AAR Ruling: Referral fee received from an Indian based recruitment agency by a non-resident is not liable to tax in India in view of the provisions of India-UK Double Taxation Avoidance Agreement [Real Resourcing Limited (AAR No. 828 of 2009)].
Real Resourcing Limited (applicant), a company incorporated in United Kingdom (UK), was a tax resident of UK. The applicant proposed to render the following services in India:
- Recruitment services where the applicant would place a candidate with an Indian company;
- Referral services where the applicant would refer potential Indian clients to third parties based in India (likely to be another Indian-based recruitment agency);
For the said services, applicant would receive payment for providing such services.
Questions before the Authority for Advance Rulings (AAR):
Whether payment to be received by the applicant for the proposed recruitment and referral services from an India client are liable to withholding tax under section 195 of the Income Tax Act read with India-UK Double Taxation Avoidance Agreement (DTAA).
Contention of the Applicant:
- Payments received will not be chargeable to tax as there is no permanent establishment (PE) of the applicant in India;
- The address information available on the web-site of the applicant is a virtual office i.e. applicant has rent the use of address and telephone address for the purpose of communication but does not have actual office space in India and therefore, there is no PE of the applicant in India;
- Further, provisions relating to fees for technical services (FTS) as per the DTAA are not attracted. Therefore, while making the payments to the applicant, the Indian clients are not obliged to withhold tax at source.
- Reliance has been placed on Cushman & Wake field Ltd (305 ITR 208).
Contention of the Revenue:
- Applicant has not furnished full facts to establish the fact that there is no PE;
- Article 13(4)(a) of the DTAA dealing with FTS is attracted as the database maintained by the applicant for providing information of suitable candidates for recruitment is consultancy services and the applicant is making available the experience and skills of the candidates who seek recruitment;
- Information downloaded from internet indicates that the applicant is having an office in New Delhi and is indicative of the presence of PE of the applicant in India.
Article 13(3)(a) and 13(4) of India- UK DTAA:
“3(a) Payments of any kind received as a consideration for the use of, or right to use, any copyright of a literary, artistic or scientific work, any patent, trademark, design or model, plant, secret formula or process or for information concerning industrial, commercial or scientific experience.”
“4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term “fees for technical services” means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or
(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or
(c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.”
AAR Observation and Ruling:
- The contention of the revenue that the income under consideration falls within the scope of clause (a) & (c) of Article 13( 4) of the DTAA is untenable;
- Collecting data and analysing it and making a data base for providing information on suitable candidates for recruitment, even if they are in the nature of consultancy services, cannot be considered to be ancillary and subsidiary to the enjoyment/ application of the right or information referred to in paragraph 3(a) of Article 13 of the DTAA.
- Moreover, 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. It would amount to unwarranted expansion of the terms FTS and Royalties. 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.
- It would be far-fetched to suggest that the ingredient of ‘making available’ technical knowledge, experience, skill, know-how or process is involved in this case. 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 [reliance placed on the rulings of AAR in the case of Anapharm Inc. (305 ITR 394), Intertek Testing (175 Taxman 375) and Cushman and Wake field (305 ITR 208)].
- On the basis of facts stated by the applicant, it cannot be said that the applicant operates through a PE in India. Catering to the function of referring the 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. For rendering such services, a fixed place of business in India or dependent agent need not necessarily be there. The applicant has clarified that it has really no office or business place in New Delhi and that the address in New Delhi is basically a ‘virtual office’. Evidently, it means that the address and phone number is given so as to serve as a contact point and for some routine work of inconsequential nature. However, as and when the applicant starts extending its referral services to India, the factual position should be notified to the Revenue so that inquiries could be made as to the role if any played by the so-called office in India.
- Therefore receipts in the nature of referral fee from the Indian based recruitment company cannot be subjected to tax as business profits in the absence of a PE in India.
- As regards the recruitment services are concerned, no information was provided by the applicant as to the exact modalities of the operations. Therefore, AAR has refrained from giving the ruling in this regard.
This ruling is in line with the ruling earlier rendered by the AAR in case of Cushman & Wake field Ltd. (305 ITR 208) wherein the referral fee in relation to the services rendered in real estate was held not to be liable to tax in India. Further, as regards the PE is concerned, the AAR has made important observation that a non-resident, using merely an office correspondence address and telephone numbers, without having any actual office space (‘virtual office’), only to serve as a contact point and for some routine work of inconsequential nature, would not give rise to a PE. The facts of this case are, however, required to be distinguished from the AAR ruling in the case of Sutron Corporation (268 ITR 156) wherein the residential address of the India country manager was held to be a fixed place of business of the non-resident. Although the AAR Ruling is applicable only in the case of an Applicant who has sought it, it nevertheless carries a persuasive value.