Withholding Tax on Translation Service
Querist :
Anonymous
(Querist) 19 July 2010
This query is : Resolved
Our Company is getting some documents Translated from Chinese Language to English by a Chinese Company. The Services are being rendered in China.
Will this be treated as Fee for TEchnical Services and therefore attract withholding tax u/s 195.
Raj Kumar Makkad
(Expert) 19 July 2010
No. As the whole work is being performed in China so it do not attract withholding of tax under section 195 of IT Act.
A V Vishal
(Expert) 19 July 2010
It is professional service and further if the payment is made out from India then 195 is surely attracted.
Querist :
Anonymous
(Querist) 20 July 2010
Thank you experts. But it does not address the querry.
Mr Makkar ???? Fee for Technical Service even provided outside India is deemed to accrue in India u/s 9 of Income Tax Act.
Mr Vishal, if it is professional service, under which provision of Income Tax Act it is taxable in India and therefore liable to withholding tax u/s 195.
I request Ld experts to kindly shed light and if possible with some judicial authority on the issue whether Translation Service is covered under "Technical Service" as defined under Income Tax Act.
A V Vishal
(Expert) 20 July 2010
Mr Anonymous,
Fees for technical services is taxed at the rate of 20 per cent of the gross amount. The term “fees for technical services” is defined in Section 9 of the Income Tax Act.
The definition of the term is very wide and almost every service rendered by the foreign enterprise, whether in India or outside India, may be caught in the net.
The situation is aggravated by the fact that the said fee is charged to tax on the gross amount without deduction of any expenses. Further, the income-tax department tries to rope in every service in the category of technical services.
In this connection it will be useful to refer to the observations of the Madras High Court in the Skycell Communications Ltd vs Deputy Commissioner of Income Tax case, 251 ITR 53.
“In the modern day world, almost every facet of one's life is linked to science and technology inasmuch as numerous things used or relied upon in every day life is the result of scientific and technological development. Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology. On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical services,” the court observed.
The taxability of fees for technical service should be examined from another angle; that is, whether the provider of technical services is a resident of a country with which India has signed a tax treaty.
If not, then the definition of Section 9 will prevail. But in case of yes, the provision of the tax treaty will supersede the Indian Income-tax Act (see 263 ITR 706).
Wherever a tax treaty is involved, the term “technical service” should be carefully analysed from following angles:-
• Where the rate of tax on fees for technical services prescribed in the tax treaty is lower than 20 per cent, the said lower rate shall be applicable. In many cases, the rate of tax on fees for technical services is only 10 per cent or 15 per cent as against 20 per cent provided in the Income Tax Act.
• In several cases tax treaties do not contain any separate provision for fees for technical services. In such cases, the fee would be taxable under the head “business profits”. Business profits of any foreign enterprise can be taxed in India only if the foreign enterprise has a permanent establishment in India. Therefore, in a case where there is no provision in the tax treaty and the foreign enterprise has no permanent establishment, then the fee for technical services may not be subjected to tax at all (see 237 ITR 142).
• In several tax treaties the scope of technical services is narrower than the definition given in the Income Tax Act. For example, definition of technical services in the Indo-US tax treaty is considerably restricted compared to the Income Tax Act.
• In certain cases a provision is made in the protocol annexed to the tax treaty that if a subsequent tax treaty gives a more favourable treatment to the taxability of fees for technical services, then the provision of subsequent tax treaty will apply. In such cases reference should be made to all such subsequent tax treaties, which contain a more favourable clause vis-a-vis fees for technical services. (see 86 ITD 791).
The rigour of tax on fees for technical services might be substantially mitigated if the term fees for technical services is analysed on the lines as discussed above.
'Fees for technical services' under various treaties between India
and other countries
The definition of FTS under the tax treaties entered between India with various other
countries is broadly of two types-
3.1 Broad Definition
In some of the double tax avoidance treaties1, FTS means payments of any kind to any
person, other than payments to an employee of the person making the payments and to
any individual for independent personal services, in consideration for services of a
managerial, technical or consultancy nature (referred to as 'broad definition'). Definition
of this type is similar to that of the definition under the Act.
3.2 Narrow definition
Some of the other treaties2 define FTS as defined under US Model (refer Para 3.1)
(referred to as 'narrow definition').
The main difference between the two definitions is the presence of a “make available”
clause, which means that the services provided should make available the technical
knowledge, experience, skill, know-how or processes, etc. to the user. Even if the services are in the nature of managerial, technical or consultancy services, but if they do
not make available any technical knowledge, experience, etc., as discussed above, then
the consideration would not qualify as FTS under the narrow definition.
Case Law:
Fee for technical services may be taxable in India even if completely rendered outside India
The assessee, an Indian company entered into an agreement with a Chinese company for availing bauxite testing services.
• The bauxite samples received from the Indian company were tested in the laboratories of the Chinese company located in China.
• The necessary reports consequent to the test conducted on the bauxite samples were prepared in China and provided to the assessee from outside India.
• At the time of making the payment to the Chinese company, the assessee made an application under section 195 of the Income Tax Act, 1961 (the Act) for obtaining a nil withholding tax order from the Assessing Officer (“AO”).
• The assessee submitted that the fees to be paid to Chinese company is in the nature of business income and in the absence of any Permanent Establishment (“PE”) of the Chinese company in India in terms of India- China tax treaty (Tax Treaty), the said fee is not taxable in India.
• The AO held that the services rendered by the Chinese company were in the nature of Fee for Technical Services (“FTS”) under the provisions of the Act as well as under the Tax Treaty and accordingly liable to withholding of tax at the rate of 10% of the gross amount under the aforesaid Tax Treaty.
Issue Before the Tribunal
• Whether the services rendered by the Chinese company from outside India is FTS under the provisions of the Act and under the Tax Treaty.
Decision of the Tribunal
• The fees payable to the Chinese company is covered within the scope of fees for technical services under explanation 2 to section 9(1 )(vii) of the provisions of the Act.
• The legal premises as laid down by the Courts in the case of Clifford Chance V DCIT (318 ITR 297) and Ishikawajima Harima Heavy Industries Ltd v DIT. (288 ITR 408) that under section 9(1)(vii) services should be (i) utilised in India, and (ii) rendered in India, in order to be taxable in India, do no longer hold good in view of the retrospective amendment made in section 9 by the Government of India.
• It is thus no longer necessary that in order to attract taxability in India the services must also be rendered in India. As the law stands now, utilization of the services in India is enough to attract taxability in India.
• It is fallacious to proceed on the basis that territorial nexus to a tax jurisdiction is inevitable to taxability in that jurisdiction and it is a normal international practice in all tax systems. This school of thought is now specifically supported by the retrospective amendment to section 9 of the Act.
• The definition of fees for technical services under India-China Tax Treaty is wider in scope. It provides for provision of services instead of provision of rendering of services. Therefore, it will cover the services even when these are not rendered in the other contracting state, i.e. India.
• Article 12(6) of India China tax treaty provides that fee for technical services arises in a country where the payer is a resident. In case it is accepted that FTS as defined under Article 12(4) will cover only such services which are rendered in a contracting state i.e. India, then the deeming provision of Article 12(6) will be unworkable.
• A literal interpretation to a Tax Treaty which renders treaty provisions unworkable and which is contrary to the clear and unambiguous scheme of the treaty has to be avoided.
• The technical services are clearly covered under Article 12(4) and under deeming fiction of Article 12(6) of the Tax Treaty. Consequently, the payment made to the Chinese company by the assessee is subject to withholding of tax in India.
Conclusion
• The decision of tribunal reaffirms the position that after amendment to section 9 of the Act, what is required is that, the services should be utilized in India in order to be taxable in India irrespective of the situs of rendering of the services.
‘Professional services’ means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of S. 44AA or of this Section.
Services rendered by a person for carrying on profession of Translation services are included in the definition of professional services.
Meaning of ‘Profession’ :
7.2 The word ‘profession’ has been interpreted in the context of S. 28 of the Act. In CIT v. Manmohan Das, (1996) 59 ITR 699 (SC), it was held by the Supreme Court that the expression ‘profession’ involves the idea of an occupation requiring either purely intellectual skill or if any manual skill, as in painting and sculpture, or surgery, skill controlled by intellectual skill of the operator, as distinguished from an occupation which is substantially the production, or sale, or arrangements for the production and sale of commodities. In another decision of the Apex Court in Indian Medical Association v. V. P. Shantha, AIR 1996 SC 550, it was held that one of the characteristics of a profession is that the nature of work is skilled and specialised and a substantial part is mental rather than manual. In CIT v. International Clearing and Shipping Agency, (2000) 241 ITR 172 (Mad.), the High Court held that the distinguishing feature of a profession is the possession by the practitioner of specialised knowledge involving intellectual skill and higher education in learning. The services rendered by the professional while practising the profession, are the services for which he has been trained. The practice of profession cannot be regarded as a commercial activity though the practice is not without compensation or profit. The compensation earned by the practitioner of professional is by reason of the personal qualification possessed by him or her. Thus, a person can be said to be providing professional services where he possesses the intellectual skill necessary for rendering the services and in which he is professionally trained. Further, the services are more mental than manual.
Querist :
Anonymous
(Querist) 20 July 2010
Thank you Mr Vishal for such a long and detailed reply. But unfortunately this does not address the basic question.
On one hand you state that Translation Service is Professional Service and on the other you state that it is caught under the definition of Technical Services.
The "Technical Services" under article 12 of DTAA with China has been defined identical to definition u/s 9(1)(vii) Expln 2. Hence if Translation Service falls under rendering of "Managerial, Technical or Consultancy Service" then certainly it will suffer withholding tax @10% as provided in article 12 of Treaty (The rate of tax u/s 115A is 10% and not 20% as stated by you.)
But if Translation Service is "Professional Service", then it goes out of ambit of Technical Service and article 12 of DTAA and would fall under article 14 (Independant Personal Service)where the tax liability would accrue on the basis of residency or period of stay.
You have stated that Translation Service fall under definition of Professional Service. That is what I am looking for. Request you to please provide me such definition, its source and any judicial pronouncement supporting the same.
Thanks in anticipation.
Querist :
Anonymous
(Querist) 22 July 2010
Awaiting replies of experts
