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K Sudarshan Chartered Accountant
Independent Personal Services (IPS)
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Overview of IPS › Article 14/15 (Deleted in OECD model) -Income from Professional
services/other activities of independent character.
› Exclude Professional Services performed in employment.
› Excludes Industrial and Commercial activities – covered under Article 5 & 7.
› Professional Services includes:
• Independent Scientific, Literary, artistic, educational or teaching activities.
• Independent activities of physicians, lawyers, engineers, architects, dentists and accountants.
• Other services of Independent Character
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Illustrative Treaty Example
› India US Treaty – Article 15 “Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State:
› (a) if such person 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 their income may also be taxed in that other State; or
› (b) if the person’s stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year. The term “professional services” includes independent scientific, literary, artistic, educational or teaching activities as well as independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.” 3
Interpretation
› IPS normally taxable only in the Resident State.
› India can tax US Resident in respect of Professional Services rendered in India if:
• US Resident has a Fixed Base regularly available to him in India (Fixed Base Test) (OR)
• US Residents period of stay in India is more than 90 days in the relevant financial year.
In some cases if the fees being borne by a resident of or a PE or a fixed place in the source country. (India- Canada)
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Definition of Services
› Inclusive definition › Services of personal nature › Independent character › Employment income is excluded › Professional knowledge of some department of science or learning is used › There may be activity of independent character – though not qualified professional › Graphite India Ltd Kolkata Tribunal (78 TTJ 418):
‘ An activity to be profession must be one carried on by an individual by his personal skill, intelligence & dependent on individual characteristics
› Advance level of Knowledge › Specialized Skill Sets › Accreditation to a certificate of practice issued by a professional body.
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Definition of Other Services
› What can be covered under ‘other services of independent character’ ? • Distinguishable from Business profit • Should be service • Be similar to professional services • Capital is of secondary importance • Indian tax treaties – by and large uses the terms “other services of
independent character”
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Entities Covered
› Treaty specific coverage of Individual and/or firms of individuals
• India – US Treaty: an Individual or a firm of individuals
• India – UK Treaty: an Individual whether in his own capacity or as a member of a partnership
• India – Singapore Treaty: an Individual
• India – Netherlands / India – Japan: All residents including a company which provides professional services
• UN Commentary IPS only for Individuals
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Fixed Base Test
› International commentaries suggest that a number of conditions must be satisfied in order to constitute a Fixed Place of Business
• There must be a place of business
• The place of business must be located at a certain area
• The individual must have a certain right of use to the place of business (disposal of the service provider)
• The use of place of business must last for a certain period of time
• The activities performed through the place of business must be a business activity and such activities should constitute the core activities.
• Graphite Industries (Supra) ‘Regularly available’
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Fixed Place - Illustrations
Fixed Base
1. Office of an architect/ Lawyer
2. Physician provided with a consulting room twice a week in a hospital.
3. Definite space in the office of an associate.
4. A lawyer exercising profession from second home in another State.
Not A Fixed Base
1. Auditor provided with a room at client’s place for audit
2. Desk made available to the manager situated in another enterprise without the presence of necessary infrastructure
3. Temporary camping by a researcher at a base camp in Leh, Ladakh
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Issues
› Can non-individuals render professional services? • Yes, if the applicable tax-treaty covers non-individuals. DTAA with US, UK
and Australia covers firms • MESB vs DIT (90 ITD793) – Article 14 can apply to non-individuals. • DTAA with Denmark only for individuals : Christiani & Nielsen Copenhagen
39 ITD 355 (Mum ITAT). Refers only to natural person.
› Period of Stay : Man days vs Solar days (Clifford Chance)
› Furnishing of Services is also covered by Article 5 (Service PE) • Service PE Article applies to service other than independent personal
services • Article 5 covers furnishing of services by an enterprise through its
employees or other personnel engaged by the enterprise.
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Issues
› Is it possible that characterization of income would encompass Independent Personal Services as well as Fees for Technical Services?
• Specific will override general
• Precedents supporting the above view : MSEB (90 ITD 793). Gustav Van Der Mark (AAR) 235 ITR 6. Estate of Bhagwan Devi (79 ITD 539)
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Dependent Personal Services / Income From Employment
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DPS –Income Tax Act › Salary Earned in India by a Non-Resident to the extent of Services Rendered.
› Resident Salary taxable irrespective of services rendered.
› Short Stay Exemption u/s 10 (6) (vi) –Employee of Foreign Enterprise (FE) renders service in India
› FE is not engaged in any trade/business in India.
› Stay in India does not exceed 90 days.
› Remuneration is not deductible from income from employer.
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DPS-DTAA › Income From Employment under the OECD Model
› Very significant considering global movement of employees.
› Exclude Director Fees, Pension Service , Government Service & any other specific service.
› Taxability in Residence vs. Source
› Short Stay Exemption
› Employer vs Employee. [An employer is a person on whom the employee has economic and personal dependence]
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Real Employer vs Economic Employer › OECD Model Para 8 ‘International Hiring - out of Labour’
› Employer : Substance over form
› Recent Model tax convention 2010, factors highlighted for determining real employer
› Services of employee integral part of the business or
› Performing service which is the core function of the organization by person deputed
› Other factor based on , control, responsibility, tools and materials, reporting factors, lien on employment etc.
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DPS – Resident Country Right to Tax
Article 16 of India USA DTAA- Dependent personal Services
Article 16(1) of India USA Treaty
“……., salaries, wages and other similar remuneration derived by a resident of a contracting state in respect of an employment shall be taxable only in that state unless the employment is exercised in the other contracting state. If the employment is so exercised, such remuneration as is derived therefrom shall be taxed in that other state.
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DPS – Source Country Rights
Article 16(2) of India USA Treaty
“Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a contracting state in respect of an employment exercised in the other contracting state shall be taxable only in the first mentioned state if:
a) The recipient is present in the other state for a period or periods not exceeding in the aggregate 183 days of the relevant taxable year
b) The remuneration is paid by, or on the behalf of, an employer who is not a resident of the other state; and
c) the remuneration is not borne by a permanent establishment or a fixed base or a trade or business which the employer has in the other state.
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DPS – Criteria for source state
India can tax remuneration of US Resident in respect of an employment exercised in India if:
• US Resident present for more than 183 days (Physical Presence Test) or
• Remuneration is paid by or behalf of an employer who is resident in India (Resident Employer Test) or
• Remuneration is borne by PE or Fixed Base or business or trade which employer has in India (PE Connect Test)
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DPS – Issues
• Physical Presence Test
• Resident Employer Test
• PE Connect Test
• Triangular Situation
• Employment exercised aboard a ship or aircraft
• Way ahead
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