FOREIGN ASSOCIATION PROVIDING ANY TECHNICAL SERVICES AGAINST THE MEMBERSHIP FEE PAID
Normally, Membership paid to foreign association is not taxable in India unless the foreign association is providing any technical services against the fee.
On the above mentioned subject, reference may be made to a recent decision of the Mumbai Tribunal in the case of TUV Bayren (India) Ltd. dated 06.07.2012 in ITA No 4944/Mum/2002. In the said case, the Hon’ble Tribunal has defined the scope of the Fee for Technical Services in the following manner:
- ‘Technical services require expertise in technology and providing the client such technical expertise.
- Managerial services are used in the context of running and management of the business of the client.
- Consultancy is to be understood as advisory services wherein necessary advice and consultation is given to its clients for the purpose of client’s business”.
On the basis of above definition, It is clarified that Membership fees paid to foreign association do not fall in definition of FTS as it is not covered in managerial , technical and consultancy services. Therefore, it cannot be taxed under FTS.
As Membership fees paid to foreign association does not get covered under FTS, therefore, we further analyze whether the concerned association has any business connection or PE in India or not.
A relation to be a “business connection” must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. [CIT v R.D.Aggarwal& Co. and others 56 ITR 20 (SC) and Barendra Prasad Roy v ITO 129 ITR 295 (SC)]. The business connection is the Indian equivalent of PE and also broader in connotation and is used effectively to tax the income of Non-Residents in India. Any profit of non-resident which can be reasonably attributable to such part of operations carried out by its business connection in India are deemed to be earned in India. [Explanation 1 to Section 9].
The landmark judgment of the Andhra Pradesh High Court in GVK Industries Ltd. v. ITO has laid down following principles which needs to be satisfied in order to constitute Business Connection:
- Existence of close, real and intimate relationship
- Commonness of interest
- Continuity of activity or operation
- A stray or isolated transaction is not enough to establish a business connection [Anglo French Textile Co Ltd v CIT ]
The membership fees paid to foreign association does not get covered in FTS. Therefore, it will not be taxed in India if there is no business connection and PE in India. If the concerned association has PE or business connection In India as defined above then such payment shall be covered u/s 9 of Income Tax Act and taxable in India. Under the tax treaty, Article 7 read with Article 5 will apply if DTAA is applicable.
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