT ACT & DTAA
25.1 Case Study Facts 551
25.2 Analysis 553
25.3 Question 1. Determine the eligibility under the DTAA 554
25.4 Question 2. Does the JV Co. constitute the BC and PE of know-how LLP in India? 556
25.5 Question 3. Taxability of the secondee in India - What amount will be taxable in India? Who will be liable to withhold taxes under section 192? 560
25.6 Question 4. Will the secondee be required to le tax return in India? 563
25.7 Question 5. How will the licence fee under royalty agreement be taxed in India? 563
25.8 Question 6. How will the technical services fee be taxed in India? 567
25.9 Question 7. Will the salary of the secondee form part of the technical services fees? 569
25.10 Question 8. Taxation of interest payable to know-how LLP 571
25.11 Question 9. Applicability of TP regulations to all the transactions between know-how LLP and JV Co. 573
25.12 Question 10. Whether the transfer of interest in know-how LLP by the UK resident 2 to its Netherlands subsidiary would attract any capital gains tax in India 574
25.13 Question 11. What is the residential status of the secondee in India in all the years that he has been seconded to the JV Co.? 578
Appendix : List of Forms Referred 585
TAXATION OF INCOME FROM FEES FOR TECHNICAL SERVICES
11.1 SCOPE OF THIS CHAPTER
This chapter deals with taxation of Fees for Technical Services (“FTS”), briefly in general and in relation to an NR. It explains the meaning of FTS under the IT Act and how it is taxed under the IT Act in the hands of a resident and an NR. It also explains the meaning of FTS and Fees for Included Services, as it is referred to in some DTAAs and explains how it is to be taxed under a DTAA.
As has been discussed in earlier chapters, an NR who is eligible to the provisions of an applicable DTAA, would be taxed under the IT Act only if the IT Act is more beneficial in terms of its scope, meaning, and rate of tax. In all other cases, the provisions of the DTAA would apply. In this chapter, for the purposes of explaining the taxability under two different sets of DTAA provisions: one where the meaning and scope of FTS is very similar to that under the IT Act, section 9(1)(vii) and the other where it requires the services to be rendered for the use of intellectual property for which royalty payment under Article 12 of the relevant DTAA is made as well as where the services make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. Therefore, in addition to providing the text of Article 12 of the UN MC and the OECD MC, this chapter also deals with the text of Article 12 under India-US DTAA along with the examples given in the protocol exchanged, to understand the meaning given to this article by the two states and one more DTAA.
There is a plethora of judicial precedents, dealing with the taxability of fees for technical services and this chapter discusses a few important and recent decisions to explain the current trend in judicial interpretation.
11.2 FEES FOR TECHNICAL SERVICES UNDER THE IT ACT, SECTION 9(1)(vii)
Under section 9(1), incomes of the nature listed under clauses (i) to (viii) are deemed to accrue or arise in India. Clause (vii) deals with fees for technical services. When such fees are payable by the following, then they are deemed to accrue or arise in India and become liable to tax in India.
(vii) income by way of fees for technical services payable by—
(a) the Government ; or
(b) a person who is a resident, except where the fees are 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 ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
Explanation 2.—For the purposes of this clause, “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”;
11.2-1 Included in the meaning of FTS
Consideration for :
Rendering of any managerial, technical or consultancy services
Any lump sum consideration in regard to rendering of managerial, technical or consultancy services
Provision of services by technical or other personnel
11.2-2 Excluded from the meaning of FTS
Consideration for :
Any construction, assembly, mining or like project undertaken by the recipient of the fee
Any income which is characterised and taxed as salary in the hands of the recipient
11.2-3 When is it accrued or arisen in India in the hands of resident or NR ?
When paid by the government
When paid by a resident
When paid by another NR but the services are utilised by the NR payer in a business or profession that the payer carries on in India or
When paid by another NR, and the NR payer uses the services for the purposes of making or earning any income from any source in India.
11.2-4 When is it not accrued or arisen in India in the hands of NR under the I.T. Act?
Though paid by the government or a resident, the services are Used in a business or profession carried on by the payer outside India or used for the purposes of making - creating – or earning any income from any source outside India.
11.2-5 Nexus approach for taxability in India
The exclusions and inclusions from the FTS accruing or arising in India is based on the nexus approach. If the nexus is with India, then the fees accrue or arise in India and are taxable in India. Where there is no nexus with India, e.g. when a resident pays FTS to an NR whose services are used to set up business outside India or for a project outside India, from
which the resident would earn income from a source outside India, then it is regarded that there is no nexus of that FTS with India and is therefore not considered accrued or arisen in India.
Conversely, when an NR uses the services of another NR to set up a project in India or for consultancy in respect of business in India, there is nexus with India, since the NR payer will benefit from those services in the course of earning its income from the business or project in India. In such a situation, the fee paid by one NR to another NR is considered accrued or arisen in India and considered taxable in India.
Case studies to explain nexus:
1. Co. A, resident of India, is in the business of pharmaceuticals. The company already has several subsidiaries and branches around the world. It is considering further expansion in the South and Latin Americas. For that purpose, the company needs advice on the practical issues of pharmaceutical industry and advice on the appropriate structure. Co. A hires a pharmaceutical industry consultant in Brazil for this advice.
In these facts of the case, the fees paid to the Brazilian consultant, may be termed as paid for business being set up outside India and hence not accrued or arisen in India in terms of the second half provision of section 9(1)(vii)(b), which excludes such fee from being regarded as accrued or arisen in India.
2. Co. C, a resident of Italy, is engaged in the business of manufacturing and selling premium sanitaryware. Co. C is looking to set up its business in India and is considering whether it should be a wholly owned subsidiary, a joint venture company or a branch, distributorship or any other form and where in India should this be set up. For this purpose, it hires a consultant located in the UAE to advise and pays fees for the same.
In these facts of the case, Co. C is NR and the consultant is also NR. However, the advice that Co. C receives is for its business in India and hence it would fall in the meaning of FTS which accrues or arises in India under section 9(1)(vii)(c) and may attract tax in India, subject to the provisions of the India-UAE DTAA to which the consultant may be eligible.
11.3 TAXABILITY OF FEES FOR TECHNICAL SERVICES UNDER THE IT ACT
11.3-1 Foreign companies with PE, receiving fees for technical services - Sections 44D & 44DA
Where the fees for technical services received by the NR are connected with the business carried out by the NR through a permanent establishment (“PE”) or a fixed base in India, such fees for technical services are taxable under section 44DA (introduced by the Finance Act, 2003). This section provides that the fees for technical services in such a situation is to be computed as per the rules applicable under the IT Act to compute the profits and gains of business or profession.
Additionally, section 44DA specifically denies the following deductions:
(i) in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such PE or fixed place of profession in India; or (ii) in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the PE to its head office or to any of its other offices.
PE under the IT Act for the purpose of this section is specifically defined to include a fixed place of business through which the business of the enterprise is wholly or partly carried on.
It can be seen that there could be different interpretations in relation to what constitutes expenditure which is “wholly & exclusively incurred for the business of the PE or fixed place of business”. As per Rule 6GA, a foreign company being taxed under this section must keep and maintain books of account and other documents as required under section 44AA and also get such accounts audited by an accountant as prescribed in section 288. This report of audit of accounts of the NR should be in Form No. 3CE and should be furnished one month prior to the date of furnishing return of income under section 139(1) of the IT Act.
Care needs to be taken while claiming deductions under these sections to determine taxable income to avoid dispute and disagreement and proper documentation and records should help in avoiding litigation.
11.3-2 Taxation of fees for technical services under section 115AOn Gross basis
Where the income of an NR includes income by way of fees for technical services which is not covered under section 44DA, i.e. it is not connected
with the PE of the NR in India, it will be taxed at 20% on the gross receipt of fees for technical services, if the following conditions are satisfied:
(
a) The agreement under which fees for technical services is so receivable is entered into on or after 1 April, 1976;
(
(
b) The agreement is approved by the Central Government; OR
c) The agreement relates to a matter included in the industrial policy of the Government in force and it is in accordance with that policy.
Please note that section 115A(3) provides that no deduction would be allowed for any expense or allowance incurred for earning such fees for technical services income.
11.3-3 Withholding tax provisions under the IT Act
Section 194J requires a payer to withhold tax at source and carry out TDS compliances when making payment to a resident as prescribed in the following manner:
(1) As per the first proviso to section 194J, no deduction is required to be made if the fee payable does not exceed INR 30,000.
(2) As per the second proviso to section 194J, no deduction is required to be made by a payer if the gross turnover of the business does not exceed INR 1 crore or INR 50 lakh in case of profession
(3) As per the third proviso to section 194J, if the payer of FTS is an individual or a member of a HUF and the services are used exclusively for personal purposes, then no TDS is required to be done.
(4) If the payment is made to a person who is only engaged in the business of operation of call centre, the tax is required to be withheld at the rate of 2%
(5) As per section 194J(1), if the payment is made for professional services, which means legal, medical, engineering or architectural, accountancy or technical consultancy or interior decoration or advertising services or such other services which may be notified by the CBDT for the purposes of section 44AA, then the tax is to be withheld at the rate of 10%.
(6) As per section 194J(1) in case of all other types of FTS, the tax is to be withheld at the rate of 2%.
As regards payment of FTS to an NR, the withholding tax obligation is set out under section 195. Under Part II of the First Schedule to the Finance Act, 2022 tax at the rate of 20% is required to be deducted at
source while making payment of FTS to an NR, subject to availability of a lower rate in case of the NR under the applicable DTAA, if any1.
11.3-4 Consequences of not complying with withholding tax requirement
Under section 40(a)(i), if tax as required and discussed in paragraph 11.3.3 above is not deducted at source and is not deposited with the tax department as required under the IT Act, while making payment to an NR, then the expense of fees for technical services is not allowed as a deductible expense. The payer is then treated as taxpayer in default and the consequences in terms of interest and even penalty for failure to comply with the tax withholding provisions would apply.
11.4 FEES FOR TECHNICAL SERVICES UNDER DTAA
11.4-1 FTS under the UN MC Article 12A
The text of Article 12A, on Fees for Technical Services under the UN Model convention updated in 2017 is set out below:
Article 12A Fees For Technical Services
1. Fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, notwithstanding the provisions of Article 14 and subject to the provisions of Articles 8, 16 and 17, fees for technical services arising in a Contracting State may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the fees is a resident of the other Contracting State, the tax so charged shall not exceed per cent of the gross amount of the fees [the percentage to be established through bilateral negotiations].
3. The term “fees for technical services” as used in this Article means any payment in consideration for any service of a managerial, technical or consultancy nature, unless the payment is made:
(a) to an employee of the person making the payment;
(b) for teaching in an educational institution or for teaching by an educational institution; or
1. Refer to Chapter 21 “Payments to NRs” of this book for more detailed understanding of compliances of TDS when making payment to an NR.
(c) by an individual for services for the personal use of an individual.
4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the fees for technical services arise through a permanent establishment situated in that other State, or performs in the other Contracting State independent personal services from a fixed base situated in that other State, and the fees for technical services are effectively connected with:
(a) such permanent establishment or fixed base, or
(b) business activities referred to in (c) of paragraph 1 of Article 7.
In such cases the provisions of Article 7 or Article 14, as the case may be, shall apply.
5. For the purposes of this Article, subject to paragraph 6, fees for technical services shall be deemed to arise in a Contracting State if the payer is a resident of that State or if the person paying the fees, whether that person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to pay the fees was incurred, and such fees are borne by the permanent establishment or fixed base.
6. For the purposes of this Article, fees for technical services shall be deemed not to arise in a Contracting State if the payer is a resident of that State and carries on business in the other Contracting State through a permanent establishment situated in that other State or performs independent personal services through a fixed base situated in that other State and such fees are borne by that permanent establishment or fixed base.
7. Where, by reason of a special relationship between the payer and the beneficial owner of the fees for technical services or between both of them and some other person, the amount of the fees, having regard to the services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the fees shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
11.4-2 FTS under the OECD MC
OECD MC has no article or provision for taxation of Fees for Technical Services. In general, OECD regards such fees to be business income of a person and the same is taxed in accordance with the provisions for taxation of business income under Article 7, if the person has a PE in the State where the FTS arise.
11.4-3 FTS under India-USA DTAA
Article 12 Royalties And Fees For Included Services
1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed :
(
a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] :
(i) during the first five taxable years for which this Convention has effect,
(a) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ; and
(b) 20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and
(ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and
(b) in the case of royalties (………………..) and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received (this refers to royalty payment) under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services.
3. The term “royalties” as used in this Article means (Not dealt with here since it is dealt with in the chapter for Taxation of Royalties):
4. For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or
(b) make available technical knowledge, experience, skill, knowhow, or processes, or consist of the development and transfer of a technical plan or technical design.
5. Notwithstanding paragraph 4, “fees for included services” does not include amounts paid:
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a);
(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ;
(c) for teaching in or by educational institutions;
(d) for services for the personal use of the individual or individuals making the payments ; or
(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).
6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or
Article 15 (Independent Personal Services), as the case may be shall apply.
7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
(b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State.
8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of the Convention.
11.4-4 FTS under India-Germany DTAA
Article 12 Royalties and Fees for Technical Services
1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged
shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services.
3. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
4. The term “fees for technical services” as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement.
5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
6. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a land or a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
7. Where, by reason of special relationship between the payer and the beneficial owner or between both of them and some other
person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
11.5 ANALYSIS OF THE TEXT OF FTS ARTICLE UNDER THE MCs, AND THE DTAAs
11.5-1
No Article in OECD for taxation of Fees for technical Services
As the OECD favours residence based taxation, there is no article in the OECD MC to give right to the Source State to tax income from services when they accrue or arise in the Source State. The OECD regards income from services to be business income of the person and supports that such business income can only be taxed in the Source State if the recipient of services income had a PE in the Source State.
However, as can be seen from the India-USA and India-Germany DTAA (and most other DTAAs), India has negotiated hybrid model. In the case of USA, they are called fees for included services and they are connected with the enjoyment of the right of the intellectual property for which royalty payment is made.
Fees for included services in India-US DTAA are defined to be for services which:
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a royalty payment is made ; OR
(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.
This significantly narrows the scope of fees for technical services paid or payable to a US resident who is eligible to the DTAA benefits. Accordingly, a US tax resident which is eligible to the benefits of the India-US DTAA may claim the benefit of the narrower definition of ‘fees for included services’ and therefore, not be subject to income tax on such fees in India. The Protocol exchanged between India and the US on this Article sets out several examples to explain the intention of what is to be regarded as taxable in the Source State under this Article. The relevant text of the
protocol exchanged and agreed in respect of Fees for Included Services and the examples are set out below for ready reference :
11.5-2 PROTOCOL under India-US DTAA
IV. AD ARTICLE 12 - It is understood that fees for included services, as defined in paragraph 4 of Article 12 (Royalties and Fees for Included Services) will, in accordance with United States law, be subject to income-tax in the United States based on net income and, when earned by a company, will also be subject to the taxes described in paragraph 1 of Article 14 (Permanent Establishment Tax). The total of these taxes which may be imposed on such fees, however, may not exceed the amount computed by multiplying the gross fee by the appropriate tax rate specified in sub-paragraph (a) or (b) whichever is applicable or paragraph 2 of Article 12.
Explanation:
Total tax on fees for included services on which US would have right to levy tax, is not to exceed the total tax under Article 12, that is agreed by the two States to be levied by the Source State.
Article 12, Paragraph 4 (in general)
This memorandum describes in some detail the category of services defined in paragraph 4 of Article 12 (Royalties and Fees for Included Services). It also provides examples of services intended to be covered within the definition of included services and those intended to be excluded, either because they do not satisfy the tests of paragraph 4, or because, notwithstanding the fact that they meet the tests of paragraph 4, they are dealt with under paragraph 5. The examples in either case are not intended as an exhaustive list but rather as illustrating a few typical cases. For the purpose of understanding, the example in this memorandum described U.S. persons providing services to Indian persons, but the rules of Article 12 are reciprocal in application.
Article 12 includes only certain technical and consultancy services. By technical services, we mean in this context services requiring expertise in a technology. By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it.
