R U L I N G (By Mr. A. Sinha )

Transcription

1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME-TAX) NEW DELHI Wednesday, the 30 th Day of April, 2008 P R E S E N T Mr. Justice P.V. Reddi (Chairman) Mr. A. Sinha (Member) Mr. Rao Ranvijay Singh (Member) AAR No. 744 of 2007 Name of the applicant and : Address KnoWerX Education(India) Private Limited, C-1, Avon Plaza-1, Thakur Complex, Kandivli (East) Mumbai Commissioner concerned : DIT (International taxation), Mumbai Present for the Applicant : Mr. Ravindra Kumar Tulsyan, Director Present for the Department : Mr. Parag A.Vyas, Advocate R U L I N G (By Mr. A. Sinha ) M/s KnoWerX Education (India) Private Limited, states in its application that it is engaged in promoting professional examinations/certification programmes of foreign institutes, societies, professional bodies, etc., of international repute, which do not have any establishment of their own in India. In the course of this activity, the applicant has signed an agreement with the American Production and Inventory Control Society, Inc. (APICS) which is a non-profit making body, and offers three certification programmes, namely, CPIM, CIRM and 1

2 CSCP. The applicant is in the process of signing another agreement with the American Society of Transportation and Logistics Inc. (AST&L) which is also a non-profit making body and offers its own certification programme known as CTL programme. The applicant intends to sign similar agreements in future with other foreign entities. Apart from this, the applicant carries on other activities as well, such as, corporate training, open public training, management consultancy, publishing and trading in educational material, etc. So far as promotion of professional examination/certification programmes of foreign entities is concerned, the applicant will act as their agent; it will collect registration forms and fees from the individuals in India, who wish to register themselves for the examination; and pass them on to the foreign entity after deducting its administrative cost and commission. The foreign entity will conduct examinations either through the applicant or through other entities in India. The evaluation of answer sheets and award of certificates will be done by those foreign entities and they will send certificates to the applicant for local distribution to the successful candidates. In the light of above mentioned facts, the applicant has sought advance ruling of this Authority in respect of APICS and AST&L on the following question:- Do we need to deduct any TDS or do we need to pay any income-tax on examination fees collected by us from individuals in India and remitted to APICS/AST&L on behalf of individuals in India? If yes, at what rate? What will be this 2

3 categorised as: Royalty, Included Services, Education, Business Profit, or something else? 2. As the question framed by the applicant was not happily worded, we have recast the same as follows:- Q.1 a) Whether the examination fee collected by the applicant on behalf of two professional organizations in USA, namely, APICS and AST&L and remitted to those two organizations is liable to be treated as the income of the said entities liable to be taxed in India? b) If the answer is in affirmative, how that income has to be classified such as business income, income from royalty, technical services? Q.2 Whether the applicant has a legal obligation to deduct tax at source in relation thereto under the relevant provisions of Income-tax Act, 1961 and if so at what rate? 3. The applicant s case is that APICS and AST&L are exempt from income-tax in USA. If any taxes are deducted at source in India out of the examination fees paid to them, they would not be able to get any offset under the agreement for avoidance of double taxation between India and USA (DTAA). As such, no deduction of tax at source should be made under the Income-tax Act, 1961 (the Act) on such income. 4. The Commissioner of Income-tax, Mumbai in his initial comments, stated that as APICS & AST&L were not tax residents of USA, they could not avail tax benefits under the DTAA. The income by way of examination fees would be taxable in India as per the provisions of the domestic law. 3

4 This income will be in the nature of business income which would accrue or arise in India. As such, tax shall be liable to be deducted at source under section 195(1) of the Act. 5. During the course of hearing, the applicant filed an affidavit stating some additional facts in relation to its business activities, which had not been specifically mentioned in the application, especially more details about the procedure adopted for receiving applications and sending fees to the US entities. The applicant also filed some more documents with regard to the liability of APICS and AST&L to pay tax under the US law. 6. Along with the application, the applicant has filed the agreement dated which it has entered into with APICS. The recital to the said agreement, inter alia, states that the parties are desirous of entering into a business relationship to promote certification examinations, promote, resell, re-print and distribute the licensed products of APICS and exchange information with APICS. A copy of the detailed terms and conditions are annexed to the agreement. Paragraph 1 of the agreement states that the provisions of articles 3, 4,5 and 6 of the terms and conditions alone shall apply to the parties. Article 3 of the agreement deals with allied organization, memberships and membership activities. Article 4 is about distribution of the licensed products of APICS by the applicant. Article 5 is regarding reprinting of the licensed products of APICS. These articles are not relevant for the present consideration as the question on which the 4

5 applicant has sought ruling of this Authority relates to its activities as exam promoter. This expression has been defined in article 1.9 of the terms and conditions, according to which the role of the exam promoter is to promote professional/certification examinations at the local level. Para 6 of the terms and conditions sets out the detailed provision in this regard. It is seen from this paragraph that the exam promoter shall have a nonexclusive right to promote such examinations in a particular local area. It is to be noted that APICS reserves the right to host, promote, advertise and market the professional/certification examinations within that local area on its own or in association with a third party. The exam promoter shall be free to decide the manner in which it will carry out the promotional and marketing activities. However, APICS shall have right to reject any promotional and marketing material, which is disparaging to or adversely affects it. The exam promoter shall collect duly filled in registration forms from the candidates and forward the same along with fees to APICS. The details of fees have been specified in Appendix-2. As per this appendix, the applicant will remit a fee of US$120 per candidate for CPIM examinations and a fee of US$ 160 for CIRM examinations to APICS. This remittance will be done in US dollars. The exam promoter will also collect and retain equivalent of US$ 90 in Indian currency for CPIM examination and US$ 67 for CIRM examination. No fee for CSCP examination has been provided in the agreement. In addition to the above functions, the 5

6 exam promoter shall also help APICS in selecting appropriate places where the examinations will be conducted. The examination will, however, be conducted by another entity called exam administrator. 7. Mr. R.K. Tulsyan, Director of the applicant company, has further clarified about these activities in the course of hearing. Interested individuals fill up forms, giving their personal particulars, specifying the examination they want to take, fee details, etc., and deposit such forms along with applicable fees with the applicant. The applicant forwards these to APICS. One to two weeks before the examination date, APICS sends examination confirmation notices to the applicant who couriers them to the candidates. APICS has entered into separate agreements for the purpose of holding examinations with management institutes, like Thakur Institute of Management and Research, Mumbai, Indian Institute of Science, Bangalore, Loyola Institute of Business Administration, Chennai, etc. The examination papers are sent by APICS to the above named institutes. After the examination is over, those institutes send question papers along with answer sheets direct to APICS. The score reports then come to the applicant for distribution to the candidates. 8. The applicant has also filed a copy of the draft agreement which it is negotiating with AST&L. According to this, AST&L would grant exclusive right for three years to the applicant to operate Certification in Transportation and Logistics (CTL) Programme in India. Under this 6

7 arrangement the applicant will also be responsible for the conduct of examination in India. Evaluation of examination papers and grant of certificates will, however, be the responsibility of AST&L which will send certificates to the applicant for distribution amongst successful candidates in India. AST&L will charge a fee of US$ 90 from each candidate for taking the examination, US $ 60 for re-taking examination, and US $ 40 for exam waiver. Mr. R.K. Tulsyan has further clarified that the individuals proposing to take the certification examination will submit forms giving their personal details, fee details etc., to the applicant who will forward the same to AST&L which, in turn, will confirm the registration of the individuals. The question papers will be sent by AST&L to the applicant who will forward it to the invigilators who, in turn, will send the answer sheets back to the applicant. The applicant will forward it to AST&L. The applicant shall collect the examination fees in Indian currency and remit the same to AST&L after conduct of the examination. 9. In the light of the above facts, we may proceed to determine the liability of APICS & AST&L to pay taxes in India in relation to the examination fees payable to them, on which the questions posed to us depend. Section 5 of the Income-tax Act, 1961 ( the Act ) specifies the scope of total income. Sub-section(2) of this section, which applies to nonresidents, reads as follows:- 7

8 5. Scope of total income. (1) x x x x x (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) (b) is received or is deemed to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India during such year. It is seen from the above that the total income of a non-resident includes all income received or deemed to be received in India by him or on his behalf. It also includes income, which accrues or arises or is deemed to accrue or arise to him in India. Accrue, arise and is received are three distinct expressions used in this sub-section. So far as receipt of income is concerned, there can be no difficulty; it conveys a clear and distinct meaning. The expressions, accrue and arise, though these do not mean exactly the same thing, but have been used in the Act to denote the same idea in contradistinction to the word receive. The expressions, accrue or arise do not mean actual receipt of income, but indicate a stage anterior to the point of time when the income has become receivable. They indicate that the assessee has acquired the right to receive the income, though it may be received by him later. On the other hand, income is said to be received when it reaches the assessee (see CIT 8

9 v. Ahmedbhai Umarbhai & Co. 1, CIT v. Ashokbhai Chimanbhai 2 and Seth Pushalal Mansinghka (P.) Ltd. v. CIT 3 ). It is nobody s case here that income accrues or arises or is deemed to accrue or arise in India. The facts of the case are clear in this regard. The income in the form of examination fees is received in India by the applicant and remitted to the non-resident entity abroad. The said income is undisputedly business income. There is no controversy about the nature of this income. 10. It is further seen that clause(a) of sub-section(2) of section 5 of the Act not only includes income received by the assessee himself, but also income received on his behalf. The expression on behalf of has a clear meaning which does not admit of any doubt. According to the New Shorter Oxford English Dictionary, this expression means as the agent or representative of another; in the name of. We have already noticed that the applicant collects a specified amount of fee from each candidate for APICS and transmits the same to that entity. Paragraphs (D) and (E) of clause (6.2), read with Appendix 2 of the agreement, are relevant in this regard. Similarly, in the case of AST&L, as per the draft agreement, the applicant is required to collect examination fees from the candidates on behalf of that entity and send it to that entity. At this juncture, we may refer to a decided case on the subject of receipt of income in India on 1 18 ITR 472 (SC) 2 56 ITR 42(SC) 3 66 ITR 159 (SC) 9

10 behalf of the non-resident assessee. In the case of Turner Morrison & Co. Ltd. v. Commissioner of Income-tax 4 a certain company manufactured salt in Egypt and sent the same to Turner Morrison & Co. Ltd, their agents in India, for sale. Turner Morrison & Co. Ltd, inter alia, collected sale proceeds in India and after deducting their expenses and commission, remitted the balance amount to the non-resident company in Egypt. A question arose for determination whether Turner Morrison & Co. Ltd received the sale proceeds in India on behalf of the non-resident company. A plea was raised that Turner Morrison & Co. Ltd were nothing but an animated post office. Rejecting the plea, the Supreme Court observed that Turner Morrison & Co. Ltd did not merely mechanically collect and transmit the sale proceeds, but were rather entrusted with important duties on behalf of the non-resident company, namely, handling cargoes, selling goods sent to them, issuing delivery orders, collecting sale proceeds and remitting the same after deducting their expenses. As such, Turner Morrison & Co. Ltd received the sale proceeds in India on behalf of the non-resident company. We find that the present case is similar to the aforesaid case in material particulars. Here also the applicant does not merely act mechanically in collecting and transmitting examination fees, or acts as a mere conduit, but it performs a number of important functions for APICS by promoting and advertising their examinations in India, collecting 4 23 ITR

11 filled in registration forms and fees from candidates, assisting APICS in selecting suitable places for conducting examinations, etc. Thus there cannot be any doubt that the applicant receives income in India on behalf of the APICS as their agent. Similar will be the position in respect of AST&L. 11. Looked purely from the perspective of sections 4 and 5 of the Act, the examination fees collected on behalf of APICS and AST&L would be taxable under the Act. But there is an agreement with USA on avoidance of double taxation. We have to also see the impact of this agreement on the tax liability of APICS and AST&L. 12. This takes us to the DTAA between Government of the United States of America and the Government of Republic of India. The applicant stated in the application that APICS and AST&L were non-profit making professional organizations and had been determined by the Internal Revenue Service (IRS), Department of Treasury, USA as tax exempt organizations. The applicant also annexed a photocopy of a letter from the IRS and print-outs from the website, namely, in support of its claim. The Commissioner in his comments took the stand that since APICS and AST&L were tax exempt organizations, they could not be regarded as tax residents of USA, and as such, the treaty provisions would not apply to them. He relied on the provisions of article 1 11

12 and 4 of the DTAA for this proposition. The relevant provisions of article 1, as contained in paragraphs 1 and 2 thereof are extracted below:- Article 1: General Scope 1. This Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention. 2. The Convention shall not restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded: (a) by the laws of either Contracting State; or (b) by any other agreement between the Contracting States. Paragraph 1 of article 4 reads as follows:- Article 4 : Residence 1. For the purposes of this Convention, the term resident of a Contracting State means any person who, under the laws of that State is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided however, that (a) (b) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. It would be seen from the above that the provisions of the DTAA are applicable only to the residents of India and USA. The expression 12

13 resident has been defined to mean a person liable to pay tax by reason of, inter alia, place of incorporation. Clause (b) of paragraph 1 of article 4 specifically mentions that a partnership, an estate, or a trust, shall be regarded as resident only if it is a taxable entity in that state, or if the beneficiaries who derive the income are liable to pay tax thereon. According to the Commissioner, partnerships, trusts, etc., are regarded as transparent entities in USA, and these are not liable to pay tax there. This point was also highlighted during the arguments by Mr. Parag A.Vyas, the learned counsel for the Revenue. As some doubt arose with regard to the residential status of APICS and AST&L under the DTAA, the applicant filed some additional documents to clarify this point. These include determination letters of the IRS in respect of APICS and AST&L respectively. The applicant also filed written submissions on the point. It emerged during the subsequent arguments that both APICS and AST&L are corporations incorporated in USA. As such, these are not transparent entities and are liable to pay federal income-tax in USA. But these have been exempted from payment of tax under section 501 (c) (6) under the Internal Revenue Code (IRC), by virtue of their belonging to certain specified categories indicated in the above provision. Such an exemption is permissible under paragraph 2 of article 1 of the DTAA. This makes it clear that APICS and AST&L are tax residents of USA and the provision of the DTAA would be attracted in this case. 13

14 13. Having realized this, the learned counsel for the Revenue advanced two new pleas. He first contended that the applicant constituted business connection in India for APICS. Since APICS earned examination fees through this business connection, the same would be chargeable to tax in India in terms of section 9 of the Act. We think otherwise. We have already observed above that the income in question is actually received in India as per sub-section (2)(a) of Section 5, instead of accruing or arising or deemed to accrue or arise in India. As such, section 9 would not be attracted and the question of business connection would not arise. 14. Mr. Parag A. Vyas, the learned counsel for the Revenue, then stated that the applicant should be treated as permanent establishment of APICS. Thus the income earned by APICS in the form of examination fee would be taxable in India in view of the stipulation contained in paragraph 1 of article 7 of the DTAA, which reads :- Article 7 Business Profits (1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment. 14

15 (2) to (7) x x x x x x x The expression permanent establishment has been defined in article 5 of the DTAA, the relevant provisions of which read as under:- Article 5 Permanent establishment 1. For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment includes especially : (a) a place of management ; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop ; (f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources ; (g) a warehouse, in relation to a person providing storage facilities for others ; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on ; (i) a store or premises used as a sales outlet ; (j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period ; (k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period ; (l) the furnishing of services, other than included services as defined in article 12 (royalties and fees for included services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period ; or 15

16 (ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (associated enterprises)]. 3. Notwithstanding the preceding provisions of this article, the term permanent establishment shall be deemed not to include any one or more of the following : (a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person- other than an agent of an independent status to whom paragraph 5 applies is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first mentioned State, if: (a) he has and habitually exercises in the first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise 16

17 from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in that State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. 6. x x x x x Permanent establishment has been defined in paragraph 1 of article 5 to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. Paragraph 2 specifies certain types of permanent establishments. Paragraph 3 clarifies what shall not constitute permanent establishment. We are not concerned here with paragraphs 2 and 3 as the applicant is not a part of APICS or AST&L. Paragraph 4 and 5 are relevant for our consideration. These deal with what is known as agency permanent establishments. According to these provisions, where an enterprise of a state carries on business in another state through an agent, the agent will constitute permanent establishment 17

18 of the enterprise depending on the fact whether it is a dependent agent or an independent agent and some other factors. As per paragraph 4, if the agent does not have independent status and habitually concludes contract or maintains stock of goods and merchandise and delivers them, on behalf of the enterprise, that agent shall be treated as a permanent establishment of the enterprise. So also will be the case where the agent habitually secures orders wholly or almost wholly for the enterprise. What follows from this is that it is not enough for an enterprise to merely have a dependent agent in the other contracting state, but that agent should also have authority to bind the enterprise in its business activities in that other state. It is only then that the dependent agent shall be treated as the permanent establishment of the enterprise. On the other hand, if the agent is a broker, general commission agent or any other agent of independent status and is acting in the ordinary course of its business, then as per paragraph 5, it will not be regarded as a permanent establishment of the enterprise. This position will, however, change if the activities of the independent agent are devoted wholly or almost wholly to that enterprise and the transaction between the two are not at arm s length. In that case, the independent agent will be treated as a permanent establishment of the enterprise. 15. We find that the applicant is not a part of APICS. It does not conclude any contracts on behalf of APICS. The acceptance of 18

19 candidature of an individual for a certification examination is solely done by APICS. The applicant does not maintain stock of goods or merchandise belonging to APICS, it does not secure orders wholly or almost wholly for APICS and it does not in any way bind APICS in the conduct of latter s examination programme in India. Similar will be the position in respect of AST&L. The applicant thus cannot be regarded as a dependent agent of APICS or AST&L under paragraph 4 of article 5. It is seen that the applicant enjoys an independent status. As stated by the applicant, there is no financial, managerial or any other type of participation between it and APICS. It carries on a variety of activities as noted above, besides promoting examinations of APICS and AST&L. So far as promotion of examination is concerned, it has engaged itself into business relationship with APICS, is in the process of forging such relationship with AST&L, and is open to having such relationship with other foreign entities. Thus, in respect of this activity too, the applicant is not wholly or substantially devoted to APICS and AST&L only. The applicant appears to carry on the work of examination promoter in the ordinary course of its business. The applicant is not subject to any control of APICS with regard to the manner in which it shall carry out its activities with regard to promotion of the certificate examination. We are thus of the view that in terms of paragraph 5 of article 5 the applicant cannot be deemed to be a permanent establishment of APICS and /or AST&L in India. 19

20 16. So far as deduction of tax at source is concerned, we may first refer to the provisions of section 4 and the general scheme of Chapter XVII, before coming to section 195. Sub-section(1) of section 4 is the charging provision. Sub-section(2) of this section says that in respect of income chargeable under sub-section(1), income-tax shall be deducted at source or paid in advance. Coming to Chapter XVII, it deals with collection and recovery of tax. Section 190 states that notwithstanding regular assessment later, tax on such income shall be payable by deduction at source or by advance payment. Various sections of Chapter XVII deal with deduction of tax at source in relation to different types of income. We are presently concerned with section 195. This section requires that any person who is paying any sum chargeable under the Act, inter alia, to a foreign company shall at the time of making payment deduct income-tax thereon at the applicable rates. As we have seen, the requirement of the Act is that taxes are to be deducted at source from incomes chargeable under the Act. Where the income is not chargeable to tax, the question of any deduction at source would also not arise. Since we have held in the present case that no tax is attracted on payment of examination fees being made to APICS & AST&L by virtue of paragraph 1 of article 7 of the DTAA, it stands to reason that no deduction of taxes need be made from such payments. 20

21 17. In the light of the foregoing discussion, we rule that the applicant is not required to either deduct any income-tax or to pay any such tax on the examination fees collected by it for APICS and AST&L and remitted to them as the same is not taxable in India. Accordingly, part (a) of question no. 1 is answered in the negative. As regards part (b) of the said question, the nature of income is business income. Question No. 2 is also answered in the negative. Ruling pronounced in the open Court of the Authority on this 30 th day of April, Sd/- Sd/- Sd/- (A. SINHA) ( P.V. REDDI) (RAO RANVIJAY SINGH) MEMBER CHAIRMAN MEMBER F.No. AAR/744/2007/ Dated: This copy is certified to be a true copy of the advance ruling and is sent to: 1. The Applicant. 2. The DIT (International Taxation), Mumbai 3. The Joint Secretary (FT &TR-I), M/o Finance, CBDT, Bhikaji Cama Place, New Delhi 4. The Joint Secretary (FT &TR-II), M/o Finance, CBDT, Bhikaji Cama Place, New Delhi 5. Guard File. (Batsala Jha Yadav) Addl. Commissioner of Income-tax (AAR) 21