One of our clients is in to the business of producing animation films for which it enters into contracts with non resident US Individuals in various capacities as writer, director, distributor co-producers etc. Whether the payments to such individuals be considered as Technical Service Fees for TDS. If yes, then what rate should be charged considering DTAA & IT Act. If no, then what procedure should be followed. Is there any provision for no deduction or lower deduction of tax. if yes, then wats the provision & the procedure. An early reply is sought. Amaresh, Bangalore
You have asked the question in very general manner because the decision whether a specific service falls under technical service is to be seen case to case. Let us first see what is the meaning of Technical Service as explained under Income Tax Act .As per Explanation to section 9(1)(vi) of the I T Act , the fees for technical service means
Explanation 2.For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) ….
So basically technical services mean
* Managerial services
* Technical services
* consultancy services
* Services of providing technical or other professional manpower
None of these are related to service given by a writer,director ,producers or distributor who are all USA based non resident individual as per your question. Therefore prima facie’ the payments to them for any services does not fall within technical fee .
However , there still lies the scope of taxing this income in hands of non resident under section 9(1)(i) which is very widely worded
all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
Since the animation movie is being produced in India, the source of income is certainly in India. Therefore fee paid to US bases non residents are taxable in India as per I T Act .
But saving grace is DTAA between India and USA !
It is legally settled that DTAA overrides I.T Act .Following cases laws should be referred to in this regard
Union of India vs Azadi Bachao Andolan 263ITR 706 SC
So we have to see what is the Double Taxation Avoidance Agreement in this regard. As is clear the services given by Writers,Director,Distributor and Producer do not fall within the definition of technical fee , I find the services given by these individual falls under the term” Independent personal services” as defined in Clause 15 of DTAA between US and India. This clause says
Article 15 - Independent personal services – 1. Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State :(a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or
(b) if the persons stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year.
2. The term professional services includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
From the aforesaid Clause 15 of DTAA , it is clear that :if
* Writers ,Directors ,Distributors are Individuals
* They are tax resident of US .
* They are having no fixed base in India or
* They are not in India for 90 days.
In that case, the income from performance of any professional or independent services in India is taxable only in US . Therefore, no tax is deductible at source in India.
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