The Hindu Business Line : Taxability of fees for technical services

Since 1976, India has applied the source rule for taxation of royalties and fees for technical services. This however ordinarily resulted into the foreign collaborator asking the Indian importer of technical services to bear the tax on the technical services. This often led to the Indian importer having to gross up the tax payable on the technical services. To provide a concession to the Indian importer bearing such tax, payments for technology approved by the Government w ere exempted.

However, since 1991, India has progressively liberalised procedures for foreign technology payments and the need to approach the Government or the Reserve Bank of India has been done away with in most cases.

Corresponding changes

In keeping with the Industrial Policy changes, the corresponding changes have been made in the provisions of the Income-Tax Act, wherever concessional rates have been provided for technology payments

An example of such provision is Section 115A of the Income-tax Act, 1961 which provides concessional rate of tax for royalty and fees for technical services earned by a non-resident or a foreign company. The same is however subject to fulfilment of certain conditions, inter alia, such as the agreement either being in respect of a matter included in the Industrial Policy in force or being approved by the Central Government. It may be noted that the conditions are clearly alternative and there is no need for specific approval of the Central Government where a matter is included in the Industrial Policy.

The Mumbai Income Tax Appellate Tribunal (Tribunal), in its recent decision in the Kaiser Aluminium Technical Services Inc (20 SOT 226) case, dealt with the said issues leading to clarity on the subject.

In the said case, a non-resident company incorporated in US was dealing with metallurgical industries, non-ferrous metal and their alloys. It entered into a technical collaboration agreement with an Indian company and received fees for technical services. It claimed the fees exempt from income-tax in the absence of a permanent establishment in India.

Further, benefit of exemption under Section 10(6A) of the I-T Act, 1961 was also claimed, whereby the non-resident company contended that the tax borne by the Indian company on the payments should not be taxed in its hands.

The exemption is available subject to fulfilment, inter alia, of a similar condition as specified under Section 115A of the Act; namely that the agreement should either be approved by the Central Government or its subject matter should be part of the Industrial Policy in force.

Documentary evidence

The tax officer insisted on documentary evidence regarding approval of the Government and in its absence denied the exemption holding that the prescribed conditions are not fulfilled.

The Tribunal allowed the exemption on the basis that the agreement between the Indian company and the foreign technology supplier is covered under the Statement of Industrial Policy (SIP) in force. Reference was made to the relevant para in SIP which stated that the Government will provide automatic approval for technology agreement related to high priority industries and in the case of other industries, if such agreements do not require expenditure of free foreign exchange.

Also, no prior approval will be required for hiring of foreign technicians. Relevant RBI circulars liberalising the parameters for payment under ‘automatic route’ in case of foreign technology agreements were also considered.

The Ruling also clarified that the conditions specified for exemption are not cumulative.

In case the agreement is covered by the Industrial Policy which freely permits the payment, specific approval of the Central Government is not required.

Welcome decision

The decision of the Tribunal is thus a well considered judgement and one which has taken note of the relevant changes in the Industrial Policy, which has since been substantially liberalised and in accordance with the overall framework of the policy, most payments on current account today are allowed to be remitted through an authorised dealer.

Given the background of the Government permitting the concessional rate of technical services to all payments within the framework of the Industrial Policy and the fact that tax treaties do not have any such precondition for the taxation of technical services, it is hoped that the Revenue adopts a pragmatic approach as that of the Tribunal. It will otherwise be a case of “what one hand gives the other takes away”

(The authors are Partner and Manager, respectively, Deloitte Haskins & Sells, Mumbai.)