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New Page 1Part C : Tribunal & AAR
International Tax Decisions
9 Laird Technologies India Pvt. Ltd.
(2010) 323ITR598(AAR)
Article 7, India-USA DTAA; S. 195
Dated : 18-2-2010
Consideration paid by Indian Company to American
Company under assignment agreement was not capital gains but business profits –
Since American Company did not have PE in India, consideration not chargeable to
tax in India. Payer not required to withhold tax u/s.195.
Facts :
The applicant Indian Company (‘IndCo’) was a group
company of a UK company (‘UK Co’). USCo was another group company of UK Co.
IndCo was engaged in the business of design and manufacture of antenna and
battery packs for mobile phones. USCo was a globally known designer and
manufacturer of antenna, etc. USCo had entered into a global Product Purchase
Agreement (‘PPA’) with Nokia for supply of products in respect of Nokia’s
requirements. Inter alia, PPA stipulated that “neither party shall assign any of
its rights or obligations under this agreement without prior written consent of
the other party”. USCo and IndCo entered into an Assignment Agreement under
which, USCo assigned all its beneficial rights, title, interest, obligations and
duties under PPA in favour of IndCo for a period of 5 years for certain lump sum
consideration.
IndCo applied to AAR for its ruling on the
following issues :
-
Whether amount received
by USCo as assignment fee from IndCo was taxable under the Income-tax Act or
under India-USA DTAA ?
-
Whether IndCo was
required to withhold tax even if the assignment fee was not taxable in the
hands of USCo ?
Held :
The AAR ruled as follows :
As regards taxability as capital gains :
An inference could not be
drawn that Nokia had consented to ratify the Assignment Agreement, nor was it
known whether Nokia was apprised of all the terms of Assignment Agreement.
Further, mere fact of Nokia accepting goods from IndCo would not lead to the
inference that assignment had approval of Nokia. Therefore, there was no valid
assignment in the eyes of law.
In the absence of any
valid assignment, the contention of IndCo that there was legal transfer of
capital asset and that consideration should be deemed to be capital gain cannot
be accepted. However, the fact remained that IndCo paid certain amount to USCo
which was received by USCo in its bank account. Thus, irrespective of the
validity of the Assignment Agreement, amount received by USCo can be examined
for ascertaining tax implications for USCo. Amount received on assignment was
business profits of USCo.
As regards constitution of PE :
There was nothing on
record that USCo had any role to play in regular manufacturing and business
activities of IndCo. IndCo did not constitute USCo’s PE in India. As per facts
on record, fixed place of PE of USCo is ruled out. USCo was not in picture after
IndCo started manufacture and supply of goods. The tax authorities did not
elaborate in what manner IndCo was dependent on USCo and hence, that contention
is not sustainable.
In absence of agency or
fixed rule PE, business income is not taxable in India.
As regards taxability and withholding tax :
As USCo had not derived
any income chargeable in India, IndCo was not required to withhold tax u/s.195
of the Income-tax Act.
