1. COMPETITION - McCarthy Tétrault

service tax. However, services such as pay roll processing, account
management, etc., rendered even through the use of computer programs,
cannot be termed as activities that primarily relate to computer systems,
since the use of a computer in these services is secondary while the
primary activity is that of business-related work. Accordingly, such services
will attract a service tax of 8%. The mere fact that a computer or a laptop
has been used for providing the service does not, ipso facto, make the
service an IT service. IT service essentially means any service related to
designing, developing, or maintaining computer software, or computerized
data processing, system networking, or any other service primarily related
to the operation of computer systems.
For more information please contact: vaibhav@nishithdesai.com
INDIA
SERVER HELD TO CONSTITUTE
PERMANENT ESTABLISHMENT
A recent resolution between the U.S. competent authority and its Indian
counterpart as regards VISA's obligation to pay taxes in India does not
provide good news to this credit card major. VISA will now be required to
shell-out the taxes demanded by the Indian revenue authorities, as the
U.S. competent authority has concurred with the views of the Indian
revenue authorities that VISA is liable to tax in India.
The Indian revenue authorities had held that the revenues attributed to
VISA operations carried out in India were taxable in India because VISA
had a fixed place of business in India. The revenue authorities reckoned
that the server through which business was transacted constituted a
Permanent Establishment (the "PE") of VISA in India.
Under Article 5 of the Indo-U.S. Double Taxation Avoidance Agreement
(the "Treaty"), a PE means a fixed place of business through which an
enterprise operates either wholly or partly, and includes a place of
management, a branch, an office, a factory, a workshop, etc. Furthermore,
as per Article 7 of the Treaty, the business profits of a U.S. company can
be taxed in India only if it has a PE in India and such profits can be taxed
only to the extent that these are attributable to the PE in India.
The Indian revenue authorities had sought to tax VISA for that portion of its
profits that could be attributed to its Indian operations by concluding that
the server located in India constituted a PE of the company in India. VISA
had contested the income tax demands raised on it and had approached
the competent authority of the U.S. as per the Mutual Agreement
Procedure (the "MAP") prescribed under the Treaty.
The U.S. competent authorities have now settled the issue in favor of the
Indian revenue authorities by holding that that VISA has a PE in India. The
U.S. authorities have sought a reassessment of income tax demand raised
on VISA, based on acceptance of the fact that the company has a PE in
India.
MAP proceedings are confidential in nature and, therefore, the details of
the same are not published for public reference.
For more information please contact: vaibhav@nishithdesai.com
INDIA
SERVICE TAX TO BPO COMPANIES
The 2003-2004 budget has increased the service tax rate from 5% to 8%,
and has brought ten new services within the tax net.
Among the new taxable services is one "provided by a commercial concern
in relation to business auxiliary service."
The phrase "business auxiliary service" has been defined as any service in
relating to:
• "promotion or marketing or sale of goods produced or provided by or
belonging to the client; or
• promotion or marketing of service provided by the client; or
• any customer care service provided on behalf of the client; or
• any incidental or auxiliary support service such as billing, collection or
recovery of cheques, accounts and remittance, evaluation of
prospective customer or public relation services, and includes services
as commission agent, but does not include any information technology
service."
Thus, the definition for "business auxiliary service" encompasses a wide
range of activity. Services like client query processing, billing, accounting,
payroll, telemarketing, etc. are now in the ambit of service tax.
Furthermore, Notification 2/2003, dated 1st March 2003, has withdrawn an
earlier notification that exempted from service tax activity involving
payments received in foreign exchange. The combined effect would mean
that most of the services that are typically rendered by BPO companies
and call centers to their foreign or Indian clients could attract a service tax
of 8%.
Services rendered by BPO companies will not be subject to service tax if
the services can be classified as "information technology services." An
explanation provides: "For the removal of doubts, it is hereby declared that
for the purposes of this clause 'information technology service' means any
service in relation to designing, developing or maintaining of computer
software, or computerized data processing or system networking, or any
other service primarily in relation to operation of computer systems."
Analysis of the above explanation reveals that the phrase "information
technology service" has been defined in a very restrictive manner, and thus
would cover only those services that relate to the design, development,
maintenance, and operation of computer software/computer systems and
system networking. Most of the above-mentioned categories do not apply
to services provided by BPO companies; computerized data processing is
the only exception that could be pertinent to BPO operation. However,
several services of a BPO company, like medical transcript, billing, etc.,
may not fall within the category of computerized data processing and
hence the service tax may be applicable.
The Budget's explanatory memorandum, however, seems to indicate
otherwise. The relevant portion of the memorandum reads: "Business
promotion and support services including customer care services. These
services include launching of products, customer education programmes,
conduct of seminars, help desk services, managing front offices, enquiry
bureaus, etc. however computer enabled services, namely, data
processing, networking, back office processing, computer facility
management shall not be subjected to service tax."
The language of the explanatory memorandum suggests that government's
intention was to exclude computer enabled data processing, as well as
computer enabled back office processing services, from the service tax.
However, the definition of "business auxiliary services" covers most of the
back office processing services as taxable services except the services
that are computerized data processing services. The phrase "computerized
data processing" is more restrictive than the phrase "computer enabled
data processing." Furthermore, computer enabled back office processing is
absent from the section altogether. This leads one to deduce that the
action does not match the intention.
In conclusion, keeping in mind the tremendous growth potential of this
industry and the desire of Indian government and industry to be hub of
back office services, it is necessary for the Government to clarify whether
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