Saturday, September 28, 2013

Twinning education pacts get tax relief boost

The Singapore campus of prestigious business school INSEAD has been held not liable to be taxed in India for payments received from an Indian educational outfit. The Authority for Advance Rulings (AAR), in its order — made available on Friday — has held that such payments to INSEAD would fall within the exclusion clause contained in the India-Singapore tax treaty and would thus not be taxable in India. An Article in the treaty covering income from 'fees for technical services' contains the exclusion clause.

Many Indian companies tie up with foreign educational outfits under what is commonly referred to as twinning programmes. Students based in India spend a fixed period overseas and are also provided online training by the foreign educational outfit. On completion of the course, they are awarded a certificate by the overseas outfit.

Eruditus Education, a Chennai-based company, had entered into a similar 'program partnership agreement' with INSEAD. While Eruditus provided marketing and managerial support and facilitated conduct of a 11-month program, INSEAD provided classroom teaching to students at its campuses in Singapore and France, in addition to classroom teaching in India and also teaching via telepresence from Singapore. For such services, Eruditus was to make a payment of 548,000 euros to INSEAD. Eruditus sought an advance ruling on the tax implications of such payments in the hands of INSEAD in India, and also its own withholding tax obligations.

If the payments made by an Indian party to a Singapore resident are treated as 'fees for technical services', such payments would be subject to withholding tax in India at the treaty rate of 10%. In other words, payments would be remitted to the foreign party after deduction of tax in India. However, Article 12 of the India-Singapore tax treaty contains an exclusion clause. Payments made for teaching in or by educational institutions are outside the ambit of 'fees for technical services'. So AAR held payments to INSEAD were not subject to any withholding tax in India.

The AAR also held that as INSEAD did not have a permanent establishment (say a branch) in India, the payments made to it could also not be treated as 'business profits', which are subject to tax in India. "This ruling would have persuasive value in tax assessment of similar cases, where the relevant tax treaty contains an exclusion clause — such as treaties with the UK, the USA and Canada. The exclusion clause would apply to the entire pedagogy of payments such as towards faculty expenses, curriculum, etc," says Sandeep Bhalla, partner, BSR & Co, who represented Eruditus.

Source: The Times of India, September 28, 2013

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