As per Article 13(2) of the Double Taxation Avoidance Agreement (DTAA) executed between India and Denmark, the amount payable towards fee for technical services to the resident of the other Contracting State can be also taxed in India at a rate not exceeding 20 percent of the gross amount of the fees for technical services.
As per Section 115A(1)(b) of the Income Tax Act, 1961, the tax on fees for technical services on a foreign company received from an Indian company is 10% if such fees for technical services is received in pursuance of an agreement made on or after the 1st day of June 2005, subject to the condition that the above agreement is approved by the Central Government or it relates to a matter included in the industrial policy for the time being in force. The RBI has already liberalized its policy on such foreign remittances and now such remittances are made through automatic route.
As per Section 90(2) of the Income Tax Act 1961, if the Central Government has entered into a DTAA with any country outside India, for TDS purposes the most beneficial rate has to be applied in the case of an assessee to whom such DTAA is applicable. Therefore, the most beneficial rate is 10% as per Section 115A accompanied by surcharge @ 2% and education cess @ 3%, the net effective rate being 10.506%.
As seen from the above provisions, we are of the view that a tax rate @ 10.506% could be applied on the payment to be made to a foreign company, towards fees for technical services rendered in India, since it is the most beneficial rate as per Section 90(2) of the Income Tax Act 1961.
Kindly confirm whether the view taken by us is in order.
Further, as per Section 68(2) of the Finance Act 1994 inserted vide Finance Act 2012, the service tax liability on any taxable services provided by any person located outside India and received by any person located in India, has to be borne by the recipient of service with effect from 01.07.2012. Further, as per the amended Cenvat Credit Rules, 2004, cenvat credit cannot be used for payment of service tax in respect of services where the person liable to pay the tax is the service recipient. In this case the service tax liability has to be discharged only through cash payment. Kindly clarify whether the above payment could be considered as the payment made towards input services by the service recipient and cenvat credit availed by the service recipient against the service tax payable on the output service provided by it. This clarification is required in the absence of any specific provision in the amended Cenvat Credit Rule, 2004.
We shall be much thankful for your considered views at the earliest.
Thanks & Regards
Chief Manager (Taxation)
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Regarding your income tax query, as long as you fulfil the conditions of Section 115A of Income Tax Act, 1961, you would be entitled to the rates prescribed under Section 115A i.e. at 10% plus surcharge and eduction cess etc.
In my view your understanding is in order.
Regarding your service tax query, where the service tax is required to be paid under reverse charge method, the payment of service tax has to be made in Cash without utilizing any Cenvat Credit.
However, after making payment of service tax, in case such service is an Input Service within the provisions of rule 2(l) of Cenvat Credit Rules, 2004, you may take the credit on the basis of Challan on which service tax has been paid.
Thank you for your feedback and prompt response.
Chief Manager (Taxation)