How to tax 2 sources of income of a foreign company earned in India?

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How to tax 2 sources of income of a foreign company earned in India?

If a foreign company is generating income from 2 sources in India, then it is entitled to treat both the incomes as per Section 90(2) separately. It can claim the benefit of the Income Tax Act for one source and the benefit of the Double Tax Avoidance Agreement (DTAA) for the other source of income. How to tax 2 sources of income of a foreign company earned in India?

Section 90(2) of the Income Tax Act, 1961 mentions that in case of any conflict between the provisions mentioned in the Income-tax Act and DTAA, the provision of DTAA would prevail over the provisions of the Income Tax Act.

Also, the liability of advance tax is not on the foreign company on whose income the payer is liable to deduct TDS u/s 195 at the time of payment.

Relevant Case-law: Dimension Data Asia Pacific Pte. Ltd. V. DCIT (Mum-ITAT) (2018)

In the present case, the assessee is providing 2 types of services to its wholly-owned subsidiary (related enterprise) in India.

  1. Service Fee
  2. Management Fee
Service Fee

It has been held that this income would be taxable as per the normal provisions of the act as the rate of 10% u/s 115A(1)(b). Service income would fall under the definition of ‘Fee for Technical Service’ u/s 9(1)(vii) read with Explanation 2.

Management Fee How to tax 2 sources of income of a foreign company earned in India?

Management fee would also fall under the definition of ‘Fee for Technical Service’ u/s 9(1)(vii) read with Explanation 2. But as per India Singapore DTAA, the income would be covered under Article 7 ‘Business Profits’.

Article 7 states that: –

The profits shall be taxable in that country in which the entity has a permanent establishment.

The relevant extract of Permanent establishment (PE) is defined in Article 5(6)(b) of DTAA which states: –

It shall be deemed to be a permanent establishment if the enterprise furnishes services to the related enterprise in India for a period of more than 30 days in aggregate.

The service was provided for 2 days in A.Y. 2012-13 and for 64 days in A.Y. 2013-14.

It was held that for the A.Y. 2012-13 there was no PE in India and so there will be no tax in India as per the DTAA and in A.Y. 2013-14 it was taxable as business profits. Hence, it was held that an assessee can claim the benefit of the Act for one source of income and can claim the benefit of DTAA for other sources of income u/s 90(2).


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About CA Mehul Gupta 30 Articles
Chartered Accountant in practice, Certified GST Practitioner & Commerce Graduate. He is mainly engaged in the practice of Direct taxes, GST, International taxation, & assurance services. A visiting faculty in the Faridabad Branch of ICAI.

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