TDS PAYMENT TO FOREIGN CONSULTANT

Is TDS applicable to foreign consultant who renders service outside India (namely in USA). Foreign consultant is US based and does not have PE in India.

·  First point before us for consideration is to decide whether the Income of the International Law firm is taxable in India or not?

a. As per the recent amendment in section 9 of Income tax act 1961proposed by finance bill 2010, as passed by Loksabha on 29th April 2010;all payments made to a nonresident outside India shall be taxable in India regardless of the fact that whether the services have been rendered in India or not. It is the situs of the payer and situs of utilization of service which is relevant now and not the situs of rendering service.

The extract of amendment is as follows:

In section 9 of the Income-tax Act, for the Explanation occurring after sub-section (2), the following explanation shall be substituted and shall be deemed to have been substituted with effect from the 1st day of June, 1976, namely:—

“Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.”.

The payment being made by the company to the International Law Firm Squarely falls within the ambit of above amendment since it is a payment for technical services as covered in explanation 2 to clause (vii) of sub-section (1) of section 9 of Income tax act.

The relevant extract of section 9 which talks about ‘Income deemed to accrue or arise in India’ is as follows:

“Explanation -For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".”

b. Another point to be noted here is that the DTAA provisions for the granting of relief to the non resident comes into picture, not at the time of deciding the taxability of non resident in India; but at the time of deciding the rates/relieves available to him. If the income is taxable as per the Indian Law, then the Non resident can opt for the provisions of the DTAA for extinction or marginalizing the liability so created

In view of the above discussion it is clear that the International law firm is taxable in India and hence is liable for deduction of tax at source on all payments received by it. The implications of the above conclusion are as follows:

1. The international law firm is required to file its Income tax return In India

b.      It is required for the Indian company to take a certificate in form 15CB from a certified chartered accountant certifying the rates at which TDS on such payments has been deducted. Subsequently, it will have to upload a form 15CA online. The duly signed Form 15CA (undertaking) and Form 15CB (certificate), will be submitted in duplicate to the Reserve Bank of India / authorized dealer.  The Reserve Bank of India / authorized dealer will in turn forward a copy the certificate and undertaking to the Assessing Officer concerned

·  Second point to be considered is what should be the rate at which TDS needs to be deducted?

Section 195 of income tax act talks about the tax to be deducted at source on payments being made to non residents. It reads as follows:

“Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force”

The rates are to be decided in accordance with the provisions of DTAA. The rates as per Income tax act or as per DTAA; whichever is beneficial to the assessee shall prevail.

Now, as per the clauses of Indo-US DTAA, payments for professional/legal services are covered in Article 15 that reads as under:

“Article 12

ROYALTIES AND FEES FOR INCLUDED SERVICES

……....5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid :

………(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in article 15 (Independent Personal Services).

Article 15

INDEPENDENT PERSONAL SERVICES

1. Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State:

(a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities, in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State ; or

(b) if the person's stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year.

2. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.”

Where tax treaties define IPS to mean services rendered by a “resident”, the term could include, inter alia, individuals, corporate entities, etc. [MSEB v. DCIT 83 TTJ 325 (Bom)]

Since the International law firm do not have a fixed base regularly available to it In India, nor its period of stay in India exceeds 90 days, there is no requirement to deduct TDS from payments made to it.

·  Another important point to be considered is that whether the International law firm is required to apply for PAN in India as per section 206AA?

The implications of abovementioned conclusion is that there is no requirement for the International law firm to apply for PAN in India as section 206AA would not apply to it. In this respect, the decision of the Hon'ble Bombay High Court in the case of CIT vs Siemens Aktiongesellschaft, [310 ITR 320] is worth consideration. In the said case, it was held that by a unilateral amendment in the domestic law, it is not possible to tax income which otherwise was not subject to tax under the tax treaty.

 Since Section 206AA has been inserted by a unilateral amendment, it cannot override the rates prescribed in the tax treaty.