DTAA art 12

DTAA art 12 — the law in short

What the courts have decided on section DTAA art 12, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Ishikawajima-Harima Heavy Industries Ltd v DIT Supreme CourtHelps taxpayerSuperseded by amendment
  Our turnkey contract has offshore supply and offshore services alongside Indian work. Is the whole contract taxable in India?
  No — a composite turnkey contract can be split. Profits on equipment supplied and paid for outside India, where title passes outside India, are outside the Indian charge, because the contract being signed in India is immaterial and there must be a sufficient territorial nexus. On offshore services the Court read s.9(1)(vii) as requiring the services to be both utilised in India and rendered in India; that second requirement has since been removed retrospectively by statute, so only the offshore supply holding survives on the domestic law side.
• Linklaters LLP v ACIT (International Taxation), Mumbai ITATHelps taxpayerNo later treatment found
  The Assessing Officer has taxed my client, a UK limited liability partnership, under the Independent Personal Services Article of the treaty because its partners are professionals. Can that Article apply to a firm at all?
  No, on this Tribunal's view. The Mumbai Tribunal held that Article 15 of the India-United Kingdom DTAA deals only with the taxability of independent personal services or independent activity of a similar character and not with a partnership firm, and that the assessee, not being an individual, was outside it. On the same order the Tribunal also held, following its own decisions in the assessee's earlier years, that the remuneration received for providing legal services was not fees for technical services and that the treaty overrode the Act.
• eBay International AG v ADIT ITATHelps taxpayer
  We charge Indian sellers a fee for listing on our overseas marketplace. Is that fees for technical services, and do our Indian support companies make us taxable here?
  No on both, and note how the second answer is reached. Providing a platform on which others transact is not the rendering of managerial, technical or consultancy services, so the user fees are not fees for technical services. On the treaty the Tribunal accepted that the Indian group companies, working exclusively for the Swiss company, were dependent agents - the assessee lost that limb - but held that a dependent agent becomes a permanent establishment only if it performs one of the functions listed in Article 5(5), and marketing and collection work is not among them. They were not a place of management either. Without a permanent establishment the business profits article keeps the income out of the Indian charge.
• WorleyParsons Services Pty Ltd v DIT (International Taxation) Advance RulingCuts both waysNo later treatment found
  Our Australian firm monitors a pipeline project in India for the owner - schedules, reporting, coordinating contractors. Is our fee a royalty, or business profits we are taxed on only if we have a permanent establishment?
  It depends, and the applicant won half. The Authority ruled that WorleyParsons's receipts under its project monitoring contract with GAIL were not royalties under article 12 of the India-Australia agreement, because merely rendering services is not enough - the services must result in technical knowledge being made available. But it held that the applicant had a permanent establishment under article 5(2)(k), its supervisory activity in connection with the project having continued more than six months, with employees present in India for 165 days in 2003-04 and 90 to 95 per cent of the work done here. The receipts were therefore taxable as business profits under article 7, but only so far as attributable to the permanent establishment.
• In re Airports Authority of India (Raytheon contracts) Advance RulingCuts both waysSuperseded by amendment
  We send faulty equipment abroad for repair by a US supplier and separately pay it to maintain the software. Do we deduct tax on either, and at what rate?
  It depends on which contract. The Authority ruled that the payment to Raytheon for hardware repair support was not taxable in India and that the applicant was not required to deduct tax on it: the repairs were done outside India, delivery was taken outside India and Raytheon had no permanent establishment here, so article 7 left those business profits to the United States. The software maintenance contract went the other way. The deputation of an engineer created no permanent establishment, but the payments were fees for included services under article 12, the applicant having a conditional right to use the software rather than an outright purchase. Tax was to be withheld at 10 per cent apart from surcharge.
• In re Cargo Community Network Pte. Ltd. Advance RulingHelps departmentNo later treatment found
  Indian cargo agents pay our Singapore company a subscription for a password to use our air-cargo booking portal, which sits on our servers in Singapore. Is that taxable in India?
  Yes. The Authority ruled that the payments made by Indian subscribers to Cargo Community Network Pte. Ltd. for a password to access and use its Ezycargo portal, hosted on servers in Singapore, were taxable in India and subject to deduction of tax at source. The portal and the server together were held to be integrated commercial-cum-scientific equipment which the Indian agents used in India, so the subscription was royalty under article 12(3)(b) of the India-Singapore agreement. The training and help-desk support supplied through the applicant's Chennai liaison office were fees for technical services under article 12(4), being ancillary to the enjoyment of the equipment. The ruling binds only that applicant.
• In re A.T. and S. India P. Ltd Advance RulingHelps department
  Our Austrian parent seconds its technical staff to us and we repay it exactly what their salaries cost. The staff work under our control. Must we withhold tax under section 195 on that repayment?
  Yes. The Authority ruled that the payments A.T. and S. India made to AT&S Austria under a secondment agreement, described as reimbursement of the salary cost of seconded personnel, were subject to withholding under section 195. AT&S Austria remained the real employer: it could recall and replace the personnel, they would return to it after the assignment, and the Indian company could not exceed the salaries it fixed. The payments were consideration for the provision of services of technical or other personnel and so were fees for technical services within Explanation 2 to section 9(1)(vii) and article 12(4) of the India-Austria agreement. The ruling binds only that applicant.
• In re Timken India Ltd Advance RulingHelps departmentSuperseded by amendment
  Our US parent charges us only its actual cost for services it performs in America, with no mark-up. Must we still withhold tax under section 195?
  Yes. The Authority ruled against the applicant on every live question. Timken India paid its US parent USD 756,728.26 under an agreement of 2 August 2000 for management, system development, engineering and manufacturing services performed wholly in the United States, the compensation being confined to actual cost with no mark-up. The Authority held the sum was not a reimbursement of costs; that it was taxable as fees for technical services under article 12 of the India-US convention though the services were rendered abroad; that the absence of a profit element was irrelevant; and that no net-basis option could be read into section 44D. Withholding was required.
• In re Airports Authority of India (feasibility study) Advance RulingHelps taxpayer
  A US firm did a feasibility study for us, but it is paid directly out of a US government grant, not by us. Is the fee taxable in India, and must we deduct tax?
  No. The Authority ruled that the payments to Innovative Solutions International Inc of Virginia were not taxable in India, either under the Act or under the agreement with the United States. The study for the applicant's communication, navigation and surveillance and air traffic management project was prepared in the United States; the firm had no office or establishment in India and its work here was confined to some meetings with the applicant's officials and coordination with local vendors. Decisively, the money was payable only by the US Trade and Development Agency out of its grant of US$450,600, and the firm had no remedy against the applicant if the Agency did not pay.
• In re Flakt (India) Ltd Advance RulingHelps department
  We have credited royalty and management fees to our Swedish and Swiss group companies in our books but remitted nothing. Do we have to deduct tax now, or only when we pay?
  Yes, now. The Authority ruled that section 195(1) is triggered when the amounts are credited to the non-resident's account in the payer's books, not only when they are remitted. The subsection operates at the time of credit of the income to the account of the payee or at the time of payment, whichever is earlier, and whether the money has actually gone out is irrelevant to the duty. It also held that the royalties and management service fees were taxable in India under the Act, article 12 of the Swedish and Swiss agreements permitting India to tax them according to its own laws, and that requiring deduction on credit does not defeat or render the agreement otiose.
• Pro-Quip Corporation v CIT Advance RulingHelps taxpayer
  We bought engineering drawings and designs outright from a US company for our plant. The buyer withheld tax treating it as royalty. Was that right?
  No. The Authority ruled that the amount Pro-Quip Corporation received from Linde Process Technologies India Ltd for the sale of engineering drawings and designs was not taxable in India. The purchase order transferred ownership in the drawings outright, with no reservation of rights, no contingency and no continuing service obligation. That is a sale of property, not consideration for the use of or the right to use property, so article 12 of the India-US convention on royalties and fees for included services was not attracted. Any services attached to the sale fell within the exclusion in article 12(5). The applicant could claim a refund of the tax deducted, with interest. The ruling binds only Pro-Quip.
• In re P. No. 30 of 1999 Advance RulingHelps departmentSuperseded by amendment
  Our Indian company pays its US group parent for time on the group's mainframe computers and for use of the group data network. Is that royalty taxable in India?
  Yes. The Authority ruled that the charges paid by the Indian company to its US group company for access to and use of the group's mainframe computers and consolidated data network were taxable in India, and fell within article 12(3)(a) of the India-US convention rather than article 12(3)(b). The Indian company was billed by reference to CPU utilisation time, email usage, bandwidth and network management. The Authority held the payment was for the use of a secret process - the embedded, customised, encrypted software through which the data was processed - and so was royalty on the first limb, not a payment for equipment. The ruling binds only that applicant.
• Von Der Mark v CIT Advance RulingCuts both waysNo later treatment found
  I am a German engineer on the board of an Indian company and I also consult for it from Germany. The department says everything the company pays me is directors' fees taxable in India. Is it?
  It depends, and the ruling splits the payments. The Authority held that the consultancy fees paid by Pennwalt India Ltd to a German engineering consultant for services rendered entirely from Germany were professional services within article 14 of the India-Germany agreement and taxable only in Germany, because he had no fixed base in India and his stay here was 13, 13 and 25 days in the three relevant years. It rejected the department's case that his directorship was itself a fixed base, and that his fees were salary under s.15. But the fee for attending board meetings and any similar payments fall under article 16, are taxable in India, and tax is deductible at source on them. The ruling binds only the applicant.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.