Section 9(1)(vii) of Act – Outsourcing fees paid by Japanese branch office of an Indian company to a non-resident (NR) and used for business development activities outside India, cannot be deemed to accrue or arise in India
Facts
The Taxpayer is a joint venture between an Indian Company (Indian JV Partner) and a Japanese Company (Japan JV Partner). The Taxpayer was engaged in the business of providing offshore software engineering services and solutions to F Co and its group companies.
The Taxpayer set up a branch office in Japan (Japan BO). The Japan BO was engaged in undertaking extensive sales and marketing activities in addition to bidding for projects and obtaining work from the customers from Japan and outside Japan (business development activities).
The Taxpayer entered into a framework agreement with Indian JV Partner and its group entity in Japan. The framework agreement was to facilitate sub-contract of software development work by Japan BO if the same could not be serviced by the taxpayer or Japan BO. During the relevant financial year, Japan BO paid certain outsourcing fee to another Japanese Company, which was group entity of Indian JV partner, without withholding taxes thereon.
The Tax authority contended that Japan BO was merely an extension of The Taxpayer and the outsourcing was undertaken by Taxpayer from India. Thus, outsourcing fee paid to Japanese Company is deemed to accrue or arise in India and the payment is therefore taxable in India. Hence, it is liable to tax withholding. Consequently, tax authority disallowed such payments made to Japanese Company in the hands of the Taxpayer for failure to withhold taxes on outsourcing fee.
The Taxpayer contended that Japan BO has an independent existence and carries on independent business in Japan. Thus, the outsourcing services are utilised by Japan BO in business carried on in Japan. Therefore, fee for such services cannot be deemed to accrue or arise in India u/s. 9(1)(vii)(c) and hence, no withholding is to be done on the payment of outsourcing fees.
Held
Taxpayer has a BO in Japan which carries on business outside India. Therefore, Japan BO creates a permanent establishment (PE) of the Taxpayer in Japan.
Japan BO had five employees as sales manager for carrying out sales and marketing activities and two managers for general administrative affairs of the company who possessed the technical skills required to understand the requirements of the projects. From the details provided about the employees in Japan and their job profile, it was clear that such employees were engaged in business development activities of Japan BO in Japan. Some of the projects obtained by Japan BO were outsourced by Japan BO as per its own business needs.
Merely because the financial statement of Japan BO is incorporated in the financial statements of the Taxpayer, the same does not conclude that the expenses are borne by the Taxpayer and not it’s Japan BO.
Payments for fee for technical services borne by the Japan BO shall not be deemed to accrue or arise in India and hence was not taxable in India. Therefore, there was no liability to withhold taxes on such outsourcing fees.
