Consultancy Services being provided to an Indian entity by an offshore entity are taxable as per Indian laws. However exemption from withholding tax is made available in certain cases, in terms of the Double Taxation Avoidance Agreement executed between India and the country of residence of the service provider.
Section 9 of the Income Tax Act, 1961, deals with Income that is deemed to accrue and arise in India, while Section 9 (1) (vii) specifically deals with income by way of fees for technical services, payable by a person who is a resident.
In terms of the Finance Act, 2008, the scope of Section 9 (1) (vii) has been further expanded retrospectively with effect from 1 June 1976 wherein income is deemed to accrue or arise in India under relevant sub-clauses shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.
Charges for technical services
The term fee for technical services under the Finance Act means any consideration (including any lump sum consideration) for rendering any managerial, technical or consultancy services (including the provision of services for technical or other personnel).
This, however, does not include a consideration for any construction, assembly or similar project undertaken by the recipient, or a consideration which would be classified as the income of a recipient, chargeable under the category of “salaries”.
A technical fee of this kind is subject to a withholding tax rate of 10% plus applicable surcharge.
Such transactions are also subject to service tax on the “import of services” at the rate of 12.36%. This is required to be deposited in addition to the tax withholding at 10% while an applicable surcharge towards tax withholding on fees for technical services must also be paid.
Thus, the income of a non-resident arising in India or deemed to accrue or arise in India on account of technical services (which includes consultancy services) rendered to an Indian enterprise, would be chargeable to tax in India under section 9 (1) (vii), regardless of the fact that there is no business connection between the non-resident and the Indian enterprise.
Taxability under the DTAA
In terms of Section 90 of the Finance Act, if there is a conflict between the provisions of the Double Tax Avoidance Agreement (DTAA) and the act, the assessee has the option to claim the provisions of the Finance Act, if they are considered more beneficial.
The provisions of section 90 prevail over those of sections 4 (charge of income tax), section 5 (scope of total income) and section 9 (income deemed to accrue or arise in India). Therefore, even where a business connection is established the profits of a company could be free from tax if covered by a DTAA.
In terms of a Double Tax Avoidance Agreement between India and Singapore, the income of a company resident in Singapore for rendering any managerial, technical or consultancy services will only be taxable in India in the case where the company has a permanent establishment in India.
If a company based in Singapore is providing consultant services from Singapore, the same would not be taxable or subject to withholding taxes in India.
In terms of a Double Tax Avoidance Agreement between India and the US, the costs for rendering any technical or consultancy services considered as “fees for included services”, is taxable in India and subject to withholding tax.
Therefore, the taxability of income for a non-resident for rendering any managerial or consultancy services varies from country to country and is dependent upon the DTAA entered into between the countries concerned.
In light of the provisions of a Double Tax Avoidance Agreement, payment to a non-resident or foreign company for rendering any managerial or consultancy services is exempted under the DTAA between India and Singapore.
However, such a fee for technical services is taxable under the DTAA between India and the US.
Therefore, a non-resident or foreign company has the option to opt for applicability of the tax measure and the taxability would vary as per the Double Taxation Avoidance Agreement between India and the country where the remittance of consultancy services are being rendered.
Sumes Dewan is a partner at KR Chawla & Co Advocates & Legal Consultants. The firm is headquartered in New Delhi and has offices in Chennai, Bangalore and San Francisco, as well as a representative office in Singapore.
7th Floor, Kailash Building
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Tel: +91 11 2335 7658-61
Fax: +91 11 2331 9997
KR Chawla Inc.
One Embarcadero Center
San Francisco; CA 94111
Tel: +415 773 2804
Mob: +415 509 2165