By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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New Page 17 KnoWerX Education (India) Private
Limited, In re
(AAR) (unreported)
Articles 1, 4, 5, 7 of India-USA DTAA;
Sections 4, 5, 9, 195 of the Act
Dated : 30-4-2008
Issues :
(i)
Examination fee
collected in India by resident on behalf of American professional
organisations and remitted to them outside India — Taxability thereof :
(a) in terms of
the Act; and
(b) in terms of
India-USA DTAA.
(ii)
Characterisation of the income mentioned in (i) above.
(iii)
TDS obligations of the resident
in respect of the income mentioned in (i) above
Facts :
The applicant was an Indian company which had
entered into agreement with an American entity for promotion of professional
certification programmes and examinations conducted by the American entity. It
was also in the process of entering into agreement with another American entity
for the same purpose. Under both the agreements, the applicant was to act as
their agent. The applicant would carry out promotional and marketing activities;
collect registration forms and fees from candidates in India desirous of
enrolling for the programmes/examinations; and remit the fees to the American
entities after deducting certain administration expenses and commission. The
American entities would conduct examinations either through the applicant or
through other entities in India; evaluate answer sheets; award certificates to
the candidates; forward these certificates to the applicant; and the applicant
would in turn distribute them to the candidates.
The AAR considered the
following questions :
1. (a) Whether
examination fees collected by the applicant in India on behalf of the
American entities and remitted to them were their ‘income’ liable to tax in
India ?
(b) If answer to (a)
is in affirmative, how should that income be classified — as business
income, royalty or fees for technical services ?
2. Whether the
applicant was required to deduct tax at source in respect of the remittances
and if so, at what rate ?
The AAR first examined the questions in light of S.
5 of the Act and observed that in terms of S. 5(2), income of a non-resident
includes income which accrues, arises or is received in India, or which is
deemed to accrue, arise or to be received in India, from any source in India. In
this context, the AAR referred to the Supreme Court’s decisions in CIT v.
Ahmedbhai Umarbhai and Co., (1950) 18 ITR 472 (SC), CIT v. Ashokbhai
Chimanbhai, (1965) 56 ITR 42 (SC) and Seth Pushalal Mansinghka (P) Ltd.
v. CIT, (1967) 66 ITR 159 (SC) and observed that while the income did not
accrue or arise, nor was it deemed to accrue or arise in India, it was received
in India as an agent of the American entities in India. It further observed that
the income was in the nature of business income. The applicant was receiving
income in India on behalf of the American entities as their agent. Hence, in
terms of S. 4 and S. 5 of the Act, the examination fee collected by the
applicant on behalf of the American entities would be taxable in India.
The AAR then considered the questions in light of
India-USA DTAA. The applicant had stated in his application that the American
entities were non-profit organisations, which were determined by American tax
authorities as ‘tax exempt organisations’. In response, the Department had
contended that since these were ‘tax exempt organisations’, they could not be
regarded as tax residents of the USA and consequently, provisions of India-USA
DTAA could not apply. For this purpose, the Department relied on the provisions
of Articles 1 and 4 of India-USA DTAA. The Department also contended that
partnerships, trusts, etc. were regarded as ‘transparent entities’ in the USA
and were not liable to pay tax there. In response, the applicant filed
additional documents and submissions to prove that the American entities were
corporations incorporated in the USA; were not ‘transparent entities’; were
liable to pay tax in the USA; but being in certain specified category, were
exempted from payment of tax. The AAR, therefore, held that they were tax
residents of the USA and provisions of India-USA DTAA would apply.
The Department also put forth the argument that the
applicant should be treated as PE in India of the American entities. After
examining the provisions of Articles 7 and 5 of India-USA DTAA, the AAR found
that the applicant did not conclude any contract on behalf of the American
entities and the admission of candidates for programme/examination was solely
done by them. Further, the applicant did not carry on any of the other
activities mentioned in Article 5 (such as storage of goods, etc.); on facts, it
could not be considered as dependent agent; it had liberty to have similar
relationship with others; it was not wholly or substantially dependent on the
American companies; it appeared to carry on promotion in the ordinary course of
its business; and it was not subject to any control of the American entities
with regard to the manner of carrying on it.
