Before proceeding into detailed discussion on this topic, let us first have a glimpse of Article 14 of Model tax convention. Article 14 of the Model tax convention read as under:
“1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State except in the following circumstances, when such income may also be taxed in the other Contracting State:
If he 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 Contracting State; or
If his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State.
2. The term “professional services” includes especially independent scientific, literary artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.”
Please note that Article 14 has been omitted from Model OECD tax convention on the basis of the report titled ‘Issues related to Article 14 of the OECD tax convention’. The decision therein reflected that there is no need of Article 14 since the concept of ‘Fixed base’ as provided in Article 14 is akin to ‘Permanent establishment’ as provided in Article 7. The effect of deletion of Article 14 from Model OECD tax convention is that income derived from professional services or other business activities are now dealt under Article 7 of Model OECD tax convention.
Let’s begin with the basic tenet of Article 14 ‘Independent Personal Services’. A person carrying on a professional or independent activities in a country other than the country of his residence shall be subject to tax in that other country only if he has a fixed base available in that other country or his stay in that another country is of 183 days or more in twelve months period of a fiscal year.
As far as Indian tax treaties are concerned, there is an additional condition present in Article of ‘Independent Personal Services’ in the tax treaty of two countries (namely, Canada and Zambia) which dictates that income of a person which is derived by a resident in respect of professional and other activities shall be taxable in a country (other than country of his residence) if the remuneration of such activity is paid by the resident of that other state or is borne by a permanent establishment or fixed base situated therein. However, the same are subject to threshold limit (i.e., USD 2,500 in case of India-Canada tax treaty and ZK 10,000 in case of India-Zambia tax treaty. To illustrate the same, we have reproduced the relevant extracts of India-Canada tax treaty:
“if the remuneration for the services in the other Contracting State is either derived from residents of that other Contracting State or is borne by a permanent establishment which a person not resident in that other Contracting State has in that other Contracting State and such remuneration exceeds two thousand five hundred Canadian dollars ($2,500) or its equivalent in Indian currency in the relevant fiscal year.”
We will now move into details of each limb(s) of Article 14 of the tax treaties.
Limb 1: Criteria of ‘Fixed base’ regularly available
To understand it properly, we should first understand it with a simple example. A person resident in one country, say UK, is a partner of law firm there. Such person should be considered to have a fixed base available to him if the law firm has offices in other country that was available to him whenever he wished to conduct business in that other country irrespective of the frequency of conducting the business. However the same should be distinguished occasional renting an accommodation in a hotel to serve as a temporary office (i.e., it cannot be treated as fixed base regularly available.
The ‘Fixed Base’ should not only exist but also be regularly available for the purpose of performing professional and other activities. The expression ‘regularly available’ means that a fixed base is available to the individual in other country (i.e., country other than the country of residence) irrespective of the fact whether or not; he makes use of such ‘Fixed Base’.
Only so much income shall be taxable as is attributed to that fixed base in other country. In other words, it can be summarised as:
If all the operations are being carried out in other country (i.e., country other than country of residence) through fixed base regularly available to him, then entire income shall be taxable in such other country. Needless to mention that only net income (i.e., Gross income less all expenses) shall be taxable.
On the other hand, if all the operations are not being carried out in other country (i.e., country other than country of residence) through fixed base regularly available to him, then only such part of income will be taxable as is reasonably attributable to such fixed base regularly available to him (i.e., Principle of Attribution shall prevail).
Limb 2: Criteria of ‘Stay’ in other country (i.e., other than the country of residence)
The second criteria of taxability, as far as article of ‘Independent Personal Services’ are concerned, is stay in the other Country for a period or periods amounting to or exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned.
The erstwhile criteria of taxability is ‘183 days in the fiscal year concerned’. The amendment was made to plug the loophole which was preventing taxation of such income. Let’s illustrate the erstwhile tax planning which was prevailing. An individual visits to other country (i.e., country other than country of residence) for last 5 months of year 1 and 5 months of year 2, he would not fulfil the erstwhile condition of ‘183 days in a fiscal year’ but would now satisfy the ‘183 days in a 12 month period’.
An issue arises while counting the No. of days that whether man days are to be counted or solar days are to be counted? This issue has been encountered by the Hon’ble Mumbai Tribunal in the case of Clifford Chance, United Kingdom v. Deputy Commissioner of Income-tax [2002] 82 ITD 106 wherein it was pronounced as: “In our opinion multiple counting of the common days is to be avoided so that the days when two or more partners were present in India, together, are to be counted only once. Multiple counting would lead to absurd results. For example, if 20 partners were present in India together for 20 days in one fiscal year, multiple counting would result in 400 days. There cannot be more than 365 days in a year. Therefore this system of multiple counting leads to absurdity. Therefore it should be avoided.”
This article outlines the basic issues revolving around the basics of the article of ‘Independent Personal Services’. In next article, we would be discussing the complex issues relating to article of ‘Independent Personal Services’ including the landmark judgments on this issue.
Disclaimer: The conclusions reached under this article are not binding upon the tax / legal authority or any court and no assurance can be given that a position contrary to that expressed herein will not be asserted by a tax / legal authority and ultimately sustained by a court. Accordingly, we are not responsible for any liability whatsoever on account of the any person taking actions based on this article.
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