We have entered into a new era of education, wherein instead of students heading abroad for pursuing their dream courses, Foreign Universities are offering such courses in India. Every set of change or evolution is not complete without its unique set of complications. One such complication in respect Foreign Educational Institutions entering into collaboration with Indian Educational Institutions and providing education to Indian students by way of Distance Learning or Full time course, is in respect of taxation on income earned by such Foreign University. The present article highlights various aspects of such taxation of the aforesaid remittance income.
Relevant provisions of Indian Income Tax Act, 1961
In order to determine the tax liability on Income of a Foreign University in India, following provisions of the Income Tax Act, 1961, needs to be discussed:
1. As per Section 4 of the Income Tax Act, 1961, Income tax is chargeable in respect of "total income" of every "person". Section 4 of the Income Tax Act, 1961 can be read as follows :
- Where any Central Act enacts that income-tax shall be
charged for any assessment year at any rate or rates, income-tax at
that rate or those rates shall be charged for that year in
accordance with, and subject to the provisions (including
provisions for the levy of additional income-tax) of, this Act in
respect of the total income of the previous year of every person
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.
- In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.
2. A Foreign University falls within the definition of person as given under part (vii) of sub-section (31) of section 2 of the Income Tax Act, 1961, as per the said definition, person includes the following:
- an individual,
- a Hindu undivided family,
- a company,
- a firm,
- an association of persons or a body of individuals, whether incorporated or not,
- a local authority, and
- every artificial juridical person, not falling within any of the preceding sub-clauses
3. Further, a Foreign University is a non-resident entity as per sub-section (4) of section 6 of the Income Tax Act, 1961, which states as follows:
"Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India"
4. Scope of 'total income' in case of non-resident is provided under section 5 of the Income Tax Act, 1961 and includes income of a non- resident which is received in Indian or accrues or arises in India, which states as follows:
"Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
- is received or is deemed to be received in India in such year by or on behalf of such person ; or
- accrues or arises or is deemed to accrue or arise to him in India during such year.
5. As per Section 195 of the Income Tax Act, 1961 person responsible for making payment to a nonresident is liable to deduct Tax on the same in the form of Tax Deducted at Source (TDS). The relevant text of Section 195 can be read as follows:
"Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—
- a residence or place of business or business connection in India; or
- any other presence in any manner whatsoever in India."
From the above provisions of Income Tax Act, 1961, it can be interpreted that all income received or deemed to be received in India on behalf of a Foreign University will be taxable in India as per the provisions of Indian Income Tax Act, 1961. Further tax will be deducted at source at the time of remittance of such Income to the Foreign University.
Foreign Universities and Double Taxation Av oidance Agreements
India has entered into Double Taxation Avoidance Agreements [DTAA]with many countries, and if a Foreign University is a resident of such country, with which India has entered into a DTTA, then provisions of such DTAA also need to be taken into consideration, before commenting on the taxation status of Income of such foreign University in India. Since many Universities of UK are running educational courses in India, let's take example of DTAA entered into between India and UK, an Income earned by a Foreign University can either be covered under the head "business profits" or "royalty income", some of the relevant provisions of the DTAA between India and UK in this context are as follows:
1. Business Profits: As per sub-clause (1) of Article 7 of the DTAA between India and UK, "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enter price may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment".
Further, Permanent Establishment is defined under Article 5 of the DTAA as "a fixed place of business through which the business of an enterprise is wholly or party carried on."
2. Royalty: As per Article 2 of the DTAA, "Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State"
Further, part (3) of Article 2 further defines "royalties" as:
- payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and
- payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.
From above provisions of India- UK DTAA, it can be observed, that if "income" earned by a University of UK falls within the ambit of business profits or royalty income, then such income will be taxable in India as per the above provisions. However, in many cases the role of Indian collaborative partner of a Foreign University is just restricted to the extent of collecting education fee for courses remitted by such Foreign University in India and remitting the same to its foreign collaborative partner. In such cases, it is difficult to categorize such collection and remittance either as "business profits" and "royalty income".
One of the Landmark case discussing the taxation of education fee earned by Foreign educational institutes by imparting educational courses in India is the case of M/s Hughes Escort Communications Ltd V/s DCIT, Circle 2(2) [ITA No: 752/Del/2005]
In this case, it was held that when role of the Indian Company was merely to enroll students, and provide the infrastructure by way of computer broad band access VSAT connectivity etc for accessing course material in the class room and there is no use of Trademark by the Indian Company, the payment made by the Indian Company will not be treated as royalty and there is no business profit hence no TDS has to be deducted on the same. The observations made in the aforesaid judgment are as follows:
"The role of the assessee is merely to enroll students, and provide the infrastructure for accessing course material in the class room. The assessee as discussed above as per the Affiliate Agreement is to provide infrastructure. Considering the respective stand of the parties before the Bench in regard to whether the payment is Royalty under Article 12 of the Indo- US DTAA it is necessary at this juncture to consider the said Article. For ready reference the same is reproduced hereunder from paper book page nos. 57 to 58 wherein copy of the same is placed by the assessee
On a careful perusal of the above it is seen that the nature of payment made to eCornell is not 'royalty' as the payment is not for the use or the right to use any copy right or literary work. The fact that it is not for artistic, scientific work, work on film, tape, radio, television, broadcasting etc. does not arise. It is also not for use or right to use patent, trade mark, design, plan, secret formula or process etc. It is purely and simply a case of pooling of resources by way of an Affiliate Agreement wherein the respective roles and responsibilities have been assigned and the arrangement being of the nature of pooling of resources where fee sharing of the two parties have been set out this is not a case where any payment is being made to eCornell by the assessee for any kind of service as it is purely a case of apportioning of fees attributable to eCornell as per the Affiliate Agreement being remitted to eCornell and the portion of the fees collected for providing enrollment infrastructure in order to access the study material by the students is retained by the assessee as its share. As such on facts the present case does not partake the nature of royalty as contemplated under Clause 3(a) of Article 12 of the Indo-US DTAA.
From the above discussions, it can be concluded that if Income earned by a Foreign University in India falls within the ambit of business profits or royalty income, then such Income is taxable in India. However, many times such simple categorization of Income is not possible and there may be situations when such income cannot be said to be either business profits or royalty income. One such situation is where, role of Indian collaborative partner of a Foreign University is just restricted to the extent of collecting education fee for courses remitted by such Foreign University in India and remitting the same to its foreign collaborative partner. In such cases, it is difficult to categorize such collection and remittance either as "business profits" and "royalty income" and therefore taxation of such Income is still an open ended question.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.