1. Dependent and Independent Personal Services
July 2013

2. Contents Overview Dependent Personal Services
Taxability under Income tax Act, 1961
Taxability under applicable Tax Treaty
Relevant Issues
Case Study
Independent Personal Services

3. Overview

4. Overview
Taxability of income arising from exercise of personal services under Tax treaties is governed by:
Article on Dependent Personal Services: Personal services while in employment
Article on Independent Personal Services: Personal services in independent capacity

5. Dependent Personal Services

6. Dependent Personal Services
Taxation of employment income under Income tax Act, 1961
Salary earned for services rendered in India is taxable irrespective of residential status of the Individual and place of receipt of such salary
Safe harbor for a non resident: Exemption under section 10(6)(vi) of Income- Tax Act, 1961 (the Act) is applicable where employee of Foreign Enterprise renders services in India provided :
Foreign Enterprise is not engaged in any trade/business in India
Stay in India does not exceed 90 days in the relevant tax year
Remuneration is not liable to be deducted from income of employer

7. Dependent Personal Services
Taxability of employment income under the applicable Tax treaty
Governed by Article titled Dependent Personal Services / Income from Employment
Applicability is restricted to employment income where recipient has employee- employer relationship with the payer
Residence Rule (versus) Source Rule. E.g. Foreign national rendering services in India
Availability of exemption from tax in “source country”
Concerned with cases of general applicability; not concerned with special categories of employees such as consulate staff, UN employees

8. Dependent Personal Services
Employer – Employee Relationship
Extract from Klaus Vogel on Double Taxation Conventions at page 899 :
“An employer is someone to whom an employee is committed to supply his capacity to work and under whose directions the latter engages in his activities and whose instructions he is bound to obey”
Performance of duties subject to directions, instructions and superintendence of the employer
Does not include:
Professionals, freelancers
Working partner
Director in his capacity as a Board member

9. Dependent Personal Services
Place of Exercise of Employment
Employee presence is a pre-condition to exercise of employment
What is not relevant:
Place where the result of work is exploited
Place of signing contract
Place of H.Q. of Employer
Residence of Employer
Nationality of Employee
Place of remittance of emoluments
Visits in connection with employment

10. Dependent Personal Services
Right to Tax for Country of Residence
India-US Tax treaty Article 16: Dependent Personal Services
Article 16(1)
“………………., 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 there from may be taxed in that other State.”

11. Dependent Personal Services
India may consider remuneration derived by a US resident as not subject to tax in India if payout is not with respect to the employment exercised in India
Any salary received in India is taxable under Income-Tax Act, 1961, however, it may be considered as not liable to tax under the applicable tax treaty:
If recipient is resident of other state AND
The salary is in respect of an employment exercised outside India
Article 16(1) - Interpretation

12. Mechanics of Article 16(1) – India US Tax Treaty
April 15, 2017
Mechanics of Article 16(1) – India US Tax Treaty No
Not covered under Dependent personal services article
Are you receiving salary income
Yes, go to Dependent Personal Service Article
Are you the tax treaty resident of India No
Are you the tax treaty resident of the US No
Pay tax as per domestic tax laws
Yes
Yes
Is salary related to services rendered in India
Is salary related to services rendered in India No
No, you are rendering services in the US
You are not taxable in India
You are taxable in India but you may claim credit of US taxes
Yes
Yes
You are taxable in India
You are taxable in India
Taxability of an outbound employee

13. Dependent Personal Services
Right to Tax for Source Country
Article 16(2) : India- USA Tax 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 in the relevant taxable year,
b) the remuneration is paid by, or on 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.”

14. Dependent Personal Services
India can tax remuneration derived by a US resident in respect of an employment exercised in India if:
US resident is present in India during the relevant tax year for more than 183 days (Physical Presence Test)
(OR)
Remuneration to the US resident is paid by, or on behalf of employer who is resident in India (Resident Employer Test)
Remuneration to the US resident is borne by PE or Fixed base or business or trade which the employer has in India (PE Connect Test)
Taxation in country of residence (US) is not affected
Article 16(2) - Interpretation

15. Dependent Personal Services
India may exempt remuneration from tax derived by a US resident in respect of an employment exercised in India if:
US resident is present in India during the relevant tax year for 182 days or less
(AND)
Remuneration to the US resident is paid by, or on behalf of employer who is not resident in India
Remuneration to the US resident is not borne by PE or Fixed base or business or trade which the employer has in India
Article 16(2) – Another way of Interpretation

16. Dependent Personal Services
Article 16(2) – Physical Presence Test
Physical presence irrespective of time spent on activities
Include : Day of arrival; day of departure; holidays; vacations; voluntary or involuntary interruptions, short breaks, sickness, etc.
Exclude : Days outside India even while on duty; training outside India in connection with Indian duty; off period leave etc.
A part of the day is also a day
Mark : Concept of Fiscal year / Taxable year qua source country

17. Dependent Personal Services
Article 16(2) – Physical Presence Test
India – US Tax treaty
“for a period or periods not exceeding in the aggregate 183 days in the relevant taxable year”
India – UK Tax treaty
“period or periods not exceeding in the aggregate 183 days during the relevant fiscal year”
India – Malaysia Tax treaty
“for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned”

18. Dependent Personal Services
Article 16(2) – Resident Employer Test
Who is the real / economic employer?
Employment contract
Control, superintendence, instruction, directions, manner of work provisioning of tools and material for work, etc.
Code of conduct, dress code, service rules, who controls place of work, reporting
Who enjoys confidentiality and fruits of labour
Responsible for conduct / risks of result of work
Bearing economic burden of salary cost

19. Dependent Personal Services
Article 16(2) – PE Connect Test
Remuneration ‘borne’ by PE
Logic : To compensate India for Tax Revenue lost through deduction
Employee functionally and economically connected with PE
Not relevant:
Defrayal by HO and no charge back to PE
Not debited to PE Book
Deduction forgone by PE by choice
Capitalisation of amount in PE books
Impact of presumptive taxation
Variants of “borne by”: deductible in computation of PE income, reasonably connected etc.

20. Dependent Personal Services
Article 16(2) – PE Connect Test
India- US Tax treaty
“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”
India – UK Tax treaty
“the remuneration is not deductible in computing the profits of an enterprise chargeable to tax in that other State”
India- Malaysia Tax treaty
“the remuneration is not borne by a resident or permanent establishment or fixed base which the employer has in the other State or by a person carrying on independent personal services in the other Contracting State”

21. Mechanics of Article 16(2) – India US Tax Treaty
April 15, 2017
Mechanics of Article 16(2) – India US Tax Treaty
Are you a treaty resident of India
Are you a treaty resident of the US
Yes No
Are you receiving salary income No No
Pay tax as per domestic tax laws
Yes
Yes
Not covered under Dependent personal services article
Is salary related to services rendered in India
Is salary related to services rendered in India No
No, you are rendering services in the US
You are not taxable in India
Yes
Are you present in India for more than 182 days
You are taxable in India but you may claim credit of US taxes
Yes No
You are taxable in India
Employer is a resident of India
Yes No
Salary cost is borne by PE in India No
You are not taxable in India
You are taxable in India
Yes
Taxability of an inbound employee

22. Dependent Personal Services – Some Relevant Issues

23. Dependent Personal Services – Some Relevant Issues
Tax Residency Certificate
The following changes are inserted in Section 90 with effect from April 1, 2013:
“An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of him being a resident in a country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.”
Applicable for financial year onwards

24. Dependent Personal Services – Some Relevant Issues
Triangular Situation
Employment
Contract
US Company
Mr. X of Norway
India
Deputation for 4 months
Exploring Business Opportunity for US Company
Relevant Tax treaty: India – Norway
Short stay exemption will be calculated based on India-Norway Tax treaty

25. Dependent Personal Services – Some Relevant Issues
Split Residency / Dual Residency
Mr. X, UK national on assignment to India during 1 April 2013 to 30 September 2013, leaves India in October 2013
Mr X has permanent home in the UK
Residential status: Domestic tax provisions
Tie-breaker clause in the following order of preference to apply:
Permanent Home
Centre of Vital Interests (Personal and Economic Interest)
Habitual Abode
Nationality
Competent authorities
Period
India UK
1 April 2013 to September 2013
Resident
Non resident
1 October 2013 to March 2014 .

26. Dependent Personal Services – Case Studies

27. Dependent Personal Services – Case Studies
Scenario
Fact Pattern 1
Tom (US resident) is in India for 190 days just exploring possibility of business for his US employer. US employer has no PE in India 2
Jerry (US resident) takes up employment with an Indian Company. He comes and works for 30 days. He leaves employment for personal reasons and believes he has no tax liability in India due to short stay 3
Harry (US resident) is employed by US Co. US Co renders services to various entities in India and has service PE in India. Harry, a specialist, comes for 3 days to India to address client emergency and criticality.

28. Dependent Personal Services – Case Studies
Facts
Mr. A is deputed to work with F Co.
F Co is a Dutch company paying taxes in India u/s 115A
The salary paid to Mr. A is not actually deducted while calculating taxable profits of F Co.
Issue
Whether salary paid to Mr. A satisfies Article 15(2)(c) of the Tax treaty as not being deductible expense for calculating profits of F Co.?

29. Dependent Personal Services – Case Studies
Facts
Mr. A is an employee of ABC US Co
Mr. A has rendered services in India in the branch office of ABC US Co for 76 days
The salary paid to Mr. A by the branch office is reimbursed by ABC US Co to the Indian branch.
Issue
Whether salary paid to Mr A satisfies Article 16(2)(c) of the Tax treaty as not being deductible expense for calculating profits of PE?

30. Independent Personal Services

31. Independent Personal Services
Overview
Income from professional services/other activities of independent character
Professional services excludes:
Professional services performed in employment
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

32. Independent Personal Services
Illustrative Treaty Example
Article 15 - India –US Tax treaty
“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:
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 the income as is attributable to that fixed base may be taxed in that other State; or
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 the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.”

33. Independent Personal Services
Interpretation
India can tax income derived by a 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 resident’s period of stay in India is more than 90 days in the relevant tax year

34. Independent Personal Services
Inclusive definition
Services of personal nature
Independent character
Employment income is excluded
Professional knowledge of some department of science or learning is used
An activity of independent character – though not qualified professional may also fall under the definition
Definition of Services

35. Independent Personal Services
What can be covered under - other services of independent character
Distinguishable from business profit
Should be service
Should be similar to professional services
Capital is of secondary importance
Indian Tax treaties- by and large use the term “other services of independent character”
Definition of Services

36. Independent Personal Services
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

37. Independent Personal Services
Fixed Base Test
International commentaries suggest that a number of conditions must be satisfied in order to constitute a Fixed Base 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
 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

38. Independent Personal Services
Illustration – Fixed Base
Fixed base
Not a fixed base
Office of an architect / lawyer
Auditor provided with a room at a client place for audit
Physician provided with a consulting room twice a week in a hospital
Desk made available to the manager situated in another enterprise without presence of necessary infrastructure
Definite space in an office of an associate
Temporary camping by a researcher at a base camp in Himalayas
A lawyer exercising profession from second home in another state

39. Independent Personal Services
Relevant Issues
Can non-Individuals render professional services?
Yes, if the applicable Tax treaty covers non-individuals. Tax treaties with US, UK and Australia covers firms
MESB vs DIT (90 ITD793) – Article 14 can apply to non individuals
Furnishing of services is also covered by Article 5 (Service PE)
Service PE Article 5 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

40. Independent Personal Services
Relevant Issues
Is it possible that characterization of income would encompass Independent Personal Services as well as Fee for Technical Services?
Specific will override general
MESB vs DIT (90 ITD793)- Elaborate explanation of professional services
DCIT vs Chadbourne & Park LLP – SOT 434 (Mum)

41. Thank You