Applicability of withholding tax in given foreign remittance

Hi Milind,

This is an interesting question about withholding tax (TDS) on payments to a foreign not-for-profit entity for subscripttion fees related to employee development activities.

Let's analyze it step-by-step:

1. Nature of Payment

• The Indian company pays a subscripttion fee to a US not-for-profit organization.

• The subscripttion is for an employees’ club organizing events aimed at soft skills and leadership development.

• Potential issuance of online/hard copy journals is a possible future activity.

2. Does it qualify as "Fee for Technical Services" (FTS)?

Under Indian Income Tax Law (Section 9(1)(vi)), FTS is broadly defined and includes:

• Fees for rendering any managerial, technical, or consultancy services.

• Payments for services involving technical knowledge, experience, or skill.

3. Is this activity “training”?

• Training services typically involve organized instruction aimed at skill development.

• Employee development through soft skills and leadership events can fall under “training” if the services rendered include technical or managerial knowledge transfer.

• However, if it’s a club membership fee merely providing access to events or facilities without distinct technical services, it may not qualify as FTS.

4. Subscripttion fee for journals

• Payment for subscripttion to publications (online/hard copy journals) is generally treated as royalty or business income, depending on facts.

• Subscripttion fees alone typically do not attract FTS withholding.

5. Relevant Double Taxation Avoidance Agreement (DTAA)

• The India-US DTAA defines “Fees for Technical Services” and “Royalties.”

• Whether the payment attracts withholding depends on DTAA provisions and nature of service.

• Not-for-profit status of the US entity and lack of Permanent Establishment (PE) in India reduce tax exposure but do not eliminate withholding obligation if payment is for taxable services.

6. Practical conclusion

• If the subscripttion fee is merely for club membership or access to events without rendering technical or managerial services, TDS under FTS may not apply.

• If the fee covers training or technical service (knowledge transfer), then it likely qualifies as FTS, and TDS should be applied at applicable rates.

• For the journal subscripttion, TDS may not apply or may attract royalty withholding rates, subject to DTAA.

7. Suggested action points:

• Review the agreement terms carefully to identify whether services include training or technical consultancy.

• If ambiguous, seek a clarification or certificate from the US entity describing the nature of services.

• Apply withholding tax based on the nature of services rendered and consult DTAA provisions.

• Maintain documentation supporting the classification of payments.