The Mumbai Income Tax Appellate Tribunal recently issued a decision on whether payments for services rendered overseas are subject to withholding tax in India. The case involved an Indian accounting firm, BSR & Company (BSR).
In the year concerned, BSR made payments for taxation and audit services to service providers in Ireland, Indonesia, the UK and the U.S., which amounted to approximately INR 7.8 million. Because the services were rendered overseas, BSR determined that it did not need to withhold any tax on the payments. However, in auditing the return, the assessing officer determined that the payments were fees for technical services (FTS), and that tax should have been withheld. Since no tax was withheld, the deduction of the payments was disallowed. BSR appealed.
In its decision, the Income Tax Appellate Tribunal sided with BSR. Regarding the payments to the U.S. providers, the tribunal looked at Article 12 (Royalties and Fees for Included Services) of the India-U.S. tax treaty, and found that the service payments could not be considered FTS because there was no evidence to establish that any technical knowledge, skill, etc. had been made available to BSR through the rendering of the services. Since the payments could not be considered FTS and the providers had no permanent establishment in India, no withholding tax was due.
Regarding the payments to the Indonesian, Irish and UK providers, the Tribunal determined that the payments should fall under the articles on independent personal services of the respective treaties between India and those countries. In general, the articles require that the service provider have a permanent establishment in India for service payments to be taxable in India. Since none of the providers had a permanent establishment in India, no withholding tax was due.
The decision of the Tribunal may be further appealed by the tax authorities.
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