Friday, 27 March 2015

India: Supreme Court rules success fees constitute fees for technical services

In a decision issued on 18 February 2015 (GVK Industries Ltd. (GVK)), India’s Supreme Court held that a “success fee” paid to a nonresident financial advisor was subject to withholding tax as fees for technical services (FTS) under India’s Income-tax Act 1961 (ITA), even though the advisor operated from offices outside India and provided the services outside India.
FTS are defined under Indian tax law as any consideration (including lump sum consideration) for the provision of managerial, technical or consultancy services (including the provision of services of technical or other personnel), but the definition does not include consideration for construction, assembly, mining or similar projects (which would be taxed as salary income of the recipient).
Section 9(1)(vii) of the ITA provides for source-based taxation of FTS paid to a nonresident by a payer located in India, unless it can be demonstrated that the services provided by the nonresident were used in the resident payer’s business or profession carried on outside India, or that the fees were used to earn income from a source outside India. The source rule also provides that FTS received by a nonresident from an Indian payer are taxable in India, irrespective of whether the nonresident has a residence, a place of business or a “business connection” in India, or whether the nonresident has rendered services in India. (The concept of a business connection is used as a way to determine the Indian tax liability of nonresidents; the business income of a nonresident will be chargeable to tax in India to the extent the income accrues or arises through a business connection in India or from an asset or source of income located in India, and to the extent that income is attributable to operations carried out in India.)
Source & more info: Deloitte