Article 12 and Article 14 of DTAA – Consultants providing technical consultancy services in the capacity of an advisor and who also bears the risk in relation to such services, would be treated as an independent person – services rendered by them would qualify as Independent Personal Services.

Article 12 and Article 14 of DTAA –
Consultants providing technical consultancy services in the capacity of an
advisor and who also bears the risk in relation to such services, would be
treated as an independent person – services rendered by them would qualify as
Independent Personal Services.

FACTS

Taxpayer, a foreign Company incorporated in
Canada, was engaged in the business of providing technical consultancy services
for development of irrigation and water resources in India. During the year
under consideration, Taxpayer was awarded a contract for providing consultancy
services in relation to irrigation development project. In relation to the said
project, Taxpayer made payments to certain non-resident individuals as fees for
consultancy services. Taxpayer did not withhold tax from the payments on the
ground that such payments were not chargeable to tax in India for the following
reasons:

a. Payments made to professionals were in the
nature of independent personal services (IPS).

b. Aggregate period of presence of such
professionals in India did not exceed the threshold provided in the treaty.

c. Professionals did not have a fixed base in
India.

The Assessing Officer (AO), however
contended that the professionals were not independent per se as their
scope of work and activities were regulated by contractual obligations or other
forms of employment. Hence, payments made to them would not qualify as IPS
under the treaty. AO held that the services were rendered by the professionals
specialising in their respective domains. Accordingly, such services were in
the nature of technical/consultancy services covered under the Fees for
Technical Services (FTS) article of the treaty and therefore, subject to
withholding of tax in India.

Aggrieved, the Taxpayer appealed before
Commissioner of Income Tax (Appeal) [CIT(A)]. CIT(A) examined the terms of
agreement between Taxpayer and the non resident consultants and held that such
services qualified as IPS and, in absence of a fixed base as also stay in India
being within the prescribed threshold of 90 / 183 days of the respective DTAA,
such income was not taxable in India.

Aggrieved, the AO appealed before the
Tribunal.

HELD

•    The non-resident consultant was engaged in
the capacity of an ‘advisor’.

•    The responsibility or the risk for the
results to a greater degree belonged to the professional.

•    The obligations arising from the contract
could not have been assigned to some other persons unlike in the case of an
employer.  Thus, the contract did not
lack independence of work/services to be rendered.

(PS: However, it is not clear from the
ruling if the recipient would have been taxable in India, if he had rendered
services in the capacity of an employee.)