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NRI Taxation - Technical Service Fees

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25 March 2008 One of our clients is in to the business of producing animation films for which it enters into contracts with non resident US Individuals in various capacities as writer, director, distributor etc. Whether the payments to such individuals be considered as Technical Service Fees for TDS. If yes, then what rate should be charged considering DTAA & IT Act. If no, then what procedure should be followed. Is there any provision for no deduction or lower deduction of tax. if yes, then wats the provision & the procedure. An early reply is sought.

19 March 2009 If the services are rendered outside India, no TDS is deductble. The transaction is in the nature of "import of services" on which service tax is payable.

07 May 2009 As per article 12 of Double Taxation Avoidance agreement between India an USA the royalty has been defined as following
“(a) payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or a scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience including gains derived from the alienation of any such right or property which are contingent on the productivity, use of disposition thereof; and
The bold part of the definition clarify that the payment made to a non resident US national for the use of or right to use the, any copyright of a literary or artistic work would be treated as payment of royalty.
As per section 9(1) (vi) of IT act the income of a non resident from the royalty would be treated as deemed to accrue and arise in India, whether provided in India or outside India. Section 115 A provides for concessional rate of tax of @ 10% + applicable SC EC on such incomes, Accordingly a Tax at source at that would be required to be deducted and paid to the Govt u/s 195/.
Section 90 (2) of Income tax Act provide as following –
Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
Since India has entered in to an agreement with the Govt of USA, the rate as per Treaty would apply as the rate prescribed in treaty is 10% ( No SC EC to be added) Since the rate of tax is more beneficial to the NR assessee the rates as per treaty would apply.
However it may be calrifed that the income of the Non resident from the distributor ship would be only in the nature of business income and will not be taxable in India.
For further clarification required, please let me know.

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