Income would be chargeable to tax in India if the same falls within the scope of section 4 read with section 5 of the Act. Section 4 is the charging provision under the Act. The charge is in respect of the total income for any year. The scope of total income chargeable to tax in India is outlined by Section 5. This scope of total income depends upon whether the assessee concerned is a resident or non-resident in India. Place of accrual assumes importance especially for non-resident taxation, since a non-resident is liable to pay tax only on income, which accrues or arises in India.
As per the provisions of Section 9(1)(vii) of the Act payment by resident to non-resident is liable to tax in India if the payment is towards ‘Fees for Technical Services’ (“FTS”) and services are utilised for the purpose of business in India. Explanation 2 under Section 9(1)(vii) defines the term FTS. FTS is defined to include consideration for services of managerial, technical or consultancy nature, including provision of services by technical and other personnel.
In most of the tax treaties signed by India, the taxation of FTS in DTAA’s is in line with what is provided in the Act. The treaties also provide for taxation in India if the payment is by Resident to non-resident towards FTS. The definition of FTS is similar in many treaties. However, in certain treaties, definition of FTS is narrower wherein “make available” test is prescribed.
Assessees engaged in film production may take services from non-resident under the line production agreement. Under such agreement, the non-resident renders various coordination/ facilitation services to Indian taxpayer in producing the television series, such as arranging of all production facilities; providing a line producer, production staff, local crew for providing stunt services, provision of transportation necessary for stunts/ production of the show; arranging for a director, staff, art department and production staff to set up and film the series; providing for all required paper work and declaration regarding fair treatment meted out to animals, insects etc.
The issue arose before the Courts whether line production services constitute ‘FTS’ and are liable for tax in India. This issue is dealt in the following decisions.
Yashraj Films Pvt Ltd v ITO (ITAT Mum) 28 Taxmann.com 247 – The Assessee was engaged in film production and shotting was done outside India. Agents abroad provide various services mainly included arranging for extras, arranging for the security, arranging for locations arranging for the accommodation of cast and crew, arranging for necessary permissions from local authorities, arranging for makeup of the stars, arranging for insurance cover etc. The AO held that same is FTS
The ITAT held that having regard to the nature of the services rendered by the overseas service providers to the assessee, the said services cannot be treated as technical services within the meaning given in Explanation 2 to section 9(1)(vii). The ITAT upheld the CIT(Appeals) conclusion that such logistic arrangement are in the nature of commercial services and the amount received by them from the assessee for such services constituted their business profit, which was not chargeable to tax in India in the absence of any PE in India of the said service providers. Therefore, there was no liability to deduct TDS.
Endemol India (P.) Ltd., In re [2014] 42 taxmann.com 395 (AAR – New Delhi) – The applicant is a resident company and engaged in the business of producing and distributing television programs. The applicant produced a stunt reality show for which the shooting was to take place outside India, primarily in Brazil. For the purpose of shooting the program/show, outside India, the applicant engaged Utopia Films, a tax resident of Brazil, for providing line production services. The applicant sought ruling from the AAR as to whether the payments made by the Applicant to Utopia Films in respect of line production services is taxable in India.
The AAR held that the services provided by the non-resident companies to the applicant company are line production services and are specifically characterized as work for the purpose of section 194C by Explanation to that section. It was therefore held that the payments made by the applicant to the non-resident company specifically falls under the definition of work under section 194C and they will not be taxable without PE in India.
Endemol South Africa (Proprietary) Ltd. vs. DCIT (2018) 98 taxmann.com 227 (Mum) – The Taxpayer, a company incorporated in South Africa, entered into an agreement with an Indian Company to provide Line Production Services for facilitating and coordinating filming of episodes of television series by Indian Co at various locations in South Africa. The Taxpayer contended that same is not in the nature of FTS u/s. 9(1)(vii) of the Act and accordingly, it was not taxable in India. However, the AO concluded that services qualified as royalty and FTS under the Act as well as the DTAA. DRP confirmed the findings.
The Tribunal held that various coordination/facilitation services rendered by the Taxpayer did not qualify as FTS for the following reasons:
Managerial Services– The term managerial services, ordinarily means handling management and its affairs. Since the services rendered by the Taxpayer were administrative services, it would not tantamount to provision of any managerial services. Therefore, services would not fall within the ambit of term ‘managerial services’.
Technical Services – The term ‘technical services’ takes within its sweep services which would require the expertise in technology or special skill or knowledge relating to the field of technology. As the administrative services rendered by the Taxpayer neither involve use of any technical skill or technical knowledge, nor any application of technical expertise on its part, while rendering such services, it could not be treated as technical services.
Consultancy Services – The term consultancy services, in common parlance, means provision of advice or advisory services by a professional requiring specialised qualification, knowledge, expertise. The ITAT observed that such services are more dependent on skill, intellect and individual characteristics of the person rendering the services. As the services rendered by the Taxpayer did not involve provision of any advice or consultancy to Indian Co, the same could not be brought within the ambit of “consultancy services”.
Since the aforesaid services were purely administrative in nature, the consideration received by the Taxpayer for rendering them could not be brought within the sweep of the definition of “FTS” either under the Act or under DTAA.