LECTURE METING

Mohandas Pai, a fellow member of the ICAI and ex-Member of the Board of Directors at Infosys, delivered the annual Dilip Dalal Oration Lecture on 29th June 2011. The subject was ‘India @ 2030’. The experienced speaker covered a snapshot of the Indian economy before going into the details of the mega trends which are changing the world and the specific challenges which are faced by India.

Shri Pai commenced his speech with an analysis of the positive factors of the Indian economy with the support of global and domestic statistics. He pointed out how the world is changing with countries like India and China expected to contribute more to the world economy than US, Europe and Japan by 2020 in terms of GDP.

He then elaborated on the three major reasons which are changing the world. According to him, globalisation, though an age-old concept, is accelerating due to factors like reduction in time for travel, communication efficiency, social networking tools, etc. Easy capital flows and reduced trade barriers were the main driving forces behind globalisation. The main impact would be the increase in competition for highly skilled and educated people and resultant brain drain. New regulatory systems would be required to be in place to avoid unfair competition and dumping of goods. However, there was no doubt that globalisation has led to improved living conditions of people. Skilled people of India and China have taken benefit of this globalisation leading to rise of these countries in the world economy. Globalisation is an unstoppable force and should be embraced.

The next big trend which is changing the world according to him is technology. His moot point was that innovation cycles are becoming much shorter. For example, the PC replaced the typewriter and soon the smartphone may well replace the PC! Technology has also led to a much democratised society. Telecommunication and the worldwide web have resulted in breaking barriers. Access to knowledge has empowered the general public. Similarly, ideas can come from any part of the world and can be implemented anywhere. There is free flow of capital, ideas and implementation.

The third mega trend according to Shri Pai is the demographic transition and the aging of population in developed countries. He gave several examples of countries where either the population has declined or there is a rise in number of aged people. In contrast, Asian, African and Islamic countries are witnessing a population growth; and immigrant population in western countries is also rising. By 2030 India will have the youngest population in the world! This represents a tremendous opportunity for India.

All these factors are leading to India’s growth. Shri Pai enumerated several estimates pointing towards a significant growth in the next 20 years. However, there are quite a few issues that India needs to resolve for it to achieve this level of growth. The primary challenges are: Poverty alleviation, healthcare for all, investment in education, and generation of employment opportunities.

For tackling poverty, Shri Pai suggested a major revamping of the subsidy regime. It has not provided the impact it should have, as proved over the last 60 years. The NREGA scheme, while giving more purchasing power to the landless and marginalised, has not given the returns in line with the investments made. Shri Pai has therefore advocated replacement of the current subsidy system by a cash transfer system which would alleviate the present problems.

Healthcare or the lack of it is the second major challenge India faces. Shri Pai suggested a national health insurance scheme for the BPL sector. This would empower the people to choose the best service provider.

While talking about Education, Shri Pai pointed out that the present system cannot decide between quantity and quality. He gave the example of IITs and IIMs where more money is spent in clearing the entrance exams than the fees for the course. He mentioned that large-scale expansion of the education sector is required to give everyone an equal chance for education. While quality in education is essential, it should not become a block. He called for liberalisation with privatisation in the education sector. Mr. Pai felt that there was no harm in having a for-profit sector in education, if access to education was available to all youngsters.

The participants also got a chance to get their queries answered from the learned speaker. The queries covered varied subjects from education problems to corruption. The participants were witness to passionate and well-considered replies from Mr. Pai to their questions.

Subject : Taxation of Cross-Border Transactions — Recent Trend in India
Speaker : Pinakin Desai, CA, Past President, BCAS
Date : 13th July 2011

The meeting began with a warm welcome from the President who introduced the speaker, Pinakin Desai and the topic for the day. The learned speaker covered the various aspects of cross- border transactions in the international tax scenario. Some of the major issues discussed by him are as follows:

Permanent Establishment (PE)

Service PE: After explaining the requirement for creating a Service PE in India, the following issue related to Service PE was discussed:

ABC Canada provides support services to XYZ India and outsources part of the service function to PQR India, an independent service provider. Contract between ABC Canada and XYZ India and between ABC Canada and PQR India are independent and at a fair price.

Issue involved: Whether period of service rendered by PQR India on behalf of ABC Canada to XYZ India would need to be taken into account for determining threshold of service PE?

Decision of the Delhi ITAT in the case of Lucent Technologies International Inc v. DCIT, (2009 TIOL 161 ITAT-Del.) was referred to and the speaker opined that to aggregate the time spent by personnel of PQR India with the time spent by the personnel of ABC Canada, the personnel of PQR should be under the command and control of ABC Canada, i.e., only the time spent by dependent non-employees of a company can be considered for computing the threshold for constituting Service PE.

Construction PE: The same issue as for Service PE would also arise for a Construction PE.

ICO-1 enters into a contract with FCO for installation of equipment, work being of long duration. FCO sub-contracts part of physical execution to an independent Indian sub-contractor ICO-2. ICO-2 is remunerated by FCO on a fair basis. FCO remains contractually liable to ICO-1, but also has a back to back indemnity from ICO-2.

Issue involved: Whether time spent by ICO-2 needs to be aggregated for determining emergence of Construction PE for FCO?

The speaker opined that same view as Service PE cannot be held in this case as the language in Construction PE article is different from the Service PE article. For a Construction PE, different views are possible, depending on the facts of the case. While there is an AAR Ruling in the case of Pintsch Bamag (318 ITR 190) favouring the view that aggregation is not required when part of the work is outsourced; the commentaries for Skaar, OECD and US appear to suggest that the time of sub-contractor needs to be aggregated.

Issue involved: What kind of work carried on by a person will be said to satisfy ‘securing orders’ criteria and thereby giving rise to a dependent agent?

Reference was made to the US treaty which offered a strict meaning to the term ‘securing an order’ and to Switzerland treaty which gave a very general meaning to the term. The speaker opined that if the matter arose in the case of a neutral treaty which follows neither US nor Swiss Protocol, the courts are more likely to uphold the interpretation of the Swiss Protocol.

The speaker opined an Agency PE from the services of a dependent agent could be avoided if the agent is remunerated at an arm’s-length price.

Section 9(1)(vii) of Income-tax Act, 1961 (Act)

The above section defines the term ‘technical services’. Explanation 2 to the section carves out certain exclusions to what would constitute fees for technical services (FTS). Accordingly, FTS would not include, inter alia, consideration for any construction, assembly, mining or like project undertaken by the recipient. The following observations were made by the speaker:

(a)    Pure services/identifiable independent services are not covered by exception of section 9(1)(vii).

(b)    When an independent service provider is providing services which require him to engage man, material and equipments within India, he could be said to be carrying on a business in India and hence, would not be covered by section 9(1)(vii).

Source Rule Exception
India-Finland DTAA: Would remote technical services provided by a Finland company to an Indian company be liable to tax in India merely because the fees are payable by an Indian resident on account of the conditions laid down in section 9(1)(vii)?

•     Article 12(5) of India-Finland DTAA provides that FTS shall be deemed to arise in India, when the payer is a resident of India. Where, however, FTS relate to services performed, within a Contracting State (Finland), then such FTS shall be deemed to arise in the State (Finland) in which the services are performed.

•     In the present case, FTS arise in Finland as services are performed in Finland and hence, not taxable in India.

India-China DTAA: Would services performed by a Chinese company in China but used for a business in India be taxable in India? Would the same analogy as for the Finland company apply?

•     Article 12(4) provides that FTS means any payment for provision of services of managerial, technical or consultancy nature by a resident of a Contracting State (China) in the other Contracting State (India).

•     Article 12(6) provides that FTS shall be deemed to arise in India when the payer is a resident of India.

•     Mumbai ITAT in the case of Ashapura Minichem has held that in view of the deeming fiction of article 12(6) of the India-China DTAA, it was not necessary to consider the merits of the argument on the scope of Article 12(4).

Technology-driven services
Can the payment made by an Indian telecom company to a foreign telecom company for roaming services be characterised as rent? The decision of the Mumbai ITAT in the case of Vodafone Essar has looked on cellular mobile telephone as service and not rent.

Would the payment made by the Indian service provider to an overseas service provider for roaming/ interconnect services provided to customers require withholding tax? The Delhi HC in the case of Bharti Cellular Ltd. (319 ITR 139) has held that ‘technical service’ would have reference to only technical services rendered by a human. Interconnect services were regarded by the HC as not requiring human intervention and hence, were not technical services and hence, there would be no withholding tax liability.

The SC observations in the case of Bharati Cellular (330 ITR 239) were also discussed. The CBDT Instruction No. 5/2011 issued as a consequence of the above decision was also analysed. The open issues of consideration from this were identified as:

•     Fate of technology-driven services

•     Extent and depth of human intervention

•     HC understanding: reference only to technical service rendered by a human

•     Likely attitude of tax department in pending telecom cases

•     Likely attitude of tax department in complex telecom cases

•     Extension of the attitude in other proceedings

•     Litigation involving cross examination of experts.

Secondment
If an employee is seconded by a foreign company to an Indian company such that the Indian company is the economic employer while the foreign company is the legal employer, then it was an accepted conclusion that it would not amount to rendering any service by the foreign company other than seconding the employee to the Indian company.

AAR Ruling in the case of Verizon Data Services India Limited (AAR No. 865 of 2010) was discussed in this context. The AAR held contrary view as in that case the foreign company reserved rights over the termination and hiring of seconded employees. The speaker emphasised the need to exercise caution in drafting the secondment agreements to avoid such views.

The observations of the AAR in treating the secondment transaction as Fees for Technical Services were discussed and the speaker opined that the judgment may have curious ramifications if upheld ultimately.

Place of Effective Management (POEM)

The concept of POEM has been introduced by the Direct Tax Code (DTC). After explaining in brief the meaning, application and importance of POEM, the learned speaker shared with the audience his view on the judgment of the Supreme Court in the case of Subbayya Chettaiar v. CIT, (19 ITR 168) which dealt with the concepts of control and management.

Vodafone and related controversy

The facts, issues and the judgment in the case of Vodafone where it was held that when there is transfer of shares of a foreign company by a foreign company to a foreign company, it would still be taxable in India, if the ultimate underlying assets which were being controlled by those shares were located in India. The speaker opined that the facts of the Vodafone case are peculiar in nature and would not necessarily apply to all similar transactions.

Supreme Court axe on black money

The Hassan Ali case relating to black money and the future outlook of India to black money were briefly discussed by the speaker.

The meeting concluded with a hearty vote of thanks and a loud round of applause to the speaker.