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IN A verdict that will have a bearing on tax exemptions given to Indian trusts, especially educational trusts, the Authority for Advance Ruling has held that tax is to be paid in India on all cross-border transactions, even if the parties involved are exempt from taxation in their respective countries.

The May 29, 2009-order of the AAR was on an application filed by the Chennai-based Sri Ramachandra Education & Health Trust, which has an agreement for obtaining services from Harvard Medical International, which is also exempt from taxation under the US laws.

In this application, Sri Ramachandra Education & Health Trust sought to clarify whether tax has to be deducted from the annual fee payable to the Harvard Medical International. The trust claimed before the AAR that as both the parties are exempt from taxation in their countries, the annual fee payable to the US party is exempt from taxes in India and hence no TDS be deducted from the payment to Harvard Medical.

The AAR held that it is not possible to conclude tax is not payable in India on the payment made to Harvard Medical merely on the ground that both are exempt from taxation in their respective countries. It stated that various transactions that took place between the parties should be scrutinised thoroughly before determining what proportion of the payment is liable to be taxed in India.

The I-T department claimed that though Sri Ramachandra trust is exempt from the Indian Income-Tax Act, the US-based Harvard Medical International is not exempt from taxation in India. Further, Sri Ramachandra Education & Health Trust may be exempt under section 12AA of the I-T Act, which exempts tax on teaching/educational activities, but the “annual alliance development and administrative/maintenance fees” that the trust has agreed to pay to Harvard Medical International do not come under the classification of payment for teaching or educational purposes.

The department further pointed out that there are several such transactions between parties that cannot be classified under teaching or educational purposes such as those for making available technical knowledge, skills, experience etc, which are not exempt under the Income-Tax Act of India.

AAR pointed out that there is a need to ascertain that programmes and workshops jointly held by the two parties are directly related to the educational activity of the trust. It said determination of taxability of payments towards such purpose would depend on further scrutiny by the department. Therefore, AAR directed the trust to return to the IT department and file an application for determining that part of payment to Harvard Medical from which tax should be deducted by Indian tax authorities.

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