Want to know about tax implications, concepts, and considerations of fees for technical services? Let us help you with a deep understanding of it.
FTS: Fee for technical Services
ITA: Indian Income Tax Act
Section-9(1)(vii) of ITA provide that Non-residents are taxable for his FTS income if payable to him by Indian government, Indian resident or even from Non-residents with few exceptions; whether or not, such non-resident has a residence or place of business or business connection in India or has rendered services in India. As a renowned chartered accountant firm in India, we urge you to read this blog.
1. For Fee for technical Services is payable by Indian resident and If it is utilised by him in his overseas business or profession; or Fee for technical Services is payable for making or earning any income from source outside India. Or
2. For Fee for technical Services is payable by non-resident and it is utilised by him for his Indian business or profession or for the purpose of making or earning any income from Indian source.
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1. FTS is taxable in the hands of non-resident in all cases irrespective the fact that he has a residence or place of business or business connection in India or has rendered services in India Except a very few exceptions as stated above. {This has been added to nullify the decision of the Honourable Supreme Court in the Ishikawajima-Harima Heavy Industries’ case (288 ITR 408) which says both rendering & utilisation of Fee for technical Services services in India in mandatory}
2. The word used is ‘payable’ not paid, it may indicate the taxability on accrual basis instead of cash basis and WHT compliance to be made on accrual basis.
3. Similarly, the word ‘utilised in’ in exception one is very limited on scope thereby not allowing ancillary services into its scope.
4. There is lot of litigation on exception ‘FTS is payable for making or earning any income from source outside India’, e.g. FTS services payable by resident to Non-resident for acquiring business outside India is not FTS, success fee for raising funds outside India is FTS, any service not at all involving human intervention in rendering is not FTS as the word ‘technical’ is placed between Managerial and Consultancy which both requires human touch in rendition of services, export commission as such payable by resident to Non-resident is not FTS, however if the role and responsibilities of the agent is more than that of normal agent is prone to be covered under FTS etc.
Explanation 2 of Section-9(1)(vii) of ITA provides that Fee for technical Services means any consideration for the rendering of any managerial, technical or consultancy services;
1. The terms managerial, technical or consultancy has not been defined in the ITA. Therefore, terms of the contract read with general meaning of these terms will decide the applicability on a case to case basis.
2. Determination of classification of consideration payable to the Non-resident is of immense importance as if considered as his business income, it will fall out of tax net in Indian in the absence of business connection or fixed based of non-resident in India.
3. The word used is ‘consideration for’ not ‘in connection with’, very limited on scope thereby not allowing ancillary services into its scope.
4. The inclusion ‘Including the provision of services of technical or other personal’ to be read wholly not in isolation, a view may be taken that unless the services are provided by technical or other personal are in the nature of managerial, technical or consultancy, such services may not be FTS.
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1. Income of non-residents from Fee for technical Services (FTS) (taxable as FTS) is taxable @10% tax rate on Gross basis as per Section-115A of ITA. The surcharge or cess shall be in addition to the tax rate.
2. Income of non-residents having Permanent Establishments in India from FTS (taxable as Business Profit) is taxable at normal tax rate on net basis as per Section-44DA of ITA. The surcharge or cess shall be in addition to the tax rate.
1. The FTS income of non-residents shall be taxable either under Secion-44DA or under Section-115A of ITA irrespective of the business to which it relates.
2. If the non-residents do not have PAN or specified informations, then tax rate as per Section-206AA of the ITA shall be 20%.
3. The FTS Income of the non-residents if taxable on gross basis under Section-115A and this being only income of the during that year, he is not required to file Tax Return in Indian, while in other case, he need to file his tax return in India.
To conclude, Fee for technical services as defined under the ITA is quite wide in scope and judicial decision will clearly support in this direction. As India do have a comprehensive treaty arrangement with most of the Countries in Action and negotiated the matters in many ways keeping in view of its economic developments and tax consideration. In the next paper, we shall discuss in details what we understand about under tax treaties with different Countries.
(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)
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