Part C – TRIBUNAL & AAR INTERNATIONAL TAX DECISIONS

Facts:

The applicant was an American company (‘US Co’) engaged in the business of process control instruments, engineering and research and technology based services, cooperative or consortium services, etc. US Co had a group company in India (‘I Co’). US Co was incurring expenditure in relation to various functions for the benefit of Group as a whole. US Co and I Co had executed a Cost Allocation Agreement dated 1-4-2007. In terms of the Agreement, US Co raised invoices on I Co for the amounts computed as per the formula in the Agreement. No personnel of US Co visited India nor were they to visit India in future for providing centralised assistance to I’Co. The amount of invoice of US Co was to be determined: the entire cost of centralised assistance directly provided to I Co was charged to I Co; and where such direct cost could not be specifically identified, it was allocated prorate, based on turnover or headcount of I Co.

US Co raised the following two questions for ruling by the AAR.

1 Whether payment made by I Co towards cost allocation was taxable in terms of India-USA DTAA?
2 Whether I Co is liable to withhold tax u/s.195 of the Act on cost allocation payments made to US Co?

Before the AAR, US Co contended that:

• Various services provided by it to I Co were managerial in nature and cannot be considered technical or consultancy services.

• Even assuming they were technical or consultancy services, they did not ‘make avail-able’ technical knowledge, skill, know-how, etc. which was an essential requirement under Article 12(4)(b) ofIndia-USA DTAA.

• As the entire services/ assistance was rendered from outside India, in terms of Supreme Court’s decision in Ishikawajima-Harima Heavy Industries Ltd. v. DIT, (2007) 288 ITR 408 (SC), amount received by US Co would not be taxable u/s.9(1) or u/ s.5 of the Act because, according to the Supreme Court, it is not sufficient that the ser-vices are utilised in India but they should also be rendered in India.

US Co furnished a list of the functions divided in five broad categories. It also drew attention of the AAR to the meaning of the word ‘manage’ as inter-preted in Intertek Testing Services India P Ltd., in re (2008) 307ITR 418 (AAR).

The tax authorities contended that the payments made under the Agreement were in the nature of service fee and not entirely on cost-to-cost basis and hence, profit element cannot be ruled out. The AAR noted that the underlying question was: whether the receipts under the Agreement were mere reim-bursement of expenses or in the nature of income.

According to AAR, although this question was not raised in the application, it did need to be answered. Hence, AAR considered the question: assuming that it is a fee received for rendering certain services, can it be subjected to tax under the provisions of the Act or India-USA DTAA ?

The AAR then referred to Article 7(1) and Article 12(1) and (2) of India-USA DTAA. The AAR analysed the nature of the functions stated in the Agreement and commented that most of them were managerial in nature and unlike some DTAAs, where apart from the terms ‘technical’ and ‘consultancy’, the term ‘managerial’ was also included within the Fees for Technical Services clause, it was not so included in case of India-USA DTAA. To examine the scope of the expression ‘technical services’, the AAR discussed the decisions in Intertek Testing Services India P Ltd., in re (2008)307 ITR 418 (AAR), G. V. K. Industries Limited v. ITO, (1997) 228 ITR 564 (AP) and J. K. (Bombay) Ltd. v. CBDT, (1979) 118 ITR 312 (Del.).

The AAR then mentioned the specific requirement of ‘make available’ in Article 12(4)(b) of India-USA DTAA and observed that even if it was to be assumed that some of the services/functions of US Co could be brought within the definition of technical or consultancy services, still they did not satisfy the requirement of ‘make available’. It then referred to Intertek Testing Services India P. Ltd., in re (2008) 307 ITR 418 (AAR), WorIey Parsons Services Pty Ltd., in re (2009) 313 ITR 74 (AAR) and Anapharm Inc, in re (2008) 305 ITR 394 (AAR) wherein the expression ‘make available’ was discussed and construed. The AAR observed that applying the test given in these decisions, one could hardly find any service of US Co which ‘makes available’ the technical knowledge, experience or skills to I Co and concluded that even if the services are ‘technical’, they do not ‘make available’ the technical knowledge, etc. within the meaning of Article 12(4)(b) of India-USA DTAA. It further noted that in view of the foregoing conclusion, it was not necessary to deal with the contention of US Co that even if the services were to be covered within the definition in Article 12(4), the income cannot be taxed in India in view of the fact that the services are rendered from abroad.

As regards certain specific services, the AAR considered the aspect whether any of these services was really rendered to I Co or they were merely in the nature of stewardship or shareholder activities.

Held:

The AAR held  that:

• on facts, services rendered by US Co to I Co were ‘managerial’ in nature;

• even if these were assumed to be technical, they did not ‘make available’ the technical knowledge, etc. within the meaning of Article 12(4)(b); and

• assuming that some of these activities were not really services but were in the nature of stew-ardship or shareholder activities, in the absence of PE of US Co in India, the payments cannot be taxed in India.

2. Fujitsu Services  Limited  (unreported) AAR No. 800/2009 S. 48 (Ist proviso, S. 112(1) (Proviso), Income-tax Act

Facts:

The applicant was a company incorporated in United Kingdom (‘UK Co’). It was a non-resident as per the Act. It was engaged in the business of information technology services. During the years 1963 to 1994, UK Co had acquired shares of an Indian company. The funds for investment were remitted in foreign currency after obtaining RBI’s approval. The shares of the Indian company were listed on the Stock Exchanges in India. UK Co held 26.55% of the share capital of the Indian company.

UK Co executed a Share Purchase Agreement dated 1-3-2007 with another Indian company (‘Purchaser’). Pursuant to the Agreement, on 4 July, 2007, UK Co sold its entire shareholding to the purchaser and a Cyprus company, which was an affiliate of the Purchaser. As per UK Co, the Cyprus company was an affiliate of the Purchaser and therefore, eligible to purchase the shares. The Purchaser and its affiliate both deducted tax @20% from the sale consideration. However, as per UK Co the correct applicable rate was 10%.

Before the AAR, UK Co sought ruling on the following two issues:

(1) Whether on facts and in law, tax applicable on long term capital gains arising on sale of shares of an Indian company would be 10% as per the proviso to S. 112(1) of the Act?

(2) Whether the beneficial rate of 10% can be applied where the long term capital gains arising to UK Co are computed in terms of S. 48 of the Act by applying the first Proviso to S. 48, read with Rule 115A ?

UK Co contended that even if the benefit under the first Proviso to S. 48 was availed of by the non-resident, the non-resident was not disentitled to invoke the Proviso to S. 112(1). As the shares of the Indian company were listed on the Stock Ex-changes, the long term capital gains were chargeable to tax @ 10% as benefit of indexation was not claimed by the assessee.

The AAR observed that the shares of the Indian company which were sold by UK Co were ‘listed securities’ in terms of S. 112(1) of the Act. In the context of the expression ‘before giving effect to the second proviso to S. 48’ (i.e. giving benefit of indexation), the AAR had consistently ruled that the said expression pre-supposes the existence of a case where the computation of long term capital gains could be made in accordance with the formula contained in the second proviso to S. 481. The AAR had also referred to Mumbai Tribunal’s decision in BASF Aktiengesellschaft v. DOlT, (2007) 293 ITR (AT) 1 (Mum.) and had expressed its disagreement with the view of Tribunal.

Held:
Following its earlier rulings, the AAR held that UK co was liable to pay tax @ 10% as per the proviso to S. 112(1) of the Act.