Indian operators are about to deduct 55 per cent from what they pay my Swedish company for installing a GSM network. Can they deduct on my thin net margin instead?
No, not on the margin, though the rate came down. The Authority ruled that the Indian companies should not withhold at 55 per cent but at 30 per cent, the rate applicable to such payments under the Finance Act 1995. It refused the applicant's case that only its net profit from local operations, said to be not more than 10 per cent of receipts, could be taxed. The receipts being fees for technical services and the agreements having been made after 31 March 1976, section 44D(b) barred any deduction for expenditure or allowance, and the entire gross receipts fell to be taxed at 30 per cent under section 115A. The net profit question was left open.
Pronounced by the Authority for Advance Rulings (S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members) on 1996-06-20, reported as [1997] 224 ITR 203 (AAR). It bears on section 44D, section 115A, section 9(1)(vii), section 195, section DTAA art 13, section DTAA art 7 of the Income Tax Act 1961, in TDS Defaults and Deductions & Disallowances matters.
Read it for what it decides, which is close to the opposite of the proposition it is sometimes cited for: on these agreements tax fell on the gross receipts, and the Authority declined to reduce the base to an estimated income element. The win was on rate alone. The mechanism it applies - fees for technical services effectively connected with a permanent establishment move from the fees article into the business profits article, but section 44D then denies deductions and section 115A charges the gross amount - is the section 44D scheme in its purest form. That scheme is now history for new contracts, section 44DA governing agreements made after 31 March 2003 where the non-resident has a permanent establishment, and allowing expenditure.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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The applicant, Ericsson Telephone Corporation India AB, was incorporated in Stockholm. It contracted with three Indian parties - RPG Cellular Services Ltd of Madras, Motorola of Bombay and Bharti Cellular Ltd of New Delhi - to install GSM mobile telephone systems. The work involved installing hardware and software, training Indian personnel and related consultancy. With the Reserve Bank's permission the applicant had branch offices at New Delhi, Bombay and Madras. For 1995 its gross receipts were Rs 13,84,70,250 and its net profit Rs 35,27,289, about 2.3 per cent of receipts; it said its margin would not exceed 10 per cent. The Indian companies proposed to withhold tax at 55 per cent, the rate in Part II of the First Schedule to the Finance Act 1995. The applicant asked whether withholding should be at that rate or at the estimated net profits from its local operations, which would have produced an effective rate of about 5.5 per cent.
The Authority ruled that the Indian companies should not withhold tax at 55 per cent and should deduct only at 30 per cent, being the rate applicable to such payments under the Finance Act 1995. It reached that rate by holding the receipts to be fees for technical services both under article 13(4) of the agreement with Sweden and under Explanation 2 to section 9(1)(vii). Because the fees arose through the applicant's Indian permanent establishment, article 13(5) sent them to article 7 as business profits; but that did not open the door to a net computation, because section 44D(b) forbids any deduction for expenditure or allowance under sections 28 to 44C where fees for technical services are received from an Indian concern under an agreement made after 31 March 1976, and section 115A charges the gross amount. The Authority therefore rejected the contention that only the net income, put at not more than 10 per cent of receipts, could be brought to tax. It expressed no opinion on the net profits, leaving that to be agitated in appropriate proceedings, and declined to decide whether the work was mere assembly outside the definition.
The Authority accepted the characterisation but not the consequence the applicant drew from it. Installing a GSM system, training the operator's staff and giving related advice is consideration for services of a managerial, technical or consultancy nature, which is what Explanation 2 to section 9(1)(vii) and article 13(4) of the Swedish agreement describe. The applicant's own branches made the fees effectively connected with a permanent establishment, so article 13(5) took them out of the fees article and into article 7. The applicant's argument was that paragraph 3 of article 7 permits deduction of expenses and so confines the charge to real profit. The Authority answered that the treaty allocates taxing rights but leaves the computation to domestic law, and domestic law here was section 44D. Clause (b) of that section is a bar in terms: where fees for technical services are received from an Indian concern under an agreement made after 31 March 1976, no deduction under sections 28 to 44C is allowed. What remains is the gross amount, and section 115A supplies the rate for such an agreement, 30 per cent, in place of the 55 per cent the payers had assumed. On the applicant's other points the Authority declined to go further: whether the contracts were assembly rather than technical services was unsupported by facts and belonged to the assessment, and the non-discrimination complaint under article 26 was premature.
the entire gross receipts will be subject to tax at 30 per cent. under Section 115A
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Handle my notice → Ask a CA on WhatsAppNo, not on the margin, though the rate came down. The Authority ruled that the Indian companies should not withhold at 55 per cent but at 30 per cent, the rate applicable to such payments under the Finance Act 1995. It refused the applicant's case that only its net profit from local operations, said to be not more than 10 per cent of receipts, could be taxed. The receipts being fees for technical services and the agreements having been made after 31 March 1976, section 44D(b) barred any deduction for expenditure or allowance, and the entire gross receipts fell to be taxed at 30 per cent under section 115A. The net profit question was left open. This was decided by the Advance Ruling (S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members) and bears on section 44D, section 115A, section 9(1)(vii), section 195, section DTAA art 13, section DTAA art 7 of the Income Tax Act 1961. It is reported as [1997] 224 ITR 203 (AAR). Read it for what it decides, which is close to the opposite of the proposition it is sometimes cited for: on these agreements tax fell on the gross receipts, and the Authority declined to reduce the base to an estimated income element. The win was on rate alone. The mechanism it applies - fees for technical services effectively connected with a permanent establishment move from the fees article into the business profits article, but section 44D then denies deductions and section 115A charges the gross amount - is the section 44D scheme in its purest form. That scheme is now history for new contracts, section 44DA governing agreements made after 31 March 2003 where the non-resident has a permanent establishment, and allowing expenditure. If it applies to you, the first step is this: Date the agreement first: section 44DA, not section 44D, governs agreements made after 31 March 2003 where the non-resident has a permanent establishment in India.
The applicant, Ericsson Telephone Corporation India AB, was incorporated in Stockholm. It contracted with three Indian parties - RPG Cellular Services Ltd of Madras, Motorola of Bombay and Bharti Cellular Ltd of New Delhi - to install GSM mobile telephone systems. The work involved installing hardware and software, training Indian personnel and related consultancy. With the Reserve Bank's permission the applicant had branch offices at New Delhi, Bombay and Madras. For 1995 its gross receipts were Rs 13,84,70,250 and its net profit Rs 35,27,289, about 2.3 per cent of receipts; it said its margin would not exceed 10 per cent. The Indian companies proposed to withhold tax at 55 per cent, the rate in Part II of the First Schedule to the Finance Act 1995. The applicant asked whether withholding should be at that rate or at the estimated net profits from its local operations, which would have produced an effective rate of about 5.5 per cent. The matter was decided on 1996-06-20 by the Advance Ruling (S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members). On those facts the Advance Ruling held as follows. The Authority ruled that the Indian companies should not withhold tax at 55 per cent and should deduct only at 30 per cent, being the rate applicable to such payments under the Finance Act 1995. It reached that rate by holding the receipts to be fees for technical services both under article 13(4) of the agreement with Sweden and under Explanation 2 to section 9(1)(vii). Because the fees arose through the applicant's Indian permanent establishment, article 13(5) sent them to article 7 as business profits; but that did not open the door to a net computation, because section 44D(b) forbids any deduction for expenditure or allowance under sections 28 to 44C where fees for technical services are received from an Indian concern under an agreement made after 31 March 1976, and section 115A charges the gross amount. The Authority therefore rejected the contention that only the net income, put at not more than 10 per cent of receipts, could be brought to tax. It expressed no opinion on the net profits, leaving that to be agitated in appropriate proceedings, and declined to decide whether the work was mere assembly outside the definition.
The Authority accepted the characterisation but not the consequence the applicant drew from it. Installing a GSM system, training the operator's staff and giving related advice is consideration for services of a managerial, technical or consultancy nature, which is what Explanation 2 to section 9(1)(vii) and article 13(4) of the Swedish agreement describe. The applicant's own branches made the fees effectively connected with a permanent establishment, so article 13(5) took them out of the fees article and into article 7. The applicant's argument was that paragraph 3 of article 7 permits deduction of expenses and so confines the charge to real profit. The Authority answered that the treaty allocates taxing rights but leaves the computation to domestic law, and domestic law here was section 44D. Clause (b) of that section is a bar in terms: where fees for technical services are received from an Indian concern under an agreement made after 31 March 1976, no deduction under sections 28 to 44C is allowed. What remains is the gross amount, and section 115A supplies the rate for such an agreement, 30 per cent, in place of the 55 per cent the payers had assumed. On the applicant's other points the Authority declined to go further: whether the contracts were assembly rather than technical services was unsupported by facts and belonged to the assessment, and the non-discrimination complaint under article 26 was premature. In the words reproduced by the source cited on this page: "the entire gross receipts will be subject to tax at 30 per cent. under Section 115A"
It was decided by the Advance Ruling on 1996-06-20 and is reported as [1997] 224 ITR 203 (AAR). Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 44D, section 115A, section 9(1)(vii), section 195, section DTAA art 13, section DTAA art 7, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The Authority ruled that the Indian companies should not withhold tax at 55 per cent and should deduct only at 30 per cent, being the rate applicable to such payments under the Finance Act 1995. It reached that rate by holding the receipts to be fees for technical services both under article 13(4) of the agreement with Sweden and under Explanation 2 to section 9(1)(vii). Because the fees arose through the applicant's Indian permanent establishment, article 13(5) sent them to article 7 as business profits; but that did not open the door to a net computation, because section 44D(b) forbids any deduction for expenditure or allowance under sections 28 to 44C where fees for technical services are received from an Indian concern under an agreement made after 31 March 1976, and section 115A charges the gross amount. The Authority therefore rejected the contention that only the net income, put at not more than 10 per cent of receipts, could be brought to tax. It expressed no opinion on the net profits, leaving that to be agitated in appropriate proceedings, and declined to decide whether the work was mere assembly outside the definition. It arises in TDS Defaults and Deductions & Disallowances matters, on section 44D, section 115A, section 9(1)(vii), section 195, section DTAA art 13, section DTAA art 7 of the Income Tax Act 1961, and was decided by S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not cite this ruling for withholding on an income element, because it refused that argument in terms. If you want tax on a net basis, build the permanent establishment and attribution case and keep books showing the expenditure attributable to that establishment. Where the payer wants comfort on rate alone, remember that an application on the rate can succeed even where the base is against you.
Superseded by amendment. Checked the official text of section 44DA, inserted by the Finance Act 2003 with effect from 1 April 2004, which governs income by way of royalty or fees for technical services received under an agreement made after 31 March 2003 where the non-resident carries on business in India through a permanent establishment, and allows expenditure incurred for that establishment. The section 44D bar that produced this result is confined to earlier agreements, so the gross basis does not follow for any modern contract. The Finance Act 1995 rates the ruling applied are spent, and the rate for royalty and fees for technical services under section 115A has been changed more than once since, so it must be taken from the Finance Act in force. I found no court decision dealing with this ruling. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The input note misdescribes this ruling. It calls it the early authority for withholding on the appropriate proportion rather than the whole remittance. The Authority decided the opposite: it expressly rejected the contention that only the net income, put at about 10 per cent of receipts, could be brought to tax, and held the entire gross receipts chargeable because section 44D(b) barred any deduction. The applicant's only success was on rate, 30 per cent instead of 55 per cent. I could not reach an official AAR text and relied on the Indian Kanoon reproduction. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Authority ruled that the Indian companies should not withhold tax at 55 per cent and should deduct only at 30 per cent, being the rate applicable to such payments under the Finance Act 1995. It reached that rate by holding the receipts to be fees for technical services both under article 13(4) of the agreement with Sweden and under Explanation 2 to section 9(1)(vii). Because the fees arose through the applicant's Indian permanent establishment, article 13(5) sent them to article 7 as business profits; but that did not open the door to a net computation, because section 44D(b) forbids any deduction for expenditure or allowance under sections 28 to 44C where fees for technical services are received from an Indian concern under an agreement made after 31 March 1976, and section 115A charges the gross amount. The Authority therefore rejected the contention that only the net income, put at not more than 10 per cent of receipts, could be brought to tax. It expressed no opinion on the net profits, leaving that to be agitated in appropriate proceedings, and declined to decide whether the work was mere assembly outside the definition.
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