Authority For Advance Rulings (Income Tax)
Infosys Technologies Ltd., In Re
P. K. Balasubramanyan (Chairman)
AAR No. 1065 of 2011
27th August, 2012
Counsel appeared :
P. J. Pardiwala, T. Suryanarayana, Tanmayee Raj Kumar & P. Prakash, for the Applicant : Shweta Mishra, for the Department
The applicant is an Indian company incorporated under the Companies Act, 1956. It is engaged in the business of development and export of computer software and related services. It has customers across the world. The applicant undertakes the work of software development and related services for its clients across the world. The work would be either onsite work or offshore work.
The applicant has clients in Australia. In the year 1999, it set up a branch office in Australia. Since the applicant felt that it would be more profitable to have a local presence in Australia, the applicant acquired 100% equity of an Australian company. The Expert Information Services Pvt. Ltd. The transaction was completed effective from 2.1.2004. That acquired company was re-named Infosys Technologies (Australia) Pvt. Ltd. That overseas subsidiary of the applicant is now engaged in the business of development of computer software and related services.
The applicant undertakes work in Australia. It then sub-contracts a part of the work to its subsidiary, Infosys Australia. Infosys Australia performs the work wholly in Australia. The applicant makes payment to Infosys Australia for such work. The applicant wanted a ruling essentially on the question whether the payments made by it to Infosys Australia as consideration for the subcontract work, is chargeable to tax in India, either under the Income-tax Act, 1961 or under the Double Taxation Avoidance Convention between India and Australia. After hearing both sides, this Authority allowed the application under section 245R(2) of the Act for giving rulings on the following questions:
Whether on the facts and in the circumstances of the case and law applicable, the income accruing or arising to Infosys Technologies Australia Pvt Ltd [hereafter referred to as overseas subsidiary]is through or from (a) any business connection in India or (b) source of income in India, as per section 9(1) (i) of the Act?
Whether on the facts and in the circumstances of the case and law applicable, the overseas subsidiary not having a Permanent Establishment in India under the DTAA between India and Australia, is not taxable in India on the business profits?
Whether on the facts and in the circumstances of the case and law applicable, payments to overseas subsidiary constitutes ‘fees for technical services’ under section 9(1)(vii) of the Act or under the Treaty?
Whether on the facts and in the circumstances of the case and law applicable, payments to overseas subsidiary does not constitute fees for technical services under DTAA between India and Australia as it does not ‘make available’ technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design?
If for any reason the payment is held to constitute fees for technical services, whether on the facts and in the circumstances of the case and law applicable, payments to overseas subsidiary being in respect of services utilized in a business carried on by the applicant outside India or for the purposes of making or earning any income from any source outside India under section 9(1) (vii) of the Act, the same is not deemed to accrue or arise in India?
Whether on the facts and in the circumstances of the case and law applicable, payments to overseas subsidiary towards sub contracting charges is liable for deduction of tax at source under section 195 of the Income Tax Act, 1961, and if so, the quantum of payment on which tax is required to be deducted at source?
Whether on the facts and in the circumstances of the case and law applicable, reimbursement of expenses by the applicant to overseas subsidiary is liable for deduction of tax at source under section 195?
At the hearing under section 245R(4) of the Act, the learned Senior Counsel for the applicant submitted that the applicant does not seek a ruling on question no. 5 formulated and that, that question was not being pressed. In the light of this, it is not necessary for this Authority to rule on this question. It is open to the Revenue to deal with that question as and when it arises.
According to the applicant, the amount payable to Infosys Australia may qualify as fees for technical services. Infosys Australia is not performing any services in India. The source of income of Infosys Australia is Australia, the place where the services are performed. Under Article 7.1 of the DTAC between India and Australia, this income of Infosys which is in the nature of business income of that entity, is taxable only in Australia and not in India since Infosys Australia does not have any permanent establishment in India. The applicant is not a permanent establishment of Infosys Australia going by Article 5 of the Convention. Even if the source is deemed to be where the payer, the applicant, is situated, even then, by virtue of the Explanation to section 9(1)(i)(a) of the Act only such part of the income that could be attributed to the activities in India can be taxed. According to the Revenue, it is not clear why the advance ruling is sought at this stage. Infosys Australia became 100% subsidiary of the applicant in the year 2004 and the activities have been going on ever since, in the same manner. The agreement with Infosys Australia now put forward does not confine the working to Australia but the questions in the application are confined to the work done in Australia. The question was pending regarding an identical transaction of the same nature before the Income-tax authorities.
It is the applicant that takes up the work and the work done by Infosys Australia on behalf of the applicant is only part of the work of the applicant. The business comes to India and to the applicant. What is paid by the applicant to Infosys Australia for carrying out the work is only the expenditure of the applicant. The source of the income of Infosys Australia is the agreement with the applicant. The contract with the clients is entered into by the applicant and the responsibility under the terms of the contract is that of the applicant. What is paid by the applicant to Infosys Australia has to be found to be a part of the income of the applicant. It is submitted on behalf of the Revenue that in the era of telecommunication and internet, the actual presence of personnel and employees is not required to deliver the services. Therefore, even if the employees or the personnel of Infosys Australia are not travelling to India to perform the services in India it does not mean that they are not rendering the services in India. What we are concerned with, is the question whether the payment made by the applicant to its Australian subsidiary for the purpose of getting a part of the work done, albeit a major part, is taxable in the hands of Infosys Australia. It is true that Infosys Australia is a 100% subsidiary of Infosys India. They are independent entities in the eye of law. Unless, it is postulated that the applicant is a permanent establishment of Infosys Australia, the income at the hands of Infosys Australia, a non-resident, for the work done by it, cannot be taxed in India. The work in Australia is no doubt secured by the applicant and the income from it is its income. But, what the applicant pays to Infosys Australia for getting the work done in Australia, can only be deemed as its expenditure, as pointed out by the representative of the Revenue. But that does not make that payment taxable at the hands of Infosys Australia by the authorities under the Act. As far as Infosys Australia is concerned, the income is earned by it for the work done in Australia, no doubt, based on a contract given to it by the applicant for a work the applicant has undertaken to perform in Australia, but that does by itself lead us to the conclusion that the income earned by Infosys Australia is chargeable to tax under the Act.
9. Can it be said that the entire income earned by Infosys Australia is earned in Australia. The payer is in India. The orders are secured by the applicant and the work sub-contracted to Infosys Australia. The contract as far as Infosys Australia is concerned, is secured from India. What is the source of the income? Is it the place from where it emanates? If it does, does not the income in this transaction emanate from India when the sub-contract is given by the applicant to Infosys Australia? The payer is also in India. Under paragraph 5 of Article 12 of the DTAC, it has to be deemed that the income has arisen in India in this case.
The fact that services are rendered in Australia cannot override the legal effect of the circumstances noticed. The applicant is giving directions to Infosys Australia about the performance of its work. Clause 2.1 of the agreement provides: “All services to be performed by the Vendor shall be in accordance with the project requirements and directions given by Customers’ authorized representatives from time to time.” A reading of paragraph 1 to 9 of Annexure D to the application relating to sub-contracting clearly brings out the role of the applicant in the entire arrangement. Considered as a whole, it has to be held that the income of Infosys Australia arises in India. Under paragraph 3 of Article 12 of the DTAC between India and Australia the fee or amount payable by the applicant to Infosys Australia would be ‘Royalty’ by virtue of clause (g) thereof. The question then would be whether any technical knowledge, experience, skill, know-how or process is made available to the applicant. It is really a case of the applicant issuing directions to Infosys Australia about the fulfillment of its contractual obligations to a customer in Australia and getting those obligations performed through its Australian subsidiary. The applicant passes on the risk to the Australian subsidiary. It also gives the subsidiary appropriate directions. But, even then the obligation of the applicant to the customers in Australia will survive.
It is not disputed that under the Act, the payment made will be fee for technical services. But no services are performed in India by Infosys Australia. The source could be the payer. But, it is submitted that in this case since the services are performed in Australia, the source would be where the services are performed. The Ruling of this Authority in International Hotel Licencing Co. S.A.R.L., In re (288 ITR 534) is relied on in support. Alternatively, it is pleaded that even if the source of income is found to be India, in terms of the explanation to section 9(1)(i)(a) of the Act, only such part of the income as is attributable to India can be taxed in India. Since Infosys Australia has no Permanent Establishment in India. Article 7 of the DTAC is not attracted. By referring to the decision of the Supreme Court in Canborandum Co. v. CIT (108 ITR 335), it is pointed out that in order to rope in the income of a non-resident under the deeming provision in section 9(1) of the Act, it must be shown by the Revenue that some of the operations were carried out in India.
The Revenue has sought to meet these contentions by pointing out that in those days of developed information technology, physical presence of the employees of Infosys Australia in India is not necessary. The contract with the customer is between the applicant and the customer. The contract with the customer is between the applicant and the customer. The contract is not with Infosys Australia. This is a case where the Indian parent and the Australia subsidiary are working on the same project. The work done by Infosys Australia is only part of the work of the project. As far as Infosys Australia is concerned, its source of income is the agreement with the applicant. The responsibility to the customer ultimately is that of the applicant. If what is paid is fees for technical services, then in terms of paragraph 8 of Article 12 of the DTAC no business connection is needed.
In reply, it is submitted that in law in the absence of physical presence, Infosys Australia must have a fixed place of business in India before its income could be taxed in India. Infosys Australia had performed services only in Australia.
On a consideration of the relevant aspects, it is seen that the source of income of Infosys Australia has to be fixed as India. It cannot be held under the circumstances, on the materials available, that Infosys Australia is making available any technical service to the applicant so as to satisfy the requirement of clause (g) of paragraph 3 of Article 12 of the DTAC. So, whatever may be the position under the Act, in terms of DTAC, the fees for technical services paid is not chargeable to tax in India. Whether sections 92 to 92F are attracted in the case on hand is not a question that has been raised in this proceeding. That question is left open.
In the light of this, on question no. 1 it is ruled that the income of Infosys Australia arises from a source in India. On question no. 2 it is ruled that what is paid by the applicant to Infosys Australia is fees for technical services, the question of the existence of a Permanent Establishment does not arise. On question no. 3 it is ruled that what is paid to Infosys Australia is fees for technical services under section 9(1)(vii) of the Act, but it is not royalty in terms of Article 12 of the DTAC between India and Australia in terms of the requirements of paragraph 3 (g) of the said Article. The Ruling on question no. 4 is already included in the ruling on question no. 3. Since what is paid is found to be for technical services, question no. 5 does not arise. Since there is no income chargeable to tax in India, question no. 6 is ruled in favour of the applicant. In view of the ruling that no withholding of tax under section 195 of the Act is called for, this question is not ruled on. Accordingly, the ruling is pronounced on this, the
27th day of August, 2012.
[Citation : 350 ITR 178]