FTS
Geondata (the applicant), an Austrian company specialising in analysis of seismic data to assist in oil exploration, was contracted to carry out such work by Indian companies Essar Oil and Essar Engineering in May 2011.
Geondata subcontracted the work to its own Indian PE, Hardson Oil Fields Services.
The applicant subsequently raised three invoices against the Essar companies for the services provided to them.
The Essar companies withheld taxes on the payments, classifying them as FTS.
However, Geondata believed it was exempt from Indian taxes on the payments and thus brought its case to the AAR.
Dispute
Karthik Ranganathan, of Nishith Desai & Associates, said the issue before the AAR was whether the income received by Geondata was FTS and whether it would fall under a presumptive tax provision which deals with foreign companies that have PEs in India, and that receive FTS through such PEs.
Geondata argued its services are a mining activity and therefore do not come under FTS.
It said since the services do not fall under FTS, it could not be taxed under the presumptive tax provision because it did not elect for this and, furthermore, that it could not be taxed under section 44DA of the Indian Income Tax Act 1961, because the payment needed to fall within the definition of FTS for 44DA to apply.
Ranganathan said that to incur tax under section 44DA non-residents must have a PE in India and receive a royalty or FTS from an Indian entity.
“The amount received would then be taxed as the business income of such PE to the extent it is attributable to it and taxed at the rate of 40%, plus the applicable surcharge,” said Ranganathan.
The Indian director of income tax argued that since Geondata subcontracted the work to an Indian PE, the payment was actually FTS and an amendment made to section 44BB of the Indian Income Tax Act meant Geondata would fall under 44DA and the FTS would be attributable to the PE and taxable as business income of the PE.
Ruling
The AAR ruled that Geondata’s services were classified as FTS since they could not be deemed a mining activity.
It also held that since the taxpayer had a PE in India, any income it received through its PE would be taxable under section 44DA, potentially giving rise to the 40% rate. However, since Geondata would be taxable under FTS there would be withholding at the rate of 10% on the payments made to it.
AAR rulings are only binding on the taxpayer in the case and do not set a precedent for other similar cases pending at administrative levels, though they do have persuasive value.
Ranganathan said in general, if a non-resident receives royalties or FTS through a PE in India, then such PE would be taxed at the rate of 40% as its business income, a position which was settled by the Delhi High Court in DIT vs. Rio Tinto Technical Services.
“However, this AAR ruling appears to be a deviation from this precedent,” said Ranganathan.
“It is therefore advisable for companies and multinationals to analyse the present situation on taxing PEs in India that are receiving royalties or FTS before structuring their business into India,” Ranganathan added.
Ernst and Young India represented Geondata in the case.
