Payments to a foreign university for teaching services not taxable

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Recently, the Authority for Advance Rulings (the AAR) in the case of Eruditus Education Private Limited (the applicant) held that payments made by the applicant to a foreign university for teaching services rendered under the terms of an agreement are not in the nature of ‘Fees for technical services’ as it falls under the exclusion clause of Article 12(5)(c) of the India-Singapore tax treaty (tax treaty).

Further, the AAR also held that the foreign university does not have a Permanent Establishment in India under Article 5 of the tax treaty in relation to the activity of conducting in-class teachings or through tele-presence in India.

Accordingly, the payments made to the foreign university are not chargeable to tax in India and there are no withholding tax implications on the same.

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Payments to a foreign university for teaching services not taxable

  1. 1. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Payments to a foreign university for teaching services not taxable as FTS in view of the exclusion clause under the India-Singapore tax treaty. Further, the foreign university does not have a PE in India 30 September 2013 Background Recently, the Authority for Advance Rulings (the AAR) in the case of Eruditus Education Private Limited 1 (the applicant) held that payments made by the applicant to a foreign university for teaching services rendered under the terms of an agreement are not in the nature of ‘Fees for technical services’ (FTS) as it falls under the exclusion clause of Article 12(5)(c) of the India- Singapore tax treaty (tax treaty). Further, the AAR also held that the foreign university does not have a Permanent Establishment (PE) in India under Article 5 of the tax treaty in relation to the activity of conducting in-class teachings or through tele- presence in India. Accordingly, the payments made to the foreign university are not chargeable to tax in India and there are no withholding tax implications on the same. _______________ 1 Eruditus Education Private Limited (AAR No. 1037 of 2011) (AAR) – Taxsutra.com Facts of the case  The applicant, incorporated as a private limited company, collaborates with global business schools and foreign educational institutions in delivering executive education programmes in India. In pursuance of its objective, the applicant entered into a ‘Programme Partnership Agreement’ (the Agreement) with a foreign university to offer a management programme (Programme) to experienced, working Indian professionals.  As per the Agreement, the foreign university is required to conduct teaching interventions while the applicant shall assist in the marketing, organising, managing and facilitating the conduct of the Programme. The Programme shall be for a period of 30 days spread over 11 months wherein teaching is conducted for 16 days in foreign campuses, 6 days in India and the balance 8 days through tele-presence.
  2. 2. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. AAR’s ruling  The services rendered by the foreign university to the applicant involve expertise in or possession of special skill or knowledge that is ‘technical’ in nature. Thus the payment for the services falls under the definition of FTS, both under the Act and the tax treaty. However, the case of the applicant will fall in the exclusion clause of Article 12(5)(c) of the tax treaty which reads as under - “Notwithstanding paragraph 4, ‘Fees for technical services does not include payment: a) ------------------ b) ------------------ c) for teaching in or by educational institutions  There is no dispute regarding the fact that the foreign university is an educational institution and services rendered are in the nature of ‘teaching’. Thus the payments are not considered as FTS under the tax treaty.  Further the AAR held that the foreign university does not have a PE in India under Article 5(1) or 5(8) of the tax treaty in relation to the activity of conducting in-class teaching or through tele- presence in India.  Thus the payments were not chargeable to tax in India and there will not be any withholding tax implications. Our comments This is a welcome ruling by the AAR where it held that payments made to a foreign university essentially for rendering teaching services through in-class teaching in India or abroad or tele-presence is not taxable in India by virtue of exclusion clause 12(5)(c) of the tax treaty. The AAR appreciated the facts of the case and invited attention to the applicability of the exclusion clause under Article 12 of the tax treaty which provides specific exemption to teaching services conducted in or by an educational institution. Further the activity of conducting in-class teaching in India or abroad or through tele-presence in India would not constitute a PE of the foreign university in India.  The applicant shall compensate the foreign university for the cost involved in teaching the entire Programme and other incidental expenses which shall include costs of all learning materials, online tutorials etc. used by it in its teaching, use of facilities and lunches and coffee breaks for participants during the modules outside India, as well as travel cost of its faculty and staff.  Upon successful completion of the Programme, the Indian participants will be awarded a certificate by the foreign university. Issues before the AAR  Whether the payments made by the applicant to the foreign university for the services under the Agreement is in the nature of FTS as per Article 12 of the tax treaty and/or under the provisions of Section 9(1)(vii) of the Income-tax Act, 1961 (the Act)?  Whether the foreign university would have a PE in India under Article 5(1) or 5(8) of the tax treaty in relation to the activity of conducting in-class teachings or through tele-presence in India?  Based on the above; whether the payments received by the foreign university are chargeable to tax in India? Whether there are any withholding tax implications and if so, then at what rate? Applicant’s contentions  The applicant and the foreign university are residents of India and Singapore respectively. Hence the applicant is entitled to invoke the beneficial provision as recognised in Section 90(2) of the Act and contended that the provisions of the tax treaty shall apply.  The applicant argued that the payments for the services rendered by the foreign university shall fall under the exclusion clause ‘for teaching in or by educational institutions’ as per Article 12(5)(c) of the tax treaty. Thus the payments shall not constitute FTS as per the tax treaty and hence not taxable in India.  The applicant stated that the services rendered are neither managerial nor consultancy nor technical in nature; thus the payment cannot be brought to tax as FTS under Section 9(1)(vii) of the Act. At the most, the payments could be construed as business profits, and since the foreign university does not have a PE in India, no tax is chargeable under the tax treaty.
  3. 3. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. However, the AAR has held that the teaching services are considered ‘technical’ in nature and covered under the definition of FTS under the Act and tax treaty. This decision will be helpful to various foreign educational institutions which offer such services in India, mostly in collaboration with Indian institutes or companies. In the present scenario wherein the government has introduced regulations 2 to facilitate the entry and operation of foreign educational institutions in India; such a ruling would further augment such collaborations. Even though the decision of the AAR is legally binding only on the parties involved in the particular case, the ruling would have a persuasive value in a similar litigation before the Indian tax authorities and Courts. _________________ 2 The University Grants Commission (Promotion and Maintenance of Standards of Academic Collaboration between Indian and Foreign Educational Institutions) Regulations, 2012
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