What constitutes ‘teaching in or by educational institutions’ under Article 12(5)(c) of India-USA DTAA ?

(2009 TIOL 13 ARA IT) (AAR)

Article 12(5)(c) read with MOU, India-USA DTAA; S. 9, S.
195, Income-tax Act

Dated : 29-5-2009

Issue :

What constitutes ‘teaching in or by educational
institutions’ under Article 12(5)(c) of India-USA DTAA ?

 

Facts :

The applicant was registered u/s.12AA of Income-tax Act. It
had two institutions — a medical college (which was a deemed university) and a
hospital (which was a university hospital). The applicant had executed an
agreement with an American medical institution (‘US Med’) for transfer of
knowledge and experience in the field of medical sciences. US Med was a
tax-exempt entity in USA. The applicant applied to AAR for determination of
the issue whether, having regard to Article 12(5) of India-USA DTAA, the
applicant would be required to deduct tax at source u/s.195 on the annual fee
payable to US Med, especially when both the payer and the payee are not liable
to tax in their respective countries.

 

The applicant stated that :

•  US Med
  would be rendering the services from USA. Being non-resident, it was not
  liable to tax u/s.9 of the Act in respect of services rendered in USA.

•  As the
  payments were for teaching in or by educational institution, they would be
  excluded from Article 12(5)(c) of India-USA DTAA. The applicant supported
  this proposition with examples 10 & 11 in the MOU appended to India-USA DTAA
  in respect of fees for included services in Article 12 (‘the MOU’).

•  As US Med
  was not liable to tax in India, the applicant had no obligation to deduct
  tax at source.

The tax authorities stated that :

•  Though
  the applicant was exempt u/s.12AA, US Med was not so exempt under the Act.

•  Fees
  payable by the applicant to US Med fall within the purview of S. 9(1)(vii)
  of the Act, read with the explanation below S. 9(2).

•  The fee
  paid was described as ‘annual alliance development
  administrative/maintenance fee’, which showed that it was not wholly for
  teaching in or by educational institution. Hence, the payment was outside
  the purview of Article 12(5)(c) of India-USA DTAA.

•  Correspondence from US Med showed that tuition fee paid was to be covered
  under ‘program deliverables’, which showed that the consideration was paid
  for making available technical knowledge, experience, skill, know-how or
  processes. As such, it was covered under Article 12(4) and example 10 of the
  MOU explaining the scope of exemption for teaching in educational
  institutions.

 

The AAR noted that, US revenue authorities had granted
exemption to US Med under US Revenue Code. It was also noted that US Med was
an incorporated entity which was exempt from tax in USA and as such, it could
invoke provisions of DTAA. The tax authorities did not dispute this position1.

 

The AAR observed that, as the question of tax deduction
would arise only if income is chargeable to tax, it was necessary to ascertain
the taxability of the fees paid. For this purpose, the AAR reviewed the
agreement. It observed that :

•  US Med
  was to provide educational and teaching services.

•  Specific
  services were to be agreed and decided in annual plan. These services were
  termed ‘deliverables’ for which fixed annual fee was to be paid.

•  Additional services were termed ‘additional deliverables’ for which
  additional payment was to be made.

•  US Med
  had granted non-exclusive, non-transferable licence to the applicant for use
  of copyright, trade mark, trade secrets, patent, etc. (‘intellectual
  property’) owned by it. The AAR observed that though the agreement clarified
  that no royalty was to be paid for use of Intellectual Property, the
  substances of the arrangement was to the contrary.

•  Based on
  information provided by the applicant, the AAR noted that following actual
  activities were conducted during the years 2004 to 2006.

•  Various
  programmes and workshops called ‘CME Programmes (comprising medical
  education).

•  Faculty
  student exchanges where the applicant’s representatives were deputed to US
  Med for doing clerkship.

•  Tele-medicine, which was a continuing program of monthly tele-medical
  education, e-learning and providing help in applicant’s institution-building
  through programmes in education, clinical care and research.

The AAR then referred to Article 12 of DTAA and examples 10
and 11 of the MOU appended to DTAA. It also referred to the legal definitions
of the terms ‘technical’ and ‘teaching’. It observed that the terms were
defined in their widest sense. The AAR then discussed examples 10 and 11 of
the MOU as also the connotations of the terms ‘technical’ and ‘teaching’.

Held :

The AAR stated that as clear picture of the activity and
payments did not emerge from the facts, it would lay down broad guidelines. In
respect of each of the activities, the AAR held that :

• Workshops and seminars are conducted from time to time. Generally, the speakers are from US Med. Medical teachers and professional from different places participated in these events. However, it was not known whether the workshops and seminars had any connection to a particular course conducted by the medical college of the applicant and whether it was meant for the benefit of students. These activities could be covered in Article 12(S)(c) : only if faculty from US Med participated in them; some of the participants benefiting from the activities were pursuing medical courses in the applicant’s institution; and seminar/workshop has substantial connection with the course of studies in the college.

• Tuition fees paid in respect of scholars deputed to complete course in USA were covered by example 10 of the MOU and consequently, were covered under Article 12(S)(c). Accordingly, they were excluded from the purview of fees for included services.

• Tele-conferencing and e-Iearning were part of teaching methodology. Hence, payments made for them would qualify for exclusion under Article 12(S)(c).

•  Payment to faculty for teaching through tele-conferencing and e-learning would be covered under Article 12(S)(c).

• Consideration for use of intellectual property would not be covered under Article 12(5)(c)2.

The AAR held that as the applicant made lump sum payment for various services, it was not possible for AAR to relate the payment to individual services which are exempt and those which relate to consideration for use of IPR. In the light of the above observations, AAR declined to give a ruling to the effect that the applicant was not at all liable to deduct tax at source in respect of payments to US Med and hence directed applicant to make an application before the tax authorities for determination of appropriate portion chargeable to tax in India.