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India's
Authority for Advance Rulings holds payments for consultancy and
marketing fees taxable in India
In
a recent ruling in the case of an Indian company, Wallace Pharmaceuticals
Pvt. Ltd. ("Company"), India's Authority for Advance Rulings
("AAR") has held that payments made by the Company to a
US consultant for availing of consultancy and marketing services
are taxable in India as "fees for technical services".
In
the instant case, the Company was engaged in the business of manufacture
and sale of pharmaceutical products and for the purpose of business
expansion, entered into an agreement with a US consultant i.e.
Penser Group ("US Consultant") to avail of specified services
which included inter-alia advising for development and promotion
of its business, entry into new markets, development of distribution
and marketing channels, attending meetings as requested by the
Company and identifying target pharmaceutical and biotech companies
within and outside the US for a monthly consulting fee. In addition
to its monthly consulting fee, the US Consultant was also entitled
to a commission on the orders it procured. Furthermore, the US
Consultant also used the services of an advocate and paid him
an amount that was reimbursed by the Company.
The
questions dealt with by the AAR pertained to whether the Company
was required to withhold tax on the payments it made for the services
(as stated above) it availed of from the US Consultant. The Company
submitted before the AAR that the services it availed of from
the US Consultant were rendered outside India (i.e. in the US)
and was therefore not obligated to deduct any withholding tax
in India on the payments it made to the US Consultant.
The
AAR observed that the consultancy fees payable by the Company
to the US Consultant were connected to a business or profession
carried on by the Company in India. Accordingly, the AAR ruled
that such fees were subject to tax in India as fees for technical
services under section 9(1)(vii) of Indian Income Tax Act, 1961
("ITA"). The AAR further ruled that the commission payable
to the US Consultant and the reimbursement of advocate fees were
also subject to withholding tax in India under section 195 of
the ITA.
This
ruling has come as a big surprise since it only considered the
provisions of the ITA and ignored the provisions of Article 12
on "Royalty and Fees for Included Services" of the India-US tax
treaty, even though the AAR categorically noted in this ruling
that US Consultant is a tax resident of the US. The conclusions
could have been different had the AAR considered the provisions
of the India-US tax treaty before pronouncing this ruling.
Source:
Tax Notes International (September 21, 2005)
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