Payments for referral services cannot be termed as fees for technical services (FTS)

Facts

• The applicant, Real Resourcing Limited is a company incorporated in the UK and is a tax resident of the UK.
• The applicant provides recruitment services (the applicant places a candidate with an Indian company) and referral services (the applicant would refer potential Indian clients to a third party based in India).
• The applicant has an address in New Delhi –which is a virtual office wherein the applicant has rented use of the address and telephone numbers in New Delhi without any actual office space. The applicant has no physical presence in India.

 Issues before the AAR

The following question was raised before the AAR:

• Whether the payment received by the applicant for the proposed recruitment services and referral services from the Indian clients is liable to withholding under section 195 of the Income tax Act, 1961 (“the Act”) read with the Double Taxation Avoidance Agreement (“tax treaty”) between India and UK

Contentions of the applicant

• Payments received in respect of the above services are not chargeable to tax in India as the applicant does not have a permanent establishment (“PE”) in India. Further, such services are not in the nature of fees for technical services as provided in the India-UK tax treaty.
• Therefore, while making payments to the applicant, the Indian clients are not obliged to withhold tax at source.
• Reliance was placed on the ruling given by the AAR in Cushman & Wakefield Ltd 305 ITR 208.

Contentions of the revenue

• The provisions of the India-UK tax treaty (Article 13(4)(a)) dealing with fees for technical services will apply as database maintained by the applicant for providing information of suitable candidates for recruitment is a consultancy service and the applicant is making available the experience and skill of the candidates who seek recruitment.

• The virtual office of the applicant in New Delhi is indicative of the presence of the permanent establishment of the applicant in India.

Ruling of the AAR

• Collecting data, analysing it and making a database for providing information on suitable candidates for recruitment is in the nature of consultancy services but it cannot be considered to be ancillary and subsidiary to the enjoyment / application of the right or information referred to in the India-UK tax treaty (Article 13(3)(a)).
• By giving access to the data base, it cannot be said that the information concerning industrial, commercial or scientific experience will be transmitted by the applicant to the recruiting agencies. Consideration for providing information concerning industrial, commercial or scientific experience basically involves the sharing of technical know-how and experience which is not the case here.
• Taking steps to make available the experience and skill of candidates available for recruitment does not at all fall within the ambit of making available the technical knowledge and experience of the service provider.
• If the payments received by the applicant are not in the nature of royalties or FTS, they can be subjected to Indian income tax in terms of Article 7 (deals with the business profits)  of the India – UK tax treaty only if the income results from a business activity carried on through a PE situated in India.
• On the facts of the case, it cannot be said that the applicant operates through a PE in India. Catering to the function of referring potential Indian candidates to the Indian based recruitment company without creating any commitment to recruit them does not, without anything more, give rise to an inference of PE. The address in New Delhi is basically a ^„virtual office^? and is given so as to serve as a contact point and for routine work of an inconsequential nature.
• The receipts in the nature of referral fee from the Indian based recruitment company cannot be subjected to tax as business profits in view of the provisions of the tax treaty.
• The ruling would apply only to referral services. As regards recruitment services, AAR declined to give any ruling in the absence of adequate details.

Conclusion

The receipts in the nature of referral fees do not constitute “fee for technical services”. Further, in the absence of a PE in India, the same cannot be subject to tax in India.

Source: Real Resourcing Limited – AAR No. 828/ 2009 dated 5 March 2010.