Indian firms outsourcing routine work to their overseas subsidiaries would not have to deduct withholding tax on the payments made to them.

In a landmark ruling, the Authority of Advance Ruling (AAR) has held that firms are exempted from deducting the withholding tax on the payments made for services like transcription and data processing.

Allowing the appeal of a Chennai-based RR Donnelley Outsource, AAR held that until the work is in the nature of technical, managerial or consultancy, it does fall under that services mentioned under the Income Tax Act.

RR Donnelley Outsource was outsourcing its routine work to its UK-based unit RRD UK and paying accordingly. The tax department had asked to pay duty on that and it was challenged before AAI.

Allowing the appeal, the authority said, "The services rendered by the RRD UK (data processing, print management, etc.) are not tantamount to any managerial, technical or consultancy services. Hence the consideration received for such services are not taxable."

AAR expressed its views while examining whether the amount received by RRD UK under the data processing services agreement is taxable as 'fees for technical services', under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom.

It said the amount received by RRD UK is not taxable as per Article 13 of the Indo-UK DTAA.

"In our view, there is no transfer of technical skill or know-how while rendering the service by RRD UK to RRD India. As per Article 13 of the Indo-UK agreement, RRD UK is not rendering any managerial or technical services to RRD India and therefore the payment received is not eligible to tax," AAR said.

Moreover, since the amount received by the RRD UK is not taxable, the question of withholding tax by RRD India "does not arise", it added.

RR Donnelley India Outsource (RRD India) is an Indian company which provides solutions in commercial printing, direct mail, financial printing, call centres, logistics and digital photograph.