Article 15 and Article 12 of India – USA Double Taxation Avoidance Agreement (DTAA ) – Software development services rendered by an individual qualified as Independent professional services (IPS) as per Article 15. In absence of satisfaction of conditions provided in Article 15, such income was not taxable in India.
Facts
The Taxpayer, an individual resident in USA, carried on his business as a sole proprietor. During the year, Taxpayer had rendered certain software development services to an Indian company (ICo). As part of the software development services, Taxpayer was required to design, build and maintain a complete video streaming website for ICo.
Taxpayer contended that the income from the software development services was in the nature of business income and in absence of a PE or a fixed base in India, income from such services is not taxable in India under Article 7 as well as Article 15 of the DTAA. Further, even if one were to contend that the services were in the nature of technical services, as such services did not make available any technical knowledge or skill, it would not be covered by Fee for Included Services (FIS) Article.
AO rejected Taxpayer’s contention on the ground that services rendered by the Taxpayer were not in the nature of IPS but in the nature of FIS. Further it was contended that the services satisfied the “make available condition” and hence, income from software development services was taxable in India.
On appeal, the First Appellate Authority (FAA) held that software development services are covered by the IPS article. Further due to a specific carve out in FIS article, services covered by IPS article would fall outside the ambit of FIS. Since the Taxpayer did not have a fixed base in India, nor did his presence in India exceed 90 days, the income from such services was not taxable in India. Aggrieved, the AO filed an appeal with the Tribunal.
Held
On a conjoint reading of Article 12 and Article 15 of the India-USA DTAA, it is clear that once an amount is found to be of such a nature as it can be covered by IPS article, the same shall stand excluded from the ambit of FIS article.
The applicability of Article 15 is substantially influenced by the status of the recipient; whether the recipient is an individual or a corporate entity. Thus, although there may be overlapping effect in the scope of services covered by Article 12 and Article 15, as long as the services are rendered by an individual or group of individuals, rendition of such services is covered by Article 15. Reliance in this regard can be placed on decision of Mumbai Tribunal in Linklaters LLP vs. ITO (2011) 9 ITR Tri 271. In the context of India-USA DTAA, this is specifically exemplified by way of a specific carve out in Article 12.
The definition of professional service in Article 15 is only illustrative and not exhaustive. The emphasis is on the nature of services.
Software development service which essentially requires predominant intellectual skill and is dependent on individual characteristics of the person pursuing software development, and is based on specialized and advanced education and expertise qualifies as a professional service under Article 15. Reliance in this regard was placed on Kolkata Tribunal decision in the case of Graphite India Ltd (2002) 86 ITD 384
It was not in dispute that the Taxpayer did not have a fixed base in India, nor did his presence in India exceed 90 days in the relevant year. Thus, although the services are in the nature of IPS, in absence of satisfaction of conditions of Article 15, income from software development services was not taxable in India.
Whether the services satisfied the make available clause under the FIS Article is wholly academic and infructuous considering the above discussion.
