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Category: Tribunal News: Part B: International Tax Decisions

DDT cannot be charged on dividend paid to a shareholder who is granted immunity from taxation

10. [2025] 175 taxmann.com 707 (Mumbai – Trib.)

Polycab India Ltd. vs. ACIT

IT APPEAL NOS. 4671 AND 4672 (MUM.) OF 2023 A.Y.: 2018-19 to 2021-22

Dated: 16.06.2025

Section 115O

DDT cannot be charged on dividend paid to a shareholder who is granted immunity from taxation

FACTS

The assessee, a listed Indian company, had paid dividends to its shareholders, which included International Finance Corporation (“IFC”), a World Bank Group entity. In terms of International Finance Corporation (“IFC”) Act, 1958, IFC was exempted from all taxation on its assets, income, property, and operations. The assessee had discharged Dividend Distribution Tax (“DDT”) under Section 115-O of the Act on entire dividend paid by it. The Assessee applied for refund of DDT under Section 237 in respect of DDT relatable to IFC.

The AO rejected the application on the footing that if the argument of the Assessee were accepted, then dividend payable to every entity which was exempt was liable to be excluded from DDT. However, no such provision is envisaged under the Act.

The CIT(A) observed that in terms of decision of Special Bench in Total Oil India P. Ltd [2023] 149 taxmann.com 332 (Mumbai -Trib.) (SB), under section 115-O, it is not a tax paid by the company on behalf of the shareholder but a charge on profits distributed by the company. Accordingly, it upheld the action of the AO.

Aggrieved by the order, the Assessee appealed to ITAT.

HELD

Pursuant to sovereign commitment under IFC agreement, India enacted IFC Act, 1958. Section 9 of IFC Act provided immunity from taxation in respect of its assets, income, property operations, etc.

Section 115-O(1A) of the Act provided for reduction of certain amount from computation of DDT. Finance Act (No.2), 2009, amended section 115-O and provided reduction of dividends paid to National Pension System Trust (NPS Trust) referred to in Section 10(44) for discharging DDT.

Several institutions such as RBI, SEBI, IMF, etc. are exempt from levy of income tax due to overarching provisions of specific legislation enacted by the Parliament.

In the past, Courts have held that income tax immunity provided to salaries received by employees of certain foreign institutions (UN, IMF, etc.) equally applies to pensions received by them, even in absence of express provision under the Act. Therefore, there is no need for specific provision in income tax, if the Parliament had enacted an overarching provision.

The ITAT observed that the charge under 115-O was on dividend distributed by a company. However, it could not override the overarching immunity granted in respect of assets, incomes, operations and transactions of IFC. Any such interpretation was contrary to the intent of the legislature.

Accordingly, the ITAT held that DDT could not be charged in respect of dividend paid to IFC.

Article 5 of India – USA DTAA – Indian subsidiary of foreign parent company cannot constitute dependent agent permanent establishment merely because it provided marketing support activity, and in absence of PE, receipts of foreign company were taxable only in USA.

9. [2025] 175 taxmann.com 992 (Delhi – Trib.)

Zscaler Inc. vs. DCIT ITA NO. 3376 (DEL) OF 2023, 928 (DEL) OF 2025

A.Y.: 2021-22 to 2022-23 Dated: 18.06.2025

Article 5 of India – USA DTAA – Indian subsidiary of foreign parent company cannot constitute dependent agent permanent establishment merely because it provided marketing support activity, and in absence of PE, receipts of foreign company were taxable only in USA.

FACTS

The Assessee was a tax resident of USA. It was engaged in the business of providing security-based software solutions globally, and the software was provided to customers through its resellers/distributors. The Assessee had an Indian subsidiary (“I Co”), which rendered back-office services, sales support, and marketing services. The Assessee compensated I Co for its services at arm’s length.

Relying on the Supreme Court decision in Engineering Analysis Centre of Excellence (P.) Ltd 432 ITR 471 (SC), the Assessee filed a Nil return of income for the relevant AYs on the footing that receipts from software did not constitute royalty. Further, the Company discharged equalization levy @ 2% of gross receipts and claimed exemption under Section 10(50) of the Act.

The AO contended that I Co secured orders for the Assessee by providing sales and market support services for software distribution in India; therefore, the activity constituted a dependent agent permanent establishment (“DAPE”) in India. The AO held that the provision of equalization levy was not applicable in view of alleged DAPE in India. The DRP upheld the draft order of the AO.

Aggrieved with the final order, the Assessee appealed to ITAT.

HELD

In terms of reseller agreement, the Assessee and resellers had principal-to-principal relationship and only they were authorized to enter into contracts with customers. Entire sales of the Assessee were through the resellers or channel partners.

The Service agreement between the Assessee and I Co was confined to IT support and marketing support services. It did not confer rights to negotiate or conclude contracts on behalf of the Assessee to I Co.

The role of the subsidiary was confined to providing updates to the client about products and inquiring about their intent to renew the subscription. These services can only be classified as marketing support, and the agreement did not confer the authority to conclude contracts or secure orders on behalf of the assessee.

The burden of proof to substantiate that the Assessee had DAPE in India was on the revenue. The AO failed to establish involvement of I Co in procuring orders or maintaining stock on behalf of the Assessee.

Accordingly, the ITAT held that the activities of the subsidiary did not constitute DAPE in India.

Article 13 and Article 24 of India – Singapore DTAA – in terms of the erstwhile Article 13(4), capital gains on shares acquired prior to 01 April 2017 are taxable only in Singapore and Article 24(1) i.e. Limitation of Relief, cannot be invoked if India does not have taxing right over such capital gains.

8. [2025] 174 taxmann.com 1244 (Mumbai – Trib.)

Prashant Kothari vs. Intl Tax Ward

IT Appeal Nos. 5391/Mum/2024

A.Y.: 2016-17 Dated: 29.05.2025

Article 13 and Article 24 of India – Singapore DTAA – in terms of the erstwhile Article 13(4), capital gains on shares acquired prior to 01 April 2017 are taxable only in Singapore and Article 24(1) i.e. Limitation of Relief, cannot be invoked if India does not have taxing right over such capital gains.

FACTS

The Assessee, a tax resident of Singapore, had earned capital gains from transfer of listed and unlisted shares which he had acquired before 01.04.2017. As per the computation, the Assessee had both losses and gains from such transfer. In respect of gains, the Assessee contented that in terms of Article 13(4) of the DTAA, such gains were taxable only in Singapore and in respect of loss, he had carried forward such losses under the Act.

The AO invoked the provisions of Article 24(1) of the DTAA dealing with limitation of relief, to contend that Assessee is entitled to treaty benefit, only if such gains are subject to tax in Singapore. The AO asserted that the Assessee failed to establish that his global income is taxable in Singapore. The AO distinguished the rulings on Article 24 by noting that the rulings were not rendered in the context of shares, and status of those Assessees was not that of individuals. The CIT(A) upheld the action of the AO and dismissed the appeal.

Aggrieved by the order, the Assessee appealed to ITAT.

HELD

Under the erstwhile Article 13(4) (as applicable to the relevant year), the gains from transfer of shares were taxable only in Singapore. Even under the amended DTAA (vide notification dated 23.03.2017), gains from the transfer of shares that were acquired on or before 01.04.2017 continued to be taxable exclusively in Singapore.

Article 24(1) provides for two cumulative conditions: if (i) income derived from a contracting state is either exempt or taxed at lower rate under the treaty; and (ii) such income is subject to tax in other contracting state only to the extent of remittance or receipt and not on the basis of accrual, then such exemption or reduced taxation must be limited to the remittance or receipt.

Article 13(4) did not provide for any exemption from taxation on capital gains. Rather, it provided the right of taxation to residence state. Article 24(1) could be invoked only with respect to exemption provision.

With respect to the second condition, the coordinate bench in Citicorp Investment Bank (Singapore) [(2017) 81 taxmann.com 368 (Mumbai – Trib.)] and APL Co. Pte Ltd v. ADIT [(2017) 185 TTJ 305 (Mumbai)], later affirmed by the Bombay High Court [457 ITR 203 (Bombay)], held that Article 24(1) is not applicable if the income was taxable in Singapore on accrual basis.

The ITAT noted that the above rulings did not deal with the aspect of income taxable in Singapore on a remittance basis. In the absence of information regarding the manner of taxation of such capital gains in Singapore, the ITAT was constrained from commenting on the satisfaction of the second condition of Article 24(1).

The ITAT affirmed that to invoke Article 24(1), twin conditions must be satisfied cumulatively. Since the first condition was not satisfied, the ITAT held that Article 24(1) is not taxable and the capital gains are taxable only in Singapore.

As regards set off of losses computed by the AO, the ITAT followed the decision of the coordinate bench ruling in Matrix Partners India Investment Holdings, LLC vs. DCIT (ITA No. 3097/Mum/2023) (Mumbai -Tribunal) to hold that gains need to be computed for each source of income separately and assessee is entitled to carry forward the loss without setting off against the gains exempt under Article 13(4) DTAA.

Article 12 of India-Germany DTAA – Where supply of drawings and designs is inextricably linked to sale of equipment, consideration received towards drawings and designs cannot constitute FTS

7. [2025] 173 taxmann.com 403 (Delhi – Trib.)

SMS Siemag AG vs. ADIT

IT Appeal Nos. 5580/Del/2011 and 2144/Del/2012

A.Y.: 2007-08 to 2016-17 Dated: 09.04.2025

Article 12 of India-Germany DTAA – Where supply of drawings and designs is inextricably linked to sale of equipment, consideration received towards drawings and designs cannot constitute FTS

FACTS

The Assessee is a tax resident of Germany, engaged in the business of supplying equipment, design, and drawings, and providing services to the metallurgical sector. During AY 2008-09, the Assessee had receipts of ₹ 41 lakhs from Indian companies towards supervisory activities and drawings, which were unconnected with supply of equipment. The Assessee offered these receipts as FTS. Apart from these, the Assessee had also received certain amounts towards offshore supply of drawings and designs.

The AO considered the receipts towards offshore supply of drawings and designs as FTS and assessed the aggregate income at ₹176 crores. The DRP upheld the assessment order.

Aggrieved by the final order, the Assessee appealed to ITAT. The Group companies also filed similar appeals. Appeal of the Assessee was taken as the lead matter.

HELD

The Tribunal relied on the coordinate bench ruling in Assesses’ own case for AY 2005-06 and SMS Concast AG vs. DDIT [2023] 153 taxmann.com 718 (Delhi – Trib.) and held as follows.

  • The Assessee had supplied drawing and designs from outside India and had also received the consideration outside India. Supply of drawings and designs were inextricably linked to sale of plant and equipment and both drawings and designs and equipment formed part of a single project undertaken for the customer.
  • The schedule of drawings and documentation also indicated that the drawings were specifically related to supply of equipment.
  • Even if the contracts for drawings and the supply of equipment were entered into separately, they cannot be read in isolation.
  • In case of delay in supply of equipment beyond the stipulated time, the purchaser had the right to terminate not only the equipment contract but also the contract for drawings. This demonstrated that the supply of drawings was an integral part of supply of equipment.
  • When the link between supply and services is strong, the payment for services cannot be regarded as FTS under Section 9(1)(vii) of the Act.

Accordingly, ITAT held that receipt of drawings that are interlinked with supply of equipment cannot be regarded as separately chargeable as FTS, either under the Act or under DTAA.

Articles 7 and 12 of India-Korea DTAA – the Assessee is entitled to set off business loss incurred by PE against Fees for technical services (FTS) earned by HO

6. [2025] 174 taxmann.com 500 (Delhi – Trib.)

Hyosung Corporation vs. ACIT

IT Appeal Nos. 2943/Mum/2023

A.Y.: 2021-22 Dated: 23 April 2025

Articles 7 and 12 of India-Korea DTAA – the Assessee is entitled to set off business loss incurred by PE against Fees for technical services (FTS) earned by HO

FACTS

The Assessee was a tax resident of Korea. It was engaged in power business in India. After setting off the business loss of PE against income of HO from FTS, the Assessee filed a return of its income in India, declaring Nil income, and claimed refund of taxes.

The AO denied set-off of losses of PE against FTS and taxed the FTS on the gross basis. The DRP upheld the order of the AO.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

The determination of income under different heads must be made by giving effect to the set-off mechanism provided under Sections 70 and 71 of the Act.

The Assessee had two streams of income: (i) income earned through PE constituted under Article 7 of India-Korea DTAA; and (ii) FTS earned by HO under Article 12 of India-Korea DTAA. Both income streams fall under the head of business income under the Act. The treaty provisions shall apply only after the determination of total income.

Section 115A(1)(b) provides that if the total income includes income in the nature of FTS, the same shall be charged to tax as per the prescribed rates. Therefore, first the total income should be determined in accordance with the provisions of the Act, including set-off of losses.

While section 115A(3) bars the Assessee from claiming expenditure or allowances, it does not bar set off of loss. Wherever required, the legislature has specifically barred an assessee from setting off losses, e.g., 115BBDA(2), 115BBH(2). In the absence of a specific bar, the Assessee is permitted to set-off the loss as per Section 71.

The coordinate bench of ITAT in Foramer S.A vs. DCIT [1995] 52 ITD 115 (Delhi) had allowed depreciation allowance while computing profits, even though DTAA did not provide for the same. The Hon’ble Calcutta High Court in CIT vs. Davy Ashmore India Limited [1991] 190 ITR 626 (Calcutta) held that when there are no express provisions under the DTAA, the provisions of income tax should govern taxation of income.

Following the above ratio, the ITAT held that while the DTAA did not have any provision for set-off of loss, the Act had provisions pertaining to such set-off. Hence, the same should be followed to determine total income. Accordingly, the Assessee was entitled to set off loss in PE against FTS.

Article 13 of India-Cyprus DTAA – Investment Holding Company located in Cyprus is a tax resident of Cyprus – qualifies for benefit under Article 13 of DTAA in respect of gain arising from sale of shares of Indian company.

5. [2025] 174 taxmann.com 498 (Delhi – Trib.)

Gagil FDI Ltd. vs. ACIT

ITA NO.2661/Delhi/2024

A.Y.: 2021-22 Dated: 7 May 2025

Article 13 of India-Cyprus DTAA – Investment Holding Company located in Cyprus is a tax resident of Cyprus – qualifies for benefit under Article 13 of DTAA in respect of gain arising from sale of shares of Indian company.

FACTS

The Assessee was incorporated as an investment holding company and wholly owned subsidiary of GA Global. Both entities were residents of Cyprus. Cyprus tax authority had granted a tax residency certificate to the Assessee. The Assessee had pooled investments from various investors across the globe. During the relevant AY, the Assessee had earned long-term capital gain aggregating to ₹959 Crores from sale of shares of National Stock Exchange India Limited (NSEIL). The Assessee contended that in terms of Article 13(5) of India-Cyprus DTAA, gains were taxable only in Cyprus. The Assessee further contended that in terms of Article 10(2) of India-Cyprus DTAA, dividend earned by it from Indian companies qualified for benefit of lower rate of tax.

The AO noted that the service provider in Cyprus was mentioned in Panama Leaks. Further, the beneficiaries of income were located in the USA, and key decisions of the Assessee were also taken by the controlling entity in the US . Therefore, treating the Assessee as a shell company, the AO alleged that it was established with the purpose of claiming benefit under India-Cyprus DTAA to the Assessee.

Observing that approval or scrutiny by various Indian regulators at the time of investment in India is routine, the DRP rejected the contention of the Assessee that it was a regulated entity and confirmed the order of the AO.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

Various Indian regulatory authorities had carried out detailed scrutiny and granted approvals for investments in NSEIL. SEBI had been seeking fitness test from the Assessee every year. Therefore, scrutiny carried out by such authorities could not be said to be routine in nature.

Perusal of board minutes showed that most of the board members were based in Cyprus. The investment / disinvestment-related decisions were made in Cyprus. Hence, it could not be said that the USA entity controlled and managed the Assessee.

The name of the entity mentioned in Panama Leaks is different from the service provider of the Assesse. The AO or DRP had not provided any evidence or findings to link the professional entity with the entity named in the Panama leaks.

The Assessee was organized as an investment holding company in Cyprus. It had raised funds from investors across the globe [Bermuda (91.15%), Germany (8.65%) and Delaware (0.21%)]. Hence, the observation that beneficiaries were located in the USA was inappropriate.

The ITAT noted that on similar facts, in Saif II-Se Investments Mauritius Ltd. vs. ACIT [2023] 154 taxmann.com 617 (Delhi – Trib.), the coordinate bench had allowed benefits under India-Mauritus DTAA considering the factors such as period of holding, nature of investment activity, TRC and approvals granted by various regulators.

Accordingly, the ITAT held that the Assessee could not be regarded as a pass-through entity, there was no treaty abuse and consequently the Assessee qualified for benefit under India-Cyprus DTAA.

Article 8 of India-Mauritius DTAA – Shipping Company is not entitled to benefit under Article 8 if its place of effective management is located in a third country; on facts, booking agent did not constitute DAPE.

4. [2025] 172 taxmann.com 857 (Mumbai – Trib.)

DCIT (IT) vs. Bay Lines (Mauritius)

IT Appeal Nos. 4858 and 4859 (Mum.) of 2018

CO Nos. 185 and 186 (Mum.) OF 2019

A.Y.: 2013-14 & 2024-15 Dated: 28th March, 2025

Article 8 of India-Mauritius DTAA – Shipping Company is not entitled to benefit under Article 8 if its place of effective management is located in a third country; on facts, booking agent did not constitute DAPE.

FACTS

The Assessee was a shipping company incorporated in Mauritius. Mauritius Tax Authorities had issued a tax residency certificate to the Assessee. The Assessee contended that the freight income received by it was exempt from tax in India under Article 8 of India-Mauritius treaty. The AO observed that the Place of Effective Management (‘POEM’) of the Assessee was in UAE (i.e. neither in Mauritius nor in India). Hence, the Assessee did not qualify for benefit under Article 8. Accordingly, the AO held that such income would be subject to provisions of Article 7 of India-Mauritius DTAA. The AO further observed that the booking agent in India habitually concluded contracts on behalf of the Assessee. Hence, it constituted a dependent agent PE (“DAPE”) of the Assessee. Accordingly, the AO held that the shipping income was taxable in India in terms of Article 7 of India-Mauritius DTAA.
In appeal, while upholding the contention of the AO that the shipping income earned by the Assessee was not covered by Article 8 of India-Mauritius DTAA, the CIT(A) held that the booking agent in India was an independent agent and as it did not conclude contracts in India on behalf of the Assessee, nor did it maintain stock of goods in India on behalf of the Assessee. Accordingly, the agent did not constitute DAPE of the Assessee in India.

Aggrieved by the order of CIT(A), both the revenue and the Assessee preferred an appeal to the ITAT.

HELD

As per Article 8(1) of India-Mauritius DTAA, profits of a shipping company from the operation of ships in international traffic is taxable in the contracting state where the POEM of the company is situated.

Since the Assessee had not pressed the issue of location of POEM, on basis of the findings of the ITAT in the Assessee’s own case, it concluded that the POEM of the Assessee was in UAE. As the POEM of the Assessee was neither in Mauritius nor in India, the ITAT held that the Assessee did not qualify for benefit under Article 8(1) of India-Mauritius DTAA.

The ITAT further held that the booking agent did not constitute DAPE of the Assessee in India for the following reasons:

  •  The activities of the booking agent were limited to accepting bookings on behalf of the Assessee. The booking agent did not conclude contracts on behalf of the Assessee in India. The AO had not provided any evidence in support of the contention that the booking agent had concluded contracts in India on behalf of the Assessee.
  • The booking agent was an agent of independent status since the revenue derived from booking services for the Assessee constituted only 25% of its revenue from all operations.

Therefore, the ITAT held that in absence of a PE in India of the Assessee, its freight income was not taxable in India.

Note: It may be noted that despite concluding that the POEM of Mauritius company was in UAE, the ITAT did not clarify why it could be considered to be resident in Mauritius? The ITAT also did not clarify whether the Assessee could qualify for benefit, if any, under India-UAE DTAA.

Article 13 of India-Singapore DTAA – Short Term Capital Gains from transfer of mutual funds is taxable under Article 13(5) of DTAA, and taxing right vests only with State of Residence.

3. [2025] 173 taxmann.com 570 (Mumbai – Trib.)

Anushka Sanjay Shah vs. ITO (IT)

IT (IT) A NO.174 (MUM) OF 2025

A.Y.: 2022-23 Dated: 26th March, 2025

Article 13 of India-Singapore DTAA – Short Term Capital Gains from transfer of mutual funds is taxable under Article 13(5) of DTAA, and taxing right vests only with State of Residence.

FACTS

The Assessee is a non-resident Indian and a tax resident of Singapore. During the relevant AY, the Assessee had earned short-term capital gain from sale of debt-oriented and equity-oriented mutual funds, amounting to ₹0.89 Crores and 0.47 Crores, respectively. The Assessee had contended that she was a tax resident of Singapore. Hence, she qualified for benefits under Article 13(5) of India-Singapore DTAA and therefore, only Singapore had taxing rights on such gain.

The AO held that gains from transfer of mutual funds were taxable in India and denied benefit under Article 13(5) of DTAA. The DRP held that units of mutual funds derive substantial value from assets located in India, therefore, such gains are taxable in India.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

The ITAT relied on the coordinate bench ruling in DCIT vs. K.E. Faizal [2019] 178 ITD 383 (Cochin – Trib.), wherein the ITAT dealt with the meaning of the term ‘shares’ in the context of India-UAE DTAA. Article 13(4) of UAE provides taxing rights to India in respect of gains from transfer of shares and in case of other property, the taxing rights vested with state of residence.

Further, the ITAT relied on the following aspects that were dealt with by the Coordinated bench:

  •  The ITAT applied Article 3(2) of DTAA, section 90(3) of the Act, and definition of ‘share’ as per Section 2(84) of Companies Act. It noted that shares mean a share in company’s capital and include stock.
  •  The term ‘company’ means a company incorporated under the Companies Act, 2013 or under previous law. As per SEBI Mutual Fund Regulations 1995, a mutual fund in India can be established only in the form of a trust and not as company. Hence, units of mutual funds cannot be regarded as shares.
  •  As per Securities Contract Regulation Act, 1956, the term ‘Securities’ includes shares, scrips, stocks….and unit or any other instrument issued to investors under any mutual fund scheme. The definition categorically provides that shares and units are two different classes of securities. Therefore, units of mutual funds cannot be regarded as shares.

Following the ratio of the decision of the coordinate bench, the ITAT held that under the residuary clause in Article 13(5) of India-Singapore DTAA, short-term capital gains on sale of mutual funds shall be taxable only in Singapore.

Article 13 of India-Ireland DTAA –Right entitlement to equity shares cannot be equated with shares – Under Article 13(6) of India-Ireland DTAA, taxing right in respect thereof vests with Resident State.

2. [2025] 172 taxmann.com 515 (Mumbai – Trib.)

Vanguard Emerging Markets Stock Index Fund vs. ACIT (IT) ITA No: 4657 (MUM) of 2023

A.Y.: 2021-22 Dated: 18th March, 2025

Article 13 of India-Ireland DTAA –Right entitlement to equity shares cannot be equated with shares – Under Article 13(6) of India-Ireland DTAA, taxing right in respect thereof vests with Resident State.

FACTS

The Assessee, a tax resident of Ireland, was registered with SEBI as a Foreign Portfolio Investor (FPI). During the relevant AY, the Assessee had earned short-term capital gain of ₹6.53 Crores from transfer of Rights Entitlement (RE). In respect thereof, the Assessee claimed benefit under Article 13(6) of India-Ireland DTAA without setting-off the same against other short-term loss of ₹42.95 Crores.

The AO held that RE was taxable and the total income was to be computed under the Act before claiming any relief under Section 90(2). Accordingly, the AO set off short-term capital gains against capital losses and denied exemption under DTAA.

The DRP held that RE and shares are related assets and the same are granted only to the existing shareholders to subscribe to shares at a discounted price. Hence, Article 13(5) has to be broadly interpreted to include any rights in respect of shares, alienation of which grants source taxation right to India.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

As per Section 62 of the Companies Act, 2013, RE are not to be equated with shares. RE is an offer to subscribe to the shares of the Company that is granted to shareholders.

The SEBI Circular on process of rights issue provides that REs would be credited to demat account and a separate ISIN will be allotted. Trading of RE in demat form is made subject to Securities Transaction Tax at a rate different from shares.

Reliance was placed on the Supreme Court decision in Navin Jindal vs. ACIT [2010] 187 Taxman 283, where it was held that a right to subscribe to additional shares or debentures is a separate and independent right from shares. In terms of Section 55(2)(aa) of the Act, read with Section 2(42A)(d), cost of acquisition of renounced REs is deemed to be Nil.

The OECD Model Convention on Income and Capital, 2017 states that in terms of residual provision of capital gains Article, gains from alienation of capital assets not expressly covered under specific paragraphs ofArticle 13 are to be taxable only in resident state. The UN Model Convention, 2017 also provided the same. In 2017, UN Model Convention was amended to include the concept of other comparable interests, such as interest in partnership or trust in para 13(4) (which deals with share of company that derives value directly or indirectly from immovable property) and 13(5) (which deals with alienation of share of a company) of capital gains article.

The pre-MLI Article 13(4) dealt with alienation of shares of a company that derives significant value directly or indirectly from immovable property. Article 13(5) deals with alienation of shares of a company. In effect, Articles 13(4) and 13(5) of the India-Ireland DTAA do not include ‘other comparable interests’ to shares of a company. However, in 2019, Multilateral Instruments (MLI) amended the scope of Article 13(4) to include ‘comparable interest’ only in relation to partnership or trust. The MLI did not amend the scope of shares of a company to include comparable interest in Article 13(5).

The Tribunal applied Article 3(2) of India-Ireland DTAA, Section 90(3) of the Act and definition of shares as per Section 2(84) of Companies Act. It noted that shares mean a share in company’s capital and includes stock. Therefore, an asset that derives value or comes into existence from another asset cannot be equated with original asset.

In light of the foregoing, the Tribunal held that in terms of Article 13(6), transfer of REs was taxable only in Ireland. The Tribunal further held that capital losses computed under provisions of the Act r.w. Article 13(5) cannot be set-off against gains from Article 13(6) as India does not have taxing rights in respect of such gains.

Article 7(3) of India-UAE and Section 44Cof the IT Act – Prior to amendment with effect from 1st April, 2008, while computing the profits of PE, expenses incurred by HO were allowable without any restriction as per domestic tax law governing computation of income

1- [2025] 171 taxmann.com 230 (SB)

Mashreq Bank Psc vs. DCIT

ITA No:1342 (MUM) of 2006

A.Y.:2002-03Dated: 6th February, 2025

Article 7(3) of India-UAE and Section 44Cof the IT Act – Prior to amendment with effect from 1st April, 2008, while computing the profits of PE, expenses incurred by HO were allowable without any restriction as per domestic tax law governing computation of income

FACTS

The Assessee, a tax resident of the UAE, was engaged in banking business in India through branches. The branch claimed deduction towards expenses incurred by HO without any restriction on the quantum of deduction. Further, it claimed certain expenses that were directly incurred outside India by HO as they were related to business operations of Indian branch.

Applying Section 44C, the AO restricted deduction of HO expenses to 5% of average adjusted total income. Further, the AO denied deduction for certain expenses (such as, SWIFT charges and global accounting software maintenance expenses) that were directly incurred by HO for branch operations.

CONSTITUTION OF SPECIAL BENCH

In Assessee’s case for AY 1996-97, ITAT held that Article 25(1) provided for computation of income and Article 7(3) of India-UAE DTAA should not be interpreted in a manner to restrict the application of domestic law. For AY 1998-99 and 2001-02, ITAT did not follow its earlier order and held that Article 7(3) did not restrict deduction of head office expenses. Therefore, provisions of DTAA should prevail over domestic law. ITAT further noted that amendment to Protocol to India-UAE DTAA with effect from 01 April 2008 restricted allowability of HO expenses.
Given the conflicting view in the Assesses’ own cases and other cases, a Special Bench was constituted at department’s request.

HELD

Head Office Expenses

Article 7(3) deals with determination of profits of PE. It provides for deducting all expenses incurred for PE business, including general and administrative expenses. Prior to amendment of India-UAE DTAA vide Protocol (Notification no. SO 2001(E) (NO) 282/2007, dated 28-11-2007), the Article did not restrict quantum of deduction or provide for reference to domestic law.

The first part of Article 25(1) provides that domestic law provisions deal with income and capital taxation arising in respective states. The later part provides that if any express provision under DTAA is contrary to domestic law, taxation shall be governed by DTAA and not by domestic law. This position aligns with interpretation of Section 90(2) namely, DTAA provisions shall override domestic law provisions to the extent beneficial to Assessee.

The scope of Article 25(1) as regards computation of business profits cannot be interpreted in a way that imposes restrictions on the manner of computing tax liability under Article 7(3), or to read restrictions under domestic law into DTAA. There was no need to introduce limitation via the Protocol if Article 25(1) was to be interpreted otherwise. Article 25(1) and Article 7(3) operate differently as the former deals with eliminating double taxes and later deals with determining business profits.

Provisions contained under DTAA must be interpreted in good faith in accordance with the terms employed by the contracting states. Prior to its amendment, Article 7(3) did not restrict allowability of expenses. This position was changed after re-negotiation of India-UAE DTAA. The amended Article 7(3) was intended to be applied w.e.f. 1st April, 2008. Hence, in absence of an express provision, it could not be applied retrospectively.

India has entered into certain DTAAs, such as those with UK and Germany, which impose restrictions on allowability of expenses, and certain DTAAs, such as those with France, Mauritius, and Japan, which do not impose any such restrictions. This indicates that conditions imposed under respective DTAAs are based on bilateral negotiations between the partners and consideration of economic and political factors.

Therefore, Article 7(3) is an express provision that overrides the provisions of Section 44C of the Act.

DIRECT EXPENSES BY THE HO FOR BRANCH OPERATIONS

Section 44C defines the term ‘head office expenditure’. These are common expenses incurred by HO for HO and various branches and are subsequently allocated to respective branches.

Circular No. 649 dated 31st February, 1993, provides that while computing business profits, the expenditure covered by Section 44C must be allowed without imposing any restriction.

Therefore, an expenditure exclusively incurred outside India for Indian branches must be allowed as a deduction without any limits.

Article 11 India-Luxembourg DTAA – Assessee, having satisfied that it is not a conduit entity, is entitled to the benefits under DTAA and considering commercial and economic substance.

15. [2025] 170 taxmann.com 475 (Delhi – Trib.)

SC Lowy P.I. (LUX) S.A.R.L. vs. ACIT

ITA No: 3568 (Delhi) of 2023

A.Y.: 2021-22

Dated: 30th December, 2024

Article 11 India-Luxembourg DTAA – Assessee, having satisfied that it is not a conduit entity, is entitled to the benefits under DTAA and considering commercial and economic substance.

FACTS

Assessee is a Limited Liability Company and a tax resident of Luxembourg. The Assessee is a subsidiary of a Cayman Island entity and a step-down subsidiary of an offshore fund located in the Cayman Islands. The Assessee is registered as a Category II – Foreign Portfolio Investor registered with SEBI, who has invested in corporate bonds and pass-through certificates of securitization trust.

It offered the interest income from bonds at 10% under Article 11 and claimed treaty benefits with respect to business income and capital gains under Article 7 and Article 13(6) of DTAA, respectively.

The AO verified the financial statements, SEBI registration, and Articles of Association to conclude that the real owner of the income is the ultimate Parent located in the Cayman Islands, with whom India does not have DTAA. The entire holding structure involves treaty shopping, and a TRC is insufficient to claim treaty benefits and beneficial ownership of income. Therefore, the AO denied the tax benefits under DTAA and taxed the interest income from bonds and securitization trusts at 40% and short-term gains at 30%.

The DRP upheld the action of the AO.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

  •  The Assessee has provided a valid TRC and satisfied the conditions prescribed under Article 29 dealing with the limitation of benefits. Having not raised any red flags on the TRC, the revenue cannot overlook the TRC without bringing any evidence to prove that the entity exists as a conduit. The Delhi High Court, in Tiger Global International III Holdings [2024] 165 taxmann.com 850 (Delhi), has held that revenue can look beyond TRC only in case of tax fraud, sham transactions or illegal activities.
  •  The Assessee was incorporated as an investment holding company in Luxembourg, and it has been in existence since 2015 and invested in distressed assets. As a Category – II FPI, it invested in securitization trust/corporate bonds in FY 2018-19. Its geographical concentration shows that it had only 14% investment in India, and the remaining investments were spread across jurisdictions.
  •  The Assessee had paid taxes and filed returns in Luxembourg with respect to income earned from Indiaand other jurisdictions. Substantial operational costs, includes consulting fees, litigation fees, professional charges, and administrative expenses, are incurred in Luxembourg.
  •  The Assessee is in existence to date and continues to hold the investments. This substantiates that they control the assets and the income thereon for their own account; hence, they cannot be regarded as a conduit entity. The AO did not bring any evidence to support his views and presumptions.
  •  The genuineness of the entity is substantiated through various activities, and it operated as a stand-alone entity without depending on its holding company.

The limitation of benefits under Article 29 as amended by Multilateral Instruments (Article 7) requires bringing on record the relevant facts andcircumstances to prove that the principal purpose of arrangements and transactions is only for the purpose of taking treaty benefit. The Revenue, without any cogent materials, failed to establish that the assessee is a conduit entity. Therefore, the benefits of the treaty cannot be denied.

Article 8 of India-USA DTAA – Whether code sharing revenue falls under the scope of ‘operations of aircraft’ and is entitled to relief under the DTAA.

14. [2024] 169 taxmann.com 8 (Mumbai – Trib.)

Delta Air Lines, Inc. vs. ACIT (International Taxation)

ITA No: 235 (Mum.) of 2022

A.Y.: 2018-19

Dated: 7th November 2024

Article 8 of India-USA DTAA – Whether code sharing revenue falls under the scope of ‘operations of aircraft’ and is entitled to relief under the DTAA.

FACTS

The Assessee, a tax resident of the USA, was engaged in the business of aircraft operations in international traffic. It had established a branch office in India, a permanent establishment that was admitted to facilitate the booking of air passenger tickets and freights. The Assessee had three streams of international journey income, namely (i) transportation using their own aircraft, (ii) transportation with a combination of own aircraft and third-party carriers vide code sharing arrangements for one or more parts of the journey, and (iii) entire transportation using third party carriers under code-sharing arrangements.

The Assessee filed NIL return of income claiming benefits under Article 8 of the DTAA. The AO denied the Article 8 benefit w.r.t second and third stream of income, stating income under code sharing cannot be regarded as derived from the operation of aircraft in international traffic. Further, AO was of the view that code sharing arrangements cannot be regarded as a space or a slot charter.

The Ld. DRP and Ld. AO followed the order of the coordinate bench in Assesse’s own case for AY 2010-11 [2015] 57 taxmann.com 1 (Mumbai) to uphold the denial of the treaty benefit qua code-share revenue. The reasoning that was adopted in earlier ITAT ruling, as also by DRP, was as under:

  •  The taxpayer must derive profit from the operation of an aircraft in international traffic as an owner/charter/lessor of the aircraft.
  •  In the case of a code-sharing arrangement, the taxpayer’s activities were only the booking of tickets, and the actual transport of passengers was carried out by a third-party airline. The same cannot hence be regarded as profits derived from international traffic carried out by the assessee.
  • Activities directly linked to the transport of passengers by the Assessee would only fall under the ambit of Article 8(2)(b). Since the transportation is carried on by other airlines, and it cannot be regarded as having direct nexus with activities carried on by the Assessee; hence, the activity relating to transportation by other airlines cannot fall under Article 8(2)(b).
  •  The ruling of the coordinate bench of the tribunal in the case of MISC Berhard [2014] 47 taxmann.com 50 (Mumbai) is not applicable to the case on hand. The MISC (supra) case dealt with revenue earned from feeder vessels, which was used to transport cargo from the Indian Port to the Hub Port and for further transportation by the third party than to mother vessels for the final destination. In the case of Assessee, there are no such instances of transporting to the hub port and then to the final destination. Since the ruling was rendered in the context of India-UK DTAA, the same cannot be applied to India-US DTAA.
  •  The code-sharing arrangement cannot be regarded as slot/space charter for qualifying under Article 8(2) as the assessee does not have exclusivity over space or flights booked.

HELD

On further appeal, the co-ordinate bench dissented with their earlier ruling on account of subsequent judicial developments and ruled in favour of the taxpayer basis the following:

  • The Bombay High Court in Balaji Shipping [2012] 24 taxmann.com 229 (Bombay) held that slot chartering by shipping companies for transportation by third-party shippers could fall under the scope of Article 9 of India-UK DTAA. The High Court held that both the following scenarios were covered under Article 9 i.e., (i) use of a third-party ship for movement between a port in India to the hub port and then for the final destination and (ii) use of a third-party ship for transport from the port in India to the final destination.
  • The Bombay High Court in APL Co. Pte. Ltd [2016] 75 taxmann.com 32 (Bombay) has applied the ruling of Balaji Shipping (supra) while interpreting the India-Singapore DTAA since both treaties’ wordings are parimateria. Therefore, this will have a binding effect when the wording of various treaties is similar. Although the passengers are transported through other airlines, the Assessee issues the tickets up to the final destination. The code-sharing arrangements facilitate the Assessee in providing services to specific destinations where they do not operate. Therefore, applying the Balaji Shipping (supra) ratio rendered in the context of shipping income receipts from code-sharing arrangements is entitled to benefit under Article 8 of DTAA.
  • When the assessee books a seat on a third-party airline through a code-sharing arrangement, it could be regarded as a charter of space in the aircraft, and the entire aircraft need not be chartered.
  • The codes used by the Assessee for booking tickets in third-party airlines are unique to them and are used for partial or complete journeys. This establishes the link between transportation by a third party and the operations of the Assessee, and they transport the passenger on behalf of the Assessee.

Article 4 and 12 of India-USA DTAA — Single Member LLC is a taxable entity under US Tax laws, hence entitled to a beneficial rate under the DTAA.

13. General Motors Company USA vs. ACIT, International Taxation

[2024] 166 taxmann.com 170 (Delhi – Trib.)

ITA No: 2359 and 2360 (Delhi) of 2022

A.Y.: 2014-15 & 2015-16

Dated: 5th September, 2024

Article 4 and 12 of India-USA DTAA — Single Member LLC is a taxable entity under US Tax laws, hence entitled to a beneficial rate under the DTAA.

FACTS

General Motors Company USA was a single-member LLC incorporated under the laws of the USA that received fees for technical/included services from two Indian entities. The Assessee claimed the rate of taxation was 15% as per Article 12 of the India-USA DTAA, which is beneficial compared to the rate of 25% under Section 115A for the relevant AY.

The AO believed that the LLC was not subjected to taxation in its own hands as per US tax laws and could not qualify as a ‘resident’ under Article 4 of DTAA. Further, the LLC is not liable to tax in US as it is a fiscally transparent entity and is not partnership or trust to get covered by Article 4(1)(b) of the treaty.. Accordingly, the AO concluded that even if the member of the LLC was a resident of the USA and pays tax on their share of the LLC’s income, the single-member LLC was not entitled to the treaty benefits.

The DRP concurred with the draft order.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

  •  The status of a corporation has to be determined based on the laws in which such LLC is formed. Publication No. 3402 of the Department of Treasury, IRS, USA explained the taxation of LLCs. Depending on its election, a two-member LLC could have been regarded as a corporation, partnership, or disregarded entity for federal tax purposes. A single-member LLC could be regarded as a corporation or a disregarded entity, and income is taxed in the hands of the owner.
  •  Instruction No. 8802 provides instructions for the application for a Tax Residency Certificate (‘TRC’) by an entity subject to US Tax. Further, Form No. 6166 provides that a fiscally transparent entity formed in the US that does not have US owners is not entitled to a TRC.
  •  The TRC issued by the IRS shows that the income of the single-member LLC is taxed in its owner’s hands; hence, the LLC was liable to tax, and the scope of such phrase had to be determined as per US tax laws.
  •  The Assessee satisfied the requirement of being a resident under Article 4 by incorporation and its separate existence from its member. Therefore, it qualifies as a person under DTAA and is entitled to benefits under DTAA.

Section 92, 92A, and 92B(2) – Whether transaction between the foreign Head Office (HO) and its Project Office (PO) in India is subject to transfer pricing provisions.

12. TBEA Shenyang Transformer Group Company Limited vs. DCIT (International Taxation)

[2024] 169 taxmann.com 145 (SB)

ITA No: 581 (Ahd.) of 2017

A.Y.: 2012-13

Dated: 11th November, 2024

Section 92, 92A, and 92B(2) – Whether transaction between the foreign Head Office (HO) and its Project Office (PO) in India is subject to transfer pricing provisions.

FACTS

The Assessee, a tax resident of the Republic of China, obtained a contract for offshore and onshore supply and services via separate agreements. A PO was formed in India to carry out onshore supply and service. A portion of onshore services had been subcontracted to third parties. The HO in China had received and also made payments on behalf of the PO due to the non-availability of a bank account in India at the relevant time.

The AO treated the transaction as reimbursement and referred it to the TPO for ALP determination. The TPO found that the rates received from PGCIL (contractor) for civil work were lower than those paid to subcontractors, suggesting that the PO was not adequately compensated at arm’s length price (ALP), leading to losses.

A Special Bench was constituted on a reference made by the Division Bench because of apparently conflicting views on the applicability of TP provisions to the transactions between an HO and its PE.

Assesses’ Arguments before SB

  •  Even if the PE is considered an enterprise per Section 92F, it does not treat PE as separate from its foreign company.
  •  There is no international transaction as per Section 92 and only fund movement between HO and PO, and the actual transactions are between PE and third parties.
  •  The Taxpayer argued that under Section 90 of the Act, the DTAA provisions override the Act to the extent they are beneficial. Further, Article 9 stipulates that TP adjustments are applicable only when one of the enterprises involved is a resident of the other contracting state. Since neither the HO nor the PE is considered a resident, the Taxpayer contended that transactions between them should not be subject to TP adjustments as per the DTAA.

HELD

  •  The object of fair and equitable tax allocation should be kept in mind while interpreting transfer pricing provisions. The crucial aspect of the case is that the PO had incurred losses while rendering services on behalf of the HO, and an evaluation of whether an independent party would enter such a contract to perform similar services is required.

Whether PE is a separate enterprise

  •  The determination of ALP is computed for an ‘enterprise’, and not for a person. There is a clear distinction between the two terms under the Act. Interpreting the term enterprise as a person will make certain provisions redundant; hence, such interpretation should be avoided.
  •  The SB referred to Article 7(2) and observed that the PE had to be treated as a separate and distinct enterprise to determine business profits.

Income arising from International Transactions

  •  The HO had undertaken the receipts and payments on behalf of the PE. The agreement entered by the HO had a bearing on the PE’s revenue and consequential income. Hence, income had to be understood in a commercial and business sense.
  •  Section 92F(v) defines the term ‘transaction’ and includes arrangement or understanding. The arrangement entered by HO led to a substantial loss in the hands of PO; hence, it must be subject to transfer pricing.

Associated Enterprise

  •  Sections 92A(1) and 92A(2) must be read together and satisfied cumulatively. Section 92A(2) provides scenarios by which an enterprise may participate in management, capital, or control of another.
  •  The SB noted that in cases involving a PE, traditional tests like holding voting power through shares or appointment of directors may not apply, as a PE does not have its own share capital or directors. The SB however indicated that the clauses of the AE definition that refer to the control by one enterprise over the other enterprise on account of certain commercial relationships (e.g. dependence on intangible property or substantial supplier or customer relationships etc.) may apply in HO-PE situations.
  •  The SB directed the division bench to analyze the applicability of Section 92A(2) clauses based on the facts and circumstances.

Deemed International Transactions

  •  The SB also highlighted the difference between Sections 92B(1) and 92B(2). The SB observed that under 92B(1), an international transaction is evaluated at an associated enterprise level, whereas under 92B(2), it was evaluated at a transaction level.
  •  The SB observed that section 92B(2) was triggered when the transaction between an enterprise and an unrelated person was influenced by the associated person of the enterprise. Such influence may be in the form of price or terms and conditions.
  •  The PO carried out the obligations of the contract entered by the HO and incurred substantial losses. When the PO was made to accept the contract terms concluded by HO, provisions of Section 92B(2) may apply.
  •  The SB directed the division bench to analyze the applicability of 92B(2) based on the facts and circumstances.

Treaty Override

  •  The purpose of Article 9 is limited to broadly confirming that similar rules exist in domestic law. Article 9(1) does not bar adjustment of profit under the domestic law even if the conditions differ from those of Article 9(1).
  •  Even if the DTAA is assumed to prevail, profits must be attributed to the PE as if it were an independent enterprise, in line with Article 7 of the DTAA. The SB concluded that this approach aligns with the arm’s length principle and found no conflict between Article 9 of the DTAA and TP regulations of the Act.
  •  Article 7(2) provided that PE had to be treated as a separate and distinct enterprise to determine profits. This reflects the transfer pricing principles, which intend to evaluate how the independent parties would have dealt in an uncontrolled situation. Thus, contention of the assessee that there is a conflict between Article 9 of DTAA and Act is rejected.

Article 11 of India-China DTAA — Interest received by China Development Bank qualified for exemption under Article 11(3) since, in fact, it was a financial institution owned by the Government of China.

11 [2024] 165 taxmann.com 603 (Delhi – Trib.)

Income Tax Officer vs. Tata Teleservice Ltd

ITA No: 1393 (Delhi) of 2023

A.Y.: 2016-17

Dated: 21st August, 2024

Article 11 of India-China DTAA — Interest received by China Development Bank qualified for exemption under Article 11(3) since, in fact, it was a financial institution owned by the Government of China.

FACTS

For FY 2015-16, the assessee had made interest payments to M/s. China Development Bank (‘CDB’), a tax resident of China without deducting taxes under Section 195. As per the assessee, CDB was wholly controlled by the Government of China. Therefore, in terms of source rule exemption as provided in Article 11(3) of India-China DTAA, the interest received by CDB was not taxable in India.

While the appeal related to AY 2016-17, in 2018, India and China subsequently executed a Protocol to DTAA, and the amended Protocol explicitly mentioned that ‘CDB’ was a qualified entity for Article 11(3).

According to the TDS officer, CDB was not eligible for exemption since the Government of China held only a 36.45 per cent stake in CDB. Therefore, he treated the assessee as an ‘assessee in default’ for not deducting taxes on interest payments. The officer did not grant an exemption since the protocol amendment entered into effect only on 17th July, 2019. The CIT(A) held that CDB qualified for the benefit of exemption.

Aggrieved by the order of CIT(A), the Department appealed to ITAT.

HELD

  •  The Ministry of Finance of China directly held 36.45 per cent stake in CDB. Four other entities, which were controlled by other state-owned entities or limited liability companies or funds established under the law of the People’s Republic of China held the remaining stake in CDB.
  •  Audited financial statements of CDB clearly showed that entities that owned CDB were funded either by the Administration of Foreign Exchange or the State Council of China.
  •  The erstwhile Article 11(3) provided the benefit to financial institutions wholly owned by the Government of China, and such provision was expansive in nature.
  •  The newly inserted Article 11(3) vide Notification No.S.O.2562(E)(No.54/2019/F.No.503/02/2008-FTD-II dated 17th July, 2019) provides similar benefit to financial institutions.
  •  Further, the protocol amended vide notification dated 17th July, 2019 specifically included CDB in the list of financial institutions eligible for benefit under Article 11(3).
  •  Under the existing and amended Article 11(3), CDB was a financial institution wholly owned by the Chinese Government and, therefore, it was entitled to the benefit of exemption. Hence, the Assessee could not be treated as ‘assessee in default’.

Article 12 of India-US DTAA — Sincereceipts for providing access to online courses and conduct of examinations did not satisfy ‘make available’ condition, it was not taxable as fees for included services.

10 [2024] 165 taxmann.com 683 (Delhi – Trib.)

Coursera Inc vs. ACIT (International Taxation)

ITA No: 2416 & 3646 (Delhi) of 2023

A.Y.: 2020-21 & 2021-22

Dated: 21st August, 2024

Article 12 of India-US DTAA — Sincereceipts for providing access to online courses and conduct of examinations did not satisfy ‘make available’ condition, it was not taxable as fees for included services.

FACTS

The Assessee, a tax resident of the USA, provided access to online courses and degrees offered by educational institutions and universities through its global online learning platform. The Assessee earned fees for enabling Indian institutions to access its platform. According to the assessee, in terms of Article 12 of India-USA DTAA, such fees were not taxable in India, either as royalties or fees for included services (‘FIS’).

According to the AO, the receipts were in nature of FIS under Article 12(4) due to the following assertions:

  • The services rendered were not confined to ‘content service’ but included a range of user-specific services that involved significant human intervention.
  • Training element was involved in navigating the features of the platform.
  • Since the assessee was not an education institution, the exception made in Article 12(5) was not applicable.

DRP directed the AO to verify the specific agreement and pass a speaking order. In his order passed pursuant to directions of DRP, the AO treated the receipts as FIS.

Being aggrieved, the assessee appealed to ITAT.

HELD

  •  The educational institutions create the courses and conduct examinations, not the Assessee. The competition certificate issued by the university bears the logo of the Assessee.
  •  The Assessee only provides access to the content created by the universities and does not create any content on their own. Upon payment of fees, the users access the content/study materials through the Assessee’s online platform. The Assessee acts as a facilitator between the universities and users. Hence, the Assessee was an aggregation service provider. The Assessee does not render any technical services while providing users with access.
  •  The AO brought no evidence on record to prove that the Assessee rendered technical services. Even assuming that services are technical in nature, the same could not be regarded as FIS unless the ‘make available’ condition was satisfied. Mere customisation of the webpage does not regard the service as technical. The burden was on the revenue to prove that the assessee had transferred technical knowledge, know-how, or skill as envisaged under Article 12(4).
  •  Relying on the rulings in the case of Elsevier Information Systems GmbH vs. Dy. CIT (IT) [2019] 106 taxmann.com 401 (Mumbai) andRelx Inc. ACIT [2023] 149 taxmann.com 78 (Delhi – Trib.), the ITAT held that receipts towards granting of access to data / information through the platform are towards ‘copyrighted article’. Hence, the same cannot be regarded as royalty.
  •  Further, providing access to data to users of the database does not involve any human intervention and, hence, cannot be regarded as fees for technical services as held by the Supreme Court in Bharati Cellular Ltd 330 ITR 239.

Article 4 of India-US DTAA — On facts, personal and economic relationships of assessee were closer to India, leading to assessee tie-breaking to India

9 [2024] 167 taxmann.com 286 (Mumbai – Trib.)

Ashok Kumar Pandey vs. ACIT

ITA No: 3986/Mum/2023

A.Y.: 2013-14

Dated: 3rd October, 2024

Article 4 of India-US DTAA — On facts, personal and economic relationships of assessee were closer to India, leading to assessee tie-breaking to India

FACTS

The Assessee, filed his return of income, declaring an income of ₹9,500. The Assessee was a dual-resident of India as well as USA and he claimed that his ‘center of vital interests’ was in the USA, under Article 4(2)(a) of the India-US tax treaty. Accordingly, he was a US resident for tax purposes. The AO argued that since a) Assessee’s presence in India was over 183 days; b) assessee had active business in India; he was an Indian tax resident and was also tie-breaking to India. Thus, assessee’s global income was taxable in India.

CIT(A) upheld AO order.

Being aggrieved, assessee appealed to ITAT

HELD

ITAT took note of the following facts:

  •  Assessee had a permanent home both in India and USA. Thus, residential status will be determined based on personal and economic relationships.
  •  Personal relationship of assessee is as under:

♦ Assessee and his entire nuclear family are US nationals, holding US passports.

♦ Later, assessee came back to India with his wife, one daughter and son whereas another daughter was staying in the US for studying purpose. All are registered as overseas citizen of India.

♦ His extended family i.e. father, mother, sisters are all US nationals holding US passport.

  •  Economic interest is as under:

♦ Passive investment in USA consisted of cash balance of $57,010; investment in M L Fortress partners $268,866; Coast Access LLC of $16,653; UBS Portfolio closing was $3,21,33,838 in USA

♦ In comparison, passive investment in India consisted of a bank balance of approx. ₹30 lakhs and investment value of approx. ₹50 lakhs.

♦ In terms of active involvement, he and his wife held shares in a company producing films. The assets of the company included work in progress of film, cash and bank balance, unsecured loan. He attended board meetings five times during the year.

  •  Personal and economic relationships, including active business management, took precedence over passive investments in establishing residency.
  •  From the USA, the assessee is deriving rental income where his house property is rented out, he has investments in bank accounts as well as alternative investments. Thus, he does not have any active involvement in the USA for earning wages, remuneration, profit.
  •  Based on his active role in the Indian company, substantial time spent in India, and primary residence with his family in India, the Assessee’s center of vital interests was closer to India, leading to his tie-breaking treaty residency in India.

Article 13(4) of India-Mauritius DTAA — on facts, assessee was not a conduit company and hence, qualified for exemption of capital gains under Article 13(4) of India-Mauritius DTAA

[2024] 164 taxmann.com 440 (Delhi – Trib.)

India Property (Mauritius) Company-II vs. ACIT

ITA No:1020/Del/2023

A.Y.: 2018–19

Dated: 18th July, 2024

8. Article 13(4) of India-Mauritius DTAA — on facts, assessee was not a conduit company and hence, qualified for exemption of capital gains under Article 13(4) of India-Mauritius DTAA.

FACTS

The assessee is a company incorporated in Mauritius. It is engaged in the business of investment activities. The assessee company claimed to be holding valid tax residency certificate (‘TRC’) and Global Business License-I (‘GBL-I License’) issued by Mauritius Financial Services Commission. During the relevant year, the assessee had transferred shares of certain Indian companies and earned long-term capital gains. Having regard to provisions of section 90(2) of the Act, read with Article 13(4) of India-Mauritius DTAA, the assessee claimed the same as exempt and filed its return of income declaring NIL income.

Return of income of the assessee was selected for scrutiny and pursuant to the directions of DRP, the AO denied DTAA benefits. In reaching his conclusion, the AO had examined fund flow, structure, business operation and other aspects of the assessee. The AO observed that on the principle of doctrine of substance over form and principal purpose test, the assessee did not qualify for benefit under clause 13(4) of India-Mauritius DTAA because of following reasons.

(a) The assessee had acquired the shares through its group company and immediately upon receipt of sale consideration, the assessee transferred the funds to another group company.

(b) The assessee had not incurred any expense on wages or salaries.

(c) The assessee did not have any physical assets such as land and building nor did it pay any rent.

(d) Though the assessee had 7 directors, no remuneration was paid to them during the relevant year. Further out of 7 directors, 4 directors were non-residents and 2 directors were executive directors of group company. One executive director of group company was attending board meetings by teleconference.

(e) The directors who were based in Mauritius did not have any effective say in management. The adviser company and sub-adviser company were both based outside Mauritius. Thus, the effective control and management of the assessee was outside Mauritius.

(f) The assessee has argued that it holds a valid TRC and as per Circular No.789 dated 13th April, 2000, and as per Supreme Court decision in UOI vs. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) and other judicial precedents, DTAA benefits should be granted on the basis of TRC issued by Mauritius revenue authorities. However, subsequent judicial precedents and decisions have held that TRC is not conclusive in deciding tax residency and granting of benefit under DTAA.

HELD

ITAT held that the assessee is the beneficial owner of income on account of the following facts:

  • The assessee had made investments long time ago. Even after disinvestment from the said companies, it continued to hold substantial investments.
  • In its decision in Vodafone BV, Bombay High Court had made a conscious distinction between companies which were without any commercial substance and were established for investments, and those which were interposed as owner of shares in India at the time of disposal of shares to a third party, solely with a view to avoid tax.
  • The AO has nowhere alleged on the basis of any evidence that any investment flowing from India was received for creating the assessee. The assessee had held investments for over five years before it transferred them. The assessee had earlier also made investments and had sold them and even now held investments in various companies. The assessee was beneficially and legally holding the investments in its own name. On facts, it could not be called a fly-by-night operator created merely for purpose of tax avoidance.
  • The genuineness of the activities of assessee could not merely be questioned on the basis that Directors were not residents of Mauritius or that there were no operational expenses or no remuneration was paid to directors.
  • Revenue cannot question genuineness of business operations of an assessee without establishing that administrative activities were sham. The assessee had validly discharged its burden by establishing that the external service provider had been outsourced and it had paid for their services. It is the wisdom and discretion of the assessee as to how it should conduct its day-to-day activities.
  • The AO sought to establish that the assessee was a conduit company by alleging that investment funds were immediately transferred to the assessee before investment, and sale consideration received by the assessee was immediately transferred in the form of share buyback and dividend. However, since the assessee is an investment fund, such transactions are normal. What is material is how long the investments were held and whether the investments had commercial expediency. In his order the AO has reproduced the resolutions of the assessee indicating why the investments were being sold and how the sale proceeds were to be distributed to the investors. Conduit company could not be presumed merely because sale consideration was immediately transferred as the invested funds were to be returned to investors with gains made.
  • The commercial rationale for incorporating the assessee in Mauritius was not for tax avoidance but to attract funds from different jurisdictions for investment in India. In its decision in Azadi Bachao Andolan case, Supreme Court has mentioned that when endeavour of Government of India is to facilitate investment in joint venture and infrastructure projects for the benefit of economy, then attributing malice to investment funds like the assessee is not justified. The AO has not brought any evidence on record to rebut the statutory presumption of genuineness of business activity of the assessee on the basis of TRC.
  • Accordingly, the Tribunal allowed the appeal in favour of the assessee.

Article 11 of India-Cyprus DTAA — Assessee is the beneficial owner of income if it has the right to receive and enjoy interest income without any obligation to pass on income to any other person.

7 [2024] 162 taxmann.com 766 (Delhi — Trib.)

Little Fairy Ltd vs. ACIT

ITA No: 1513/Del/2022

A.Y.: 2017–18

Dated: 15th May, 2024

Article 11 of India-Cyprus DTAA — Assessee is the beneficial owner of income if it has the right to receive and enjoy interest income without any obligation to pass on income to any other person.

FACTS

Assessee, a tax resident of Cyprus, invested in Compulsorily Convertible Debentures (CCDs) of an Indian Company (ICO). In terms of India-Cyprus DTAA, the assessee offered a gross amount of interest on CCDs to tax @10 per cent. AO held that the assessee was not the beneficial owner of income as (a) the Assessee had not performed any activity in Cyprus; (b) there were other companies having the same registered address; and (c) the Assessee was merely a conduit for channelizing the funds invested in CCDs. Accordingly, AO charged tax @40 per cent on the interest income of the assessee.

On appeal, CIT(A) confirmed the order of AO. Being aggrieved, the assessee appealed to ITAT.

HELD

ITAT held that the assessee is the beneficial owner of income on account of the following facts:

  •  The Assessee had taken the following decisions in its Board meeting held in Cyprus:

               (a) Decision to invest in ICO. (b) Declaration of dividend to its sole shareholder.

  •  The parent company by itself does not become the beneficial owner of income because it does not get any right over the assets of the assessee.
  •  The Assessee made an investment in CCD’s of ICO in its own name through proper banking channels. Unlike in the case of manufacturing and trading businesses where a person is required to undertake business activity, after making an investment, no activity is required since the investment may fetch either interest or capital gains to the assessee without doing anything.
  •  The Assessee being an investment company, does not require any personnel other than directors on its payroll to carry out day-to-day operations. The Directors of the assessee company were qualified and competent to run the company and make its business investment decisions. Furthermore, the assessee had availed services of a professional administrator for general administration, such as book-keeping, company secretarial services, etc., and there was no need to have any employee on its own payroll.
  •  The Assessee received interest in its bank account. Assessee had the right to receive interest income. There was no compulsion or contractual obligation to simultaneously pass on the same to another entity. The assessee had also borne foreign currency risk as well as counter-party risk.

Article 13 of India-Denmark DTAA — Assessee, a Danish tax resident, had obtained software licenses from Microsoft for its group entities and received payments from its Indian AE SGIPL. Since software was used by Indian AE, and such use did not involve any transfer of copyright or other rights, as neither assessee nor SGIPL had right to sub-license or modify software, payment made by Indian AE to assessee could not be characterised as royalty.

6 [2024] 161 taxmann.com 590 (Delhi – Trib.)

Saxo Bank A/S.vs. ACIT

ITA No: 2010/Del/2023

A.Y.: 2020–21

Dated: 16th April, 2024

Article 13 of India-Denmark DTAA — Assessee, a Danish tax resident, had obtained software licenses from Microsoft for its group entities and received payments from its Indian AE SGIPL. Since software was used by Indian AE, and such use did not involve any transfer of copyright or other rights, as neither assessee nor SGIPL had right to sub-license or modify software, payment made by Indian AE to assessee could not be characterised as royalty.

FACTS

Assessee was a tax resident of Denmark. It entered into a global agreement with Microsoft for procuring various shrink-wrapped software licenses such as Microsoft Visual Studios, Dynamic 365, remote desktop, office 365, etc., for entities within the Saxo Group. The assessee received payments from its Indian Associated Enterprise (‘AE’) against the above licenses. Indian AE had withheld tax under section 195 of the Act. In its return of tax, assessee claimed refund of tax withheld by the Indian AE.

AO held that the assessee had received charges from Indian AE for allowing use of its IT infrastructure, which consisted of various third-party software, owned / leased / supported platforms, including hardware systems. Hence, the receipts were taxable as royalty. The DRP upheld order of the AO.

Being aggrieved, the assessee filed appeal to the ITAT.

HELD

  •  The software used by SGIPL and the amount cross-charged by the assessee did not pertain to use or right to use any copyright, as neither the assessee nor the Indian AE had any right to sub-license, transfer, reverse engineer, modify or reproduce the software or user license.
  •  The Indian AE had acknowledged that the Microsoft Software was granted to assessee by Microsoft Denmark ApS under an object code-only, non-exclusive, non-sublicensable, non-transferable, revocable license to access and use the object code version of the proprietary software, solely for internal business purposes of the assessee and its group / associate companies.
  •  The core of a transaction is to authorise the end-user to have access to and make use of the licensed software over which the licensee has no exclusive rights and no copyright is parted. Payment for the same cannot be characterised as royalty.

Article 12 of India-USA DTAA — Subscription fees received by an American scientific society for providing access to online chemistry database and for sale of online journal to Indian subscribers did not qualify as Royalty, either in terms of section 9(1)(vi) of Act, or in terms of article 12(3) of India-USA DTAA.

5 [2024] 161 taxmann.com 354 (Mumbai – Trib.)

American Chemical Society vs. DCIT

ITA No: 415/Mum/2023

A.Y.: 2021–22

Dated: 27th March, 2024

Article 12 of India-USA DTAA — Subscription fees received by an American scientific society for providing access to online chemistry database and for sale of online journal to Indian subscribers did not qualify as Royalty, either in terms of section 9(1)(vi) of Act, or in terms of article 12(3) of India-USA DTAA.

FACTS

The assessee (ACS) was a society based in the USA and supported scientific inquiry in the field of chemistry. Its source of income was subscription fees — for providing access to online chemistry database and for sale of online journals from outside India to Indian subscribers.

Following the orders passed in earlier years, the AO treated the payments received by the assessee as royalty. The DRP upheld the order of the AO.

Being aggrieved, the assessee appealed to the ITAT.

HELD

Following the orders passed for earlier years1, the ITAT held that the subscription fees received by the assessee from its customers for providing access to database and journals was not royalty as the subscribers did not acquire use of a copyright. Key findings of the ITAT in earlier years were:

  •  The grant of a copyright means that the recipient has a right to commercially exploit the database / software, e.g. reproduce, duplicate or sub-license the same.Such payments may be classified as royalty. However, in the present case, assessee had not transferred such rights in the database or search tools to its subscribers.
  •  The user of the copyrighted software does not receive the right to exploit the copyright in the software. He merely enjoys the product or the benefits of the product in the normal course of his business.

The journal provided by ACS did not provide any information arising from its previous experience. The experience of the assessee was in the creation of and maintaining of such online format. By granting access to the journals, the assessee neither shared its experiences, techniques or methodology employed in evolving databases with the subscribers, nor did the assessee impart any information relating to the subscribers.

 

1 American Chemical Society vs. Dy. CIT (IT) [2019] 106 taxmann.com 253 (Mumbai) (para 4) and American Chemical Society vs. Dy. CIT [2023] 151
taxmann.com 74 (Mumbai - Trib.) (para 4).

Income in respect of offshore supply of goods made on CIF basis to customers in India did not accrue in India, and hence, was not liable to tax in India because property in goods had passed outside India and payment was also made outside India.

4 [2023] 148 taxmann.com 79 (Mumbai – Trib)

Schindler China Elevator Company Ltd. vs. ACIT

ITA No: 3355/Mum/2023

A.Y.:2020-21

Dated: 22nd March, 2024

Income in respect of offshore supply of goods made on CIF basis to customers in India did not accrue in India, and hence, was not liable to tax in India because property in goods had passed outside India and payment was also made outside India.

FACTS

Assessee was a non-resident company incorporated in China. It was engaged in the business of designing, manufacturing and supplying elevators and escalators.

Assessee had formed a consortium with its Indian AE for bidding in tenders floated by two Indian companies for design, manufacture, supply, installation, testing and commissioning of escalators. Consortium of Assessee and AE were awarded the tenders. During the relevant year, Assessee had earned certain income from supply of escalators. It contended that the said income represented business profits and since it did not have PE in India, in terms of Article 7 of the India-China DTAA, the business profits were not taxable in India.

The AO contended that Assessee had earned income from India in respect of a composite contract having significant on-shore elements. Assessee had entered into an arrangement with its Indian AE for fulfilment of obligations of Assessee under the contracts. Both contracts were composite and indivisible and could not be split into separate parts for supply and commissioning as was contended by Assessee. The AO further contended that the consortium was liable to be assessed as an AOP and income from transactions was chargeable to tax in India because no benefit of India-China DTAA could be granted to AOP. AO held that Assessee had a clear business connection in India and it was having regular income from India from the contracts. Therefore, AO held that 5 per cent of total receipts of Assessee were taxable as income from composite contract and were liable for taxation in India @ 40 per cent.

DRP rejected the objections filed by Assessee and confirmed the draft assessment order. AO passed final assessment order in line with the draft assessment order.

HELD

  •  ITAT noted that the facts in current year were identical to those in Assessee’s own case for earlier year where coordinate bench of ITAT had held that since both transfer of property in goods and also the payment, were carried out outside India, the transaction could not be taxed in India. Hence, for current year also ITAT relied on the said decision. ITAT summarised the relevant observations and operational part of the ruling as follows.
  •  Assessee had formed consortium for bidding in tenders. Assessee had entered into MOU with AE. Both parties had jointly bid for the project as a consortium and each party was responsible for its own scope of work, which was separately defined. Work of AE could begin only after goods reached port of destination. In MOU, the parties had specified the percentage of effort and time that was expected to be spent by each of them on the project. The said percentage did not, in any way, imply share of profit or losses. Each party was to raise separate invoices as per the contract price and retain its own profits, or bear its own losses, as the case may be.
  •  MOU was made part of contracts and thus, the distinct scope of work and separate responsibility of each member of the consortium was also accepted by Indian customers. Assessee had contended that since consideration it received was in respect of offshore supply of elevators and escalators to both customers, it was not taxable in India. The Revenue had not brought any material on record to controvert the contention of the Assessee. AE had offered consideration received by it in respect of its scope of work for taxation in India.
  •  Draft assessment order had held that since the offshore supplies had been made by Assessee at an Indian port of destination, the delivery of the goods was in India. Therefore, profit made by Assessee on CIF basis was liable to be taxed in India since the sale was completed in India.
  •  Relying upon decision of another coordinate bench in JCIT vs. Siemens Aktiengesellschaft, [2009] 34 SOT 16 (Mumbai), coordinate bench of ITAT had rejected these contentions. The said decision referred to the expression “Cost, Insurance and Freight” as per INCO Terms, 1990. It was noted that in case of CIF though the seller pays cost, insurance and freight etc., the buyer bears all risks of loss of, or damage to, the goods from port of shipment to port of destination. Hence, in case of CIF, theproperty in goods passed on to the buyer at the portof shipment. Therefore, when Assessee made offshore supply of equipment to buyer on CIF Bombay basis for agreed consideration, the property in the equipment passed to the buyer at the port of shipment itself.
  •  Following the aforesaid coordinate bench ruling in Siemens Aktiengesellschaft, the coordinate bench of ITAT in case of Assessee for earlier year had held that the title in the property in the goods shipped by Assessee was transferred at the port of shipment itself.
  •  The coordinate bench had also relied upon SC judgment in Ishikawajma-Harima Heavy Industries, wherein SC had held that only such part of incomeas was attributable to operations carried out in Indiacould be taxed in India. Thus, since both transferof property in goods and also the payment, were carried out outside India, the transaction could not be taxed in India.
  •  ITAT held that issues raised in the present case, were similar to those in preceding AY. Hence, relying on the decision of coordinate bench of ITAT in earlier year, ITAT held that since, in the present case, the Assessee did not carry out any operation in India in respect of its scope of work, income earned by Assessee from offshore supply of escalators and elevators to Indian customers was not taxable in India.
  •  Accordingly, ITAT deleted additions.

Capital gains on transfer of shares acquired prior to 1st April, 2017 were not taxable in terms of Article 13(4) of India-Mauritius DTAA because of grandfathering provisions; it was evident from TRC that Assessee was a tax resident of Mauritius.

3 [2024] 160 taxmann.com 632 (Delhi – Trib.)

Norwest Venture Partners X-Mauritius vs. DCIT

ITA No: 2311/Del/2023

A.Y.: 2020-21

Dated: 19th March, 2024

Capital gains on transfer of shares acquired prior to 1st April, 2017 were not taxable in terms of Article 13(4) of India-Mauritius DTAA because of grandfathering provisions; it was evident from TRC that Assessee was a tax resident of Mauritius.

FACTS

Assessee was a non-resident company incorporated under laws of Mauritius. The Assessee was an investment holding company. The ultimate parent company of Assessee was beneficially owned by an American entity. Assessee was issued Category-1 Global Business License in Mauritius. Based on Tax Residency Certificate (“TRC”) issued by Mauritius Revenue Authority, it was a tax resident of Mauritius. In India, Assessee was registered with SEBI as a foreign venture capital investor. Assessee had invested in equity shares of various Indian companies. During the previous year relevant to AY 2020-21, Assessee had sold shares of certain Indian companies and derived capital gains. In its return, Assessee had claimed exemption in respect of LTCG in terms of Article 13(4) of India-Mauritius DTAA.

Revenue noted that ultimate parent company of Assessee was beneficially owned by an American entity. Revenue held that: (a) Assessee was controlled and managed from outside of Mauritius; (b) it did not have any commercial substance or real economic activity in Mauritius; and (c) mere TRC was not sufficient evidence to prove tax residency of Assessee in Mauritius. Therefore, adopting substance over form approach, revenue concluded that Assessee was a shell / conduit company and consequently, it was not entitled to avail benefits under India-Mauritius DTAA.

DRP directed Revenue to factually verify facts and contention of Assessee on the basis of documents/submissions available in the assessment records and without conducting any fresh enquiry. DRP also directed revenue to pass a speaking and reasoned order. Revenue retained the proposed addition in the draft assessment order.

HELD

  •  Assessee was carrying on investment activity in India since July 2007. Even after 1st April, 2017 when capital gain exemption was withdrawn, Assessee continued to make substantial investments in India.
  •  SEBI had registered Assessee as foreign venture capital investor in 2007. SEBI would have granted registration only after due verification of credentials of Assessee. So, Assessee was a genuine investor and not a fly-by-night operator.
  •  Assessee had furnished documentary evidences for claiming benefit in terms of Article 13(4), read with Section 90. On the contrary, neither draft nor final assessment order brought on record any conclusive evidence to prove the allegation that since the control and management of Assessee was not in Mauritius, Assessee was a shell/conduit company.
  •  Category-1 Global business license and TRC would have been issued only after due verification of facts and evidence by Mauritius Tax Authority. Hence, its correctness could not be questioned.
  •  CBDT has also accepted the sanctity of TRC by issuing Circular No.789 dated 13th April, 2000, which states that TRC issued by Mauritius Tax Authority will constitute sufficient evidence regarding residential status and beneficial ownership for applying DTAA provisions, including in respect of income from capital gain on sale of shares. Hence, denial of treaty benefits clearly runs in the teeth of the said Circular.
  •  This issue has been well-settled by now, beginning from SC judgment in Azadi Bachao Andolan. Judgments of Bombay HC in JSH Mauritius and Bid Services, judgement of P & H HC in Serco BPO, and judgement of coordinate bench in MIH India also supported the case of Assessee. Reference made by DRP to LOB clause in Article 27A of DTAA is irrelevant in this case because Assessee had not claimed any benefit under Article 13(3B), and Revenue had also failed to demonstrate fulfilment of conditions therein regarding shell/conduit company.
  •  Restoration of issue by DRP without deciding on merits was contrary to scheme of Section 144C as it did not confer power to set aside. Such an action of DRP had resulted in gross violation of rules of natural justice because once a direction is issued, AO had to pass final assessment order in conformity with such directions without providing any further opportunity of being heard to Assessee. As Revenue had merely confirmed the draft assessment order, the impugned order was also not sustainable since directions of DRP were not implemented in letter and spirit.

Explanation 5 to Section 9(1)(i) of the Act — Substantial viewership of Channel in India cannot be a reason to hold that Channel is situated in India; situs of intangibles is the situs of owner.

16 Star Television Entertainment vs. DCIT

ITA No: 1814/1813/Mum/2014

A.Ys.: 2009-10

Date of Order: 8th December, 2023

Explanation 5 to Section 9(1)(i) of the Act — Substantial viewership of Channel in India cannot be a reason to hold that Channel is situated in India; situs of intangibles is the situs of owner.

FACTS

Assessee, a Hong Kong based company, transferred ‘Star World’ channel vide a business agreement, to one of its sister concerns based in Hong Kong. The Taxpayer did not offer the gain arising out of such transaction to tax in India based on the contention that the transaction was undertaken between two non-residents and the underlying asset (i.e., channel) was not situated in India and, hence, no income accrued or can be deemed to accrue or arise in India.

AO contended that the transfer of the Channel would result in a trigger of indirect transfer provisions under the Act. Further, gains arising from transfer of channel can be deemed to accrue or arise in India and, hence taxable in India basis the following arguments:

• The very nature of the asset and its ability to regularly generate income from India created a strong nexus and business connection with India.

• Various elements of the asset being the brand name, logo, contents, permits, customer base (advertisers), substantial viewer base etc. were located in India hence the situs of the channel was in India.

DRP upheld order of AO. Being aggrieved, assessee appealed to ITAT.

HELD

• Delhi High Court in the case of Cub Pty Ltd1 held that the situs of intangibles (such as Channel, here) is the situs of the owner i.e., outside India. The down-linking license obtained by the assessee from Ministry of Information and Broadcasting of India, establishes that ownership of the channel is situated outside India. Accordingly, applying the ratio of Delhi High Court, ITAT held that the situs of the channel is also outside India.

• Delhi High Court decision in the case of Asia Satellite Telecommunications Co Ltd2 supports that merely because the footprint area includes India and the viewers of the channel are located in India, does not amount to carrying on a business in India.

• The indirect transfer provision under the Act is a deeming provision which deems that a share or
interest in a company or entity located outside India is located in India, if such share or interest derives substantial value from assets in India. However, there is no such specific provision with regard to the situs of intangible assets.

• Without prejudice, the indirect transfer provisions require that for an asset to be deemed as being situated in India, it must derive substantial value from assets in India. While there may be merit in the argument that viewership in India may affect the determination of whether the Channel derives substantial value from India, AO has not brought any material on record to show that the Channel derives substantial value from assets in India.

• ITAT held that gains from transfer of channel is not taxable in India.

2(2016) 71 taxmann.com 315
3 332 ITR 340

Article 5 of India-Singapore DTAA — For computation of duration of Service PE, only time spent in India needs to be considered. Presence in India should not include days during which employees did not render any services to the client such as days of vacation and business development. Further, presence should be computed based on solar days i.e. day on which more than one employee is present in India should be counted as one day.

15 Clifford Chance PTE Ltd. vs. ACIT

[2024] 160 taxmann.com 424 (Delhi – Trib.)

ITA No: 2681 & 3377/Del/2023

A.Ys.: 2020-21 & 2021-22

Date of Order: 14th March, 2024

Article 5 of India-Singapore DTAA — For computation of duration of Service PE, only time spent in India needs to be considered. Presence in India should not include days during which employees did not render any services to the client such as days of vacation and business development. Further, presence should be computed based on solar days i.e. day on which more than one employee is present in India should be counted as one day.

FACTS

Assessee, a tax resident of Singapore provided legal services to its clients in India. Part of the services were provided remotely from outside India and some services were rendered by the employee physically present in India. Assessing Officer (AO) held that the assessee had Service PE in India as the duration threshold of 90 days as provided in the DTAA was exceeded. AO also included the duration of services provided from outside India, total presence of employees in India inclusive of vacation, non-billable hours in the form of business development and computed period based on man-days. On appeal, DRP upheld the order of AO.

Being aggrieved, the assessee appealed to ITAT.

HELD

• For the purpose of Service PE clause, the actual performance of services in India is essential and only duration of the employees physically present in India for furnishing services are to be taken into account.

• Assessee does not have Service PE in India as its employees were present for 441 days which is less than the 90 days threshold.

• For calculating presence in India, following days should be excluded.

• Days when no service was rendered to the client i.e. employees vacation period.

• Days when employees performed non-revenue generating activities i.e. business development such as identification of customers, technical presentation/providing information to prospective customers, developing market opportunities, providing quotations to customers.

• Presence in India should be computed based on solar days i.e. days on which more than one employees are present in India should be counted as one day.

1 Assessee substantiated this based on time sheet, HR system and employees declaration

Section 92C, read with section 92B, of the Income-tax Act, 1961 — In light of peculiar facts, TPO was correct in recharacterizing part consideration of merger in form of cash and CCD as income. Cash payment was to be treated as deemed loan and ALP for CCD interest was determined at Nil.

14 Dimexon Diamonds Ltd vs. ACIT

[2024] 159 taxmann.com 118 (Mumbai – Trib.)

ITA No: 2429/Mum/2022

A.Ys.: 2018–19

Date of Order: 30th January, 2024

Section 92C, read with section 92B, of the Income-tax Act, 1961 — In light of peculiar facts, TPO was correct in recharacterizing part consideration of merger in form of cash and CCD as income. Cash payment was to be treated as deemed loan and ALP for CCD interest was determined at Nil.

FACTS

DIHPL, an Indian company, was a wholly owned subsidiary of DIHBV, a Netherlands company. Assessee, another Indian company, was a wholly owned subsidiary of DIHPL. DIHPL and the assessee undertook a reverse merger whereby DIHPL merged into the assessee. Assessee discharged following consideration to DIHBV, which held the entire equity capital of DIHPL.

In the transfer pricing report, the assessee disclosed the aforesaid transaction as an international transaction. However, it was stated that the transaction was not required to be benchmarked since pursuant to the implementation of the said scheme of amalgamation, the assessee had neither generated any income nor incurred any expenditure. Without prejudice, the assessee adopted ‘other method’ and placed a third party valuer report to justify consideration.

TPO rejected the valuation report. In particular, TPO: (a) treated cash payment as loan and imputed interest thereon; (b) Disregarded issuance of CCD; and (c) treated ALP of interest as Nil. DRP upheld the order of AO.

Being aggrieved, the assessee appeal to ITAT.

HELD

• Amalgamation results in business restructuring and falls within the definition of international transaction. Each mode of consideration i.e. equity, cash and CCD needs to be examined separately. No adjustment was made by TPO in respect of issuance of equity shares.

• During NCLT proceedings, the assessee submittedthat it would comply with applicable Income Tax law. Thus, even if the scheme is approved by NCLT, the tax department had not waived its right to examine the issue arising out of the scheme of amalgamation. Further, approval of the scheme and computation of ALP are different aspects.

• The valuation report stated that management had decided to give cash consideration to DIHBV as excess cash was available with the assessee. Thus, the valuation report was not prepared scientifically as consideration was determined by management of companies.

• DIHBV was holding the assessee and the other two subsidiaries through DIHPL, After the merger, DIHBV directly held 100 per cent shares of the assessee and the other two subsidiaries through the assessee. Thus, a merger transaction is a mere restatement of the accounts of the subsidiary companies without the actual transfer of any asset and liability by DIHBV.

• ITAT upheld the findings of lower authorities that in substance the transaction is really a relocation of shares and insofar as the parent holding company is concerned nothing has changed in substance.

• Considering the finding in the valuation report that management had excess cash, TPO was correct in holding that the issuance of CCDs and payment of cash of ₹100 crore represents excessive payment.

Section 92C, read with section 92B, of the Income-tax Act, 1961 — Interest-free loan is an international transaction. The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.

13 Intas Pharmaceuticals Ltd vs. ACIT

[2024] 159 taxmann.com 429

(Ahmedabad —Trib.)

ITA No: 1334/AHD/2017 & Others

A.Ys.: 2009–10 to 2011–12

Date of Order: 31st January, 2024

Section 92C, read with section 92B, of the Income-tax Act, 1961 — Interest-free loan is an international transaction. The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.

FACTS

Assessee is engaged in the business of manufacturing and trading of pharmaceuticals. It advanced the amount to its AEs for registration of the assessee’s product in overseas territories. Assessee had the option to convert advances into equity. Hence, the assessee considered that the advances were in the nature of quasi capital. Therefore, the assessee did not charge Interest on the same. In the subsequent year, the assessee converted loans given to three of its AEs into equity.

In the course of the assessment, AO made an upward adjustment on account of interest on loans and advances.

In appeal, CIT(A) gave partial relief in respect of advances given to three of the AEs whose loans were converted into equity in the subsequent year. In respect of other foreign AEs, CIT(A) confirmed the upward adjustment on the grounds that loans and advances given to them were not converted into equity.

Being aggrieved, both parties appeal to ITAT.

HELD

Tribunal confirmed the decision of AO and affirmed upward addition for all the loans.

  • In the case of quasi capital, there is an option to convert the loan to equity, however, in the case of a loan, the consideration is received in terms of interest and return of principal amount after a pre-decided deferred period1.

 

  • The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.
  • In the instant facts, there was nothing to suggest that at the time of advancing the loans to the AEs, such loans were in the nature of quasi-capital. The fact that in the subsequent year, such loans were converted into equity (at the option of the assessee) would not alter the nature of such advance to quasi-capital.

 

  • Following considerations were irrelevant for deciding the issue of charging interest on loan:
  • Advances made were out of commercial expediency.
  • Advanced by the assessee to its AEs are inextricably linked with export sale of finished goods or such advances have yielded the economic benefits to the assessee including increase in export turnover.
  • Advances were given from interest free funds available with the assessee.

____________________________________________

1 Bialkhia Holdings Pvt. Ltd. vs. Additional Commissioner of Income Tax 115 taxmann.com 230 (Surat Tribunal)

Section 9(1)(vi) of the Act; Article 12(3) of India-Sweden DTAA — Since the facts for the relevant year are identical to those of AY 2014–15, where it was held that the receipts in question could not be taxed as “royalty”, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA, the assessee was not liable to deduct tax

12 Volvo Information Technology AB, Sweden

vs. DCIT, International Taxation, Circle-3(1)(1), New Delhi

ITA Nos.: 393/Del/2018 and 2780/Del/2022

Member: Shri Kul Bharat, Judicial Member and Dr. B.R.R. Kumar

A.Ys.: 2014–15 and 2015–16

Date of Order: 20th December, 2023

Section 9(1)(vi) of the Act; Article 12(3) of India-Sweden DTAA — Since the facts for the relevant year are identical to those of AY 2014–15, where it was held that the receipts in question could not be taxed as “royalty”, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA, the assessee was not liable to deduct tax.

FACTS

The assessee was a member-company of ‘V Group’, which has global presence. It filed its return of income declaring total income of ₹77.72 crores under the head “income from other sources” and offered the same to tax
@ 10 per cent as per the provisions of DTAA. Subsequently, it revised the return of income declaring nil income.

The AO passed a draft assessment order proposing to assess the total income at ₹77.72 crores by treating the receipts as royalty in terms of section 9(1)(vi) of the Act as well as DTAA and charging tax thereon @ 10 per cent on gross receipts.

The assessee contended that it received the payments for providing facilities to Indian entities of V Group (“Indian entities”), because of which Indian entities were not required to separately obtain right to use the copyright in any of the software / business software / application owned and executed by the assessee.

HELD

  • The issue pertains to characterising the payments of ₹77.72 crores received by the assessee during the relevant year as royalty and taxing them @ 10 per cent of gross receipts.
  • The assessee had raised the same issue in its appeal before this Tribunal in respect of A.Y. 2014–15. In A.Y. 2014–15, while the assessee had declared nil income, the AO treated the entire receipts of ₹119.88 crores from India entities as ‘royalty’ in terms of section 9(1)(vi) of the Act as well as under Article 12(3) of India-Sweden DTAA and had charged the same to tax @ 10 per cent on gross receipts.
  • On the facts and circumstances of the case in respect of A.Y. 2014–15 and in law, this Tribunal held that CIT(A) had erred in treating the payments aggregating to ₹119.88 crores received by the assessee from Indian entities as royalty, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA.
  • Since the facts for the relevant year in question are identical to those of A.Y. 2014–15 in the assessee’s own case, where this Tribunal has held that the receipts in question could not be taxed as ‘royalty’. For the same reasons, the entire receipt of ₹77.72 crores received from Indian entities could not be taxed as ‘royalty’. Accordingly, the orders of authorities were set aside.

Sections 9(1)(vii)(b), 195, and 40(a)(i) of the Act — Payments made to foreign service providers for testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer is merely a support service and not in the nature of FTS. Even if it is considered to be FTS, still, payment is within the source rule carve out u/s 9(1)(vii)(b) of the Act since: (a) payments were made to foreign service provider who was a non-resident; (b) it had not rendered the services in India; (c) it did not have any permanent establishment in India; and (d) the services were utilised by the taxpayer in business carried on outside India, or for the purpose of making or earning income from a source outside India

11 Dy. CIT/Jt. CIT (OSD), Corporate Circle -1(1) vs. Aspire Systems India (P.) Ltd.

[2023] 157 taxmann.com 699 (Chennai – Trib.)

ITA Nos.: 1069, 1070 & 1071 (Chny.) 2022, 159 & 315 (Chny.) 2023

A.Y.: 2013–14

Date of Order: 13th December, 2023

Sections 9(1)(vii)(b), 195, and 40(a)(i) of the Act — Payments made to foreign service providers for testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer is merely a support service and not in the nature of FTS. Even if it is considered to be FTS, still, payment is within the source rule carve out u/s 9(1)(vii)(b) of the Act since: (a) payments were made to foreign service provider who was a non-resident; (b) it had not rendered the services in India; (c) it did not have any permanent establishment in India; and (d) the services were utilised by the taxpayer in business carried on outside India, or for the purpose of making or earning income from a source outside India.

FACTS

The assessee was engaged in the business of providing software development services to offshore customers. In connection with such services, it entered into a contract with a foreign service provider (“F Co”) for providing installation and testing services. As per the agreement between the assessee and F Co, F Co carried out testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer. In consideration, the assessee paid outsourcing charges / consultancy charges to F Co in respect of certain American clients of the assessee.

According to the AO, the payments made by the assessee to F Co were in the nature of fee for technical services (FTS) as defined under section 9(1)(vii) of the Act. Accordingly, since the assessee had not deducted tax under section 195 of the Act, the AO disallowed such payments under section 40(a)(i) of the Act.

On appeal, CIT(A) held that the payments made by the assessee to F Co were for rendering services outside India, and hence, they could not be deemed to accrue or arise in India. Therefore, they were not liable for deduction under section 195 of the Act. He further held that services rendered by F Co did not fall under the purview of FTS. Consequently, payments made to F Co could not be disallowed under section 40(a)(i) of the Act for non-deduction of tax at source under section 195 of the Act.

HELD

  • F Co carried out testing, implementation, tutoring and demonstrating services. Such services by F Co represented services performed on behalf of the assessee for a client of the assessee located in the USA. From the nature of services provided by F Co, it appears that they were support services and not purely technical services for them to fall under the definition of FTS.
  • Also, for any payment made to a non-resident to be considered as FTS, it should be analysed in light of provisions of section 9(1)(vii) of the Act, read with exceptions thereto. As per clause (b) to section 9(1)(vii) of the Act, payments made by a person who is a non-resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source
    outside India, is outside the scope of section 9(1)(vii) of the Act. From clause (b), it is evident that the services rendered by F Co clearly fall under the exception whereby the same cannot be deemed to accrue or arise in India.
  • From perusal of contract between the assesse and F Co, it is clear that payments made by the assessee to F Co are directly related to services rendered to clients of the assessee outside India and income earned by the assessee from such
    clients forms part of business income of the assessee. Therefore, it falls under the category of services utilised in a business or profession carried on by such person outside India.
  • Second aspect of exception in clause (b) to section 9(1)(vii) of the Act is that the services were utilised for the purpose of making or earning any income from any source outside India.
  • F Co performed services outside India for offshore clients. As the clients were situated outside India and services were utilised for earning income from source outside India, the second part of exception as per section 9(1)(vii)(b) of the Act was also satisfied.
  • Therefore, payments made to F Co were not chargeable to tax in India as they were covered within exception in section 9(1)(vii)(b) of the Act. Accordingly, provisions of section 195 of the Act were not attracted and the question of disallowance under section 40(a)(i) of the Act did not arise.

Section 9, read with sections 195 and 201, of the Act — Payments made for Live Rights are not payments for copyright as broadcasting Live events does not amount to a work in which copyright subsists — hence, they cannot be charged to tax as royalty under section 9(1)(vi) of the Act

10 Lex Sportel Vision (P.) Ltd. vs. Income Tax Officer

[2024] 158 taxmann.com 129 (Delhi – Trib.)

ITA No.: 2397/Del/2023

A.Y.: 2018–19

Date of Order: 26th December, 2023

Section 9, read with sections 195 and 201, of the Act — Payments made for Live Rights are not payments for copyright as broadcasting Live events does not amount to a work in which copyright subsists — hence, they cannot be charged to tax as royalty under section 9(1)(vi) of the Act.

FACTS

The assessee was engaged in the business of broadcasting or sub-licensing right to broadcast sport events, e.g., golf, cricket, soccer, etc., on live and non-live basis. The assessee filed a return of income for the relevant year declaring nil total income. During the relevant year, the assessee had entered into agreements with certain non-residents for acquiring the following two types of rights.

(a) Right to broadcast live sports events (“Live Rights”).

(b) Right to use audio-visual recording of the sport events for subsequent telecasting, cutting small clips for advertisements, making highlights of the event, etc., (“Non-Live Rights”).

The agreements and the invoices issued by non-residents clearly bifurcated the total consideration between consideration for “Live Rights” and that for “Non-Live Rights”1.

1. The decision does not mention the respective amounts paid for “Live Rights” and “Non-Live Rights”.

The assessee considered payments towards acquisition of “Non-Live Rights” as “Royalty” in terms of section 9(1)(vi) of the Act. And deducted tax thereon under section 195 of the Act. However, the assessee did not deduct tax under section 195 of the Act on the payments made for “Live Rights”.

In appeal, CIT(A) held that the payment for “Live Rights” was chargeable to tax as “Royalty”.

HELD

Whether payments for Live Rights are for use of copyright?

  • The Tribunal examined in detail certain judgments2 on the subject.
  • Based on the examination, broadcasting “Live events” does not amount to a work in which copyright subsists, as right to broadcast live events i.e., “Live Rights” is not “copyright”.
  • Therefore, any payment made towards Live Rights cannot be said to be chargeable to tax as “Royalty” under section 9(1)(vi) of the Act. Further, the judicial authorities have held that when the agreements clearly bifurcate the consideration paid towards Live and Non-Live Rights, it is not open for the Department to deem that the payment made for Live Rights was for a bouquet of rights.
2. CIT vs. Delhi Race Club [2014] 51 taxmann.com 550/[2015] 273 CTR 503/228 Taxman 185 (Hon'ble Delhi HC); Fox Network Group Singapore Pvt. Ltd. vs. ACIT (IT) [2020] 121 taxmann.com 330 (ITAT Delhi); Cricket Australia vs. ACIT (IT) (ITA No. 1179/Delhi/2022) (ITAT Delhi); ESS (formerly known as ESPN Star Sports) vs. ACIT (ITA No. 7903/DEL/2018) (ITAT Delhi); ESPN Star Sports vs. Global Broadcast News Ltd. 2008 (38) PTC 477 (ITA T Delhi); ADIT (IT) vs. Neo Sports Broadcast Pvt. Ltd. [2011] 15 taxmann.com 175/[2011] 133 ITD 468 (ITAT Mumbai); DDIT(IT) vs. Nimbus Communications Ltd (2013) 20 ITR(T) 754 (ITAT Mumbai).

Whether payments were for use of process?

  • As regards the issue whether the payments were made for the use of “process” or not, the payments in dispute were made to overseas rights holders. The said payments were neither made to any satellite operators nor for use of any satellite. Hence, the payments were not made for use of any “process” as defined under section 9(1)(vi) of the Act. Therefore, they cannot be brought to tax as “Royalty” in the hands of the overseas rights holders.
  • Accordingly, while passing the order under section 201 of the Act, the AO erred in law by treating the remittances to have been made for use of a “Process”.

Article 13(4) of old India-Mauritius DTAA – Having failed to establish that assessee is a conduit, basis TRC issued by tax authorities, the assessee is a tax resident of Mauritius and is entitled to DTAA benefits

9 Veg N Table vs. DCIT
TS-657-ITAT-2023 (Del)
ITA No.: 2251/Del/2022
A.Y.: 2018-19

Date of Order: 31st October, 2023

Article 13(4) of old India-Mauritius DTAA –— Having failed to establish that assessee is a conduit, basis TRC issued by tax authorities, the assessee is a tax resident of Mauritius and is entitled to DTAA benefits.

FACTS

Assessee, a Mauritius-based investment holdingcompany, sold shares of Indian Company (ICO) and claimed exemption under Article 13(4) of India-Mauritius DTAA. Shares were acquired prior to 1st April, 2017. Assessing Officer (AO) denied exemption noting that:a) ICO was 75 per cent held by UKCO and 25 per centby Canadian individuals b) there were no operatingincome or expense in the books of the assesse since the date of investment c) no remuneration was paid to directors d) two out of three directors held a number of directorships e) Third director was a Canadian individual who was ultimate beneficial owner f) there is no commercial rationale for establishing a company in Mauritius.

The assessee appealed to DRP. DRP upheld the order of AO.

Being aggrieved, the assessee appealed before the Tribunal.

HELD

Assessee holds valid TRC and should be treated as a resident of Mauritius. Reliance was placed on CBDT circulars and under noted decision1.

AO alleged that the assessee is a conduit company. These allegations are not supported by substantive and cogent material.

GAAR provisions empowered AO to deny DTAA benefits. AO did not invoke GAAR provisions.

1    ABB AG in IT(IT)A No.1444/Bang/2019 dated 24th November, 2020

Article 12(5) of India-Finland DTAA — Services are performed at the place where service is used and not where services are rendered — In absence of make available clause in India-Finland DTAA, consideration is chargeable to tax in India; Article 21 of India-Finland DTAA — Since providing corporate guarantee was not business activity but shareholder obligation, corporate guarantee fee was Other Income covered under Article 21 of India-Finland DTAA.

8 Metso Outotec OYJ, (Earlier Known as Outotec Oyj) vs. DCIT

[2023] 153 taxmann.com 723 (Kolkata – Trib.)

ITA No: 300/Kol/2022; ITA No: 269/Kol/2023

A.Ys.: 2018–19 & 2020–21

Date of Order: 29th August, 2023

Article 12(5) of India-Finland DTAA — Services are performed at the place where service is used and not where services are rendered — In absence of make available clause in India-Finland DTAA, consideration is chargeable to tax in India; Article 21 of India-Finland DTAA — Since providing corporate guarantee was not business activity but shareholder obligation, corporate guarantee fee was Other Income covered under Article 21 of India-Finland DTAA.

FACTS

Assessee, a tax resident of Finland, had provided IT services to Indian AE (“I Co”) and received consideration from I Co for such services. In view of Assessee, since it had performed IT services in Finland, and since it did not have PE in India, consideration received, therefore, was not chargeable to tax in India in terms of Article 12(5) of India-Finland DTAA1 .

Further, Assessee had provided corporate guarantee for I Co and received corporate guarantee fee from I Co. In view of Assessee, corporate guarantee fee was business income and since Assessee did not have PE in India, it was not taxable in India.

AO did not agree with the contentions of the Assessee and brought both receipts to tax. DRP ruled that services are performed at the place where beneficiaries can use them and guarantee fees are in the nature of parental support taxable as other income.

Being aggrieved, the Assessee filed an appeal before the Tribunal.

HELD

Income from IT Service

• Assessee had rendered specific services for the use of I Co. As India-Finland DTAA does not have a ‘Make Available’ clause, consideration for providing such services was taxable in India.

• ITAT followed its earlier decision in Assessee’s case2, wherein it had held that the performance-based rule in Article 12(5) was not applicable to the case of Assessee for the reasons given on the next page:
• Payment was made for test results which were used in India.

• Though Assessee may have conducted a process of testing outside India, I Co had made payment not for use of the process but for the results of testing which were used by I Co in India.

Income from corporate guarantee fee

• The main line of business of Assessee was to carry on, by itself, or through its subsidiary, the design, manufacture and construction of trade machinery, devices, etc.

• Giving of guarantee was a routine activity. It was the obligation of the Assessee towards its subsidiary. It was more like a shareholder obligation than a service activity.

• Giving of guarantee was not a business activity of Assessee, which was evident from the fact that except for I Co, Assessee had not given guarantee for anyone else.

• The fee received for giving corporate guarantee was in the nature of other income, which was covered under Article 21 of India-Finland DTAA.

Note: Article 21(3) of India-Finland DTAA provides items of income of a resident of a Contracting State not dealt with in other Articles of DTAA and arising in the other Contracting State may be taxed in that other State. The decision has not dealt with the aspect of place or situs where corporate guarantee arises.

1 “Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is … a resident of that State. Where, however, … the fees for technical services relate to services performed, within a Contracting State, then such … fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed ….”
2 Outotec (Finland) Oy vs. DCIT [2019] 109 taxmann.com 69 (Kol. – Trib.)

Section 9 r.w. Article 13 of India-Mauritius DTAA – Where Mauritius company had acquired CCPS prior to 1.4.2017 but they were converted into equity shares after said date, without there being any substantial change in rights of the assessee, LTCG derived from the sale of such equity shares were within the ambit of Article 13(4) of India-Mauritius DTAA, and hence, was exempt from tax in India.

7. Sarva Capital LLC vs. ACIT

[2023] 153 taxmann.com 618 (Delhi-Trib.)

ITA No.: 2289/Del./2022

A.Ys.: 2019–20

Date of Order: 10th August, 2023

 

Section 9 r.w. Article 13 of India-Mauritius DTAA – Where Mauritius company had acquired CCPS prior to 1.4.2017 but they were converted into equity shares after said date, without there being any substantial change in rights of the assessee, LTCG derived from the sale of such equity shares were within the ambit of Article 13(4) of India-Mauritius DTAA, and hence, was exempt from tax in India.

FACTS

The assessee was a tax resident of Mauritius. It was incorporated with the objective of investing in India in education, agriculture, healthcare, microfinance institutions and other financial services sectors. Mauritius tax authority had granted TRC to the assessee. The assessee had invested in CCPS of ‘V’ prior to 1st April, 2017. CCPS were converted into equity shares of ‘V’ as per the terms of their issue without there being any substantial change in the rights of the assessee. The conversion resulted in only a qualitative change in the nature of the rights of the shares but did not alter voting or other rights of the assessee.

The assessee sold the shares during the A.Y. 2019–20 and earned long-term capital gain (“LTCG”) from the same. The assessee claimed LTCG as exempt in terms of Article 13(4) of India-Mauritius DTAA. Subsequently, it revised its return and offered LTCG to tax in terms of Article 13(3B) of India-Mauritius DTAA.

AO denied the benefit of DTAA to the assessee and brought to tax, the entire LTCG under the IT Act.

HELD

(i) Valid TRC bars AO from questioning tax residency:

• The assessee was granted TRC by Mauritius Tax Authority. It is well settled that if an assessee is holding a valid TRC, the AO in India cannot go behind such TRC to question the tax residency of the assessee and deny benefits of DTAA.

• ITAT placed reliance on UOI vs. AzadiBachaoAndolan1 to support its view that DTAA benefit cannot be denied even if Mauritius does not levy capital gains tax.

• AO’s allegations that the assessee, (a) was set up for tax avoidance purposes through treaty shopping, (b) was a conduit company and there was an absence of commercial rationale or substance behind the setting up of the assessee were not supported by any material / evidence.

(ii) CCPS acquired prior to 1st April, 2017, converted to equity shares after that date:

• Since the assessee had acquired CCPS prior to 1st April, 2017, LTCG derived from the sale of equity shares after the conversion of CCPS was covered under Article 13(4) of India-Mauritius DTAA and not under Article 13(3A) or 13(3B) of India-Mauritius DTAA.

• Therefore, in terms of Article 13(4) of India-Mauritius DTAA, LTCG was taxable only in the country of residence of the assessee (i.e., Mauritius).

• A perusal of Article 13(3A) of India-Mauritius DTAA shows that the expression therein is ‘gains from the alienation of shares’. The term ‘shares’ has been used in a broader sense and will cover within its ambit all shares, including preference shares.

• Initially, the assessee had claimed LTCG as exempt in terms of Article 13(4) of India-Mauritius DTAA. Subsequently, it revised its return and offered LTCG to tax in terms of Article 13(3B) of India-Mauritius DTAA. However, that would not preclude the assessee from claiming benefit under Article 13(4) if LTCG were clearly within the ambit of Article 13(4) of India-Mauritius DTAA

Section 115-O read with Dividend Article of DTAA – Dividend Distribution Tax (DDT) rate prescribed under section 115-O cannot be reduced to rate mentioned in Dividend Article of DTAA rate applicable to a non-resident shareholder.

20. DCIT vs. Total Oil India (Pvt) Ltd
[2023] 149 taxmann.com 332 (Mumbai-Trib.) (SB)
[ITA No: 6997/Mum/2019]
A.Y.: 2016-17
Date of order: 20th April, 2023

Section 115-O read with Dividend Article of DTAA – Dividend Distribution Tax (DDT) rate prescribed under section 115-O cannot be reduced to rate mentioned in Dividend Article of DTAA rate applicable to a non-resident shareholder.

FACTS

Taxation of dividend income under the Act has been subject to various amendments from time to time. Pre-1997, classical system of taxation was prevalent wherein the dividends were taxed in the hands of shareholders and companies declaring these dividends were required to withhold taxes on dividend income. From the year 1997 to 2020 (except for April 2002 to March 2003) the classical system was done away with and DDT regime existed. As per this regime, the company declaring dividend was made liable to pay taxes on dividends declared/distributed or paid. Consequently, such dividend income was regarded as exempt in the hands of the shareholders under the ITL. Vide Finance Act, 2020, DDT regime was abolished, and the classical system of taxation was restored.

On the judicial front, various Courts and ITAT have ruled on the DDT issue. Notably, given below are the relevant observations for the present controversy:

  • The SC in the case of Tata Tea4 held that the entirety of income distributed by the company engaged in the business of growing and manufacturing tea is dividend subject to DDT even if it is partially paid out of the exempt agricultural income of the company. A dividend distributed by a company, being a share of its profits declared as distributable among the shareholders, does not partake in the character of profits from which it reaches the hands of the shareholder. Since dividend income is not agricultural income, the same will be chargeable to tax.
  • Further, the SC in the case of Godrej & Boyce5 held that the dividend income was exempt in the hands of the shareholder and, hence, any expense in relation to such exempt income cannot be regarded as deductible. The SC held that tax incidence on dividend income was in the hands of the payer company. A domestic company is liable to pay DDT as a distinct entity and not as an agent of the shareholders. Accordingly, the income is not taxable in the hands of recipient shareholders and, thus, the same did not form part of the total income of the shareholder.
  • Delhi ITAT in the case of Giesecke & Devrient6 and Kolkata ITAT in the case of Indian Oil Petronas Pvt Ltd7, held that the DDT rate on dividend paid to non-resident shareholders needs to be restricted to the rates prescribed under the DTAA, if the conditions for DTAA entitlement are satisfied. The Tribunal noted that DDT is effectively a tax on dividend income, the incidence of which needs to be seen from the perspective of the recipient shareholder. Accordingly, the income tax should be charged at the lower of rate specified under the Act or DTAA for the recipient.
4    (2017) 398 ITR  260 (SC)
5    394 ITR 449 (SC),
6    [TS-522-Tribunal-2020]
7    [TS-324-Tribunal-2021(Kol)]

Later, Mumbai ITAT in the case of Total Oil India Pvt Ltd8 expressed its apprehensions about the correctness of the Tribunal decisions in the case of Giesecke & Devrient and Indian Oil Petronas Pvt Ltd and directed for the constitution of a Special Bench

Question for consideration before the Special Bench was:

“Where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts additional income-tax (tax on distributed profits) referred to in section 115-O of the Income-Tax Act,1961 (in short ‘the Act’), whether such additional income-tax payable by the domestic company shall be at the rate mentioned in Section 115-O of the Act or the rate of tax applicable to the non-resident shareholder(s) with reference to such dividend income”

HELD

Though dividend is an income in the hands of the shareholder, taxability need not necessarily be in the hands of the shareholder. The sovereign has the prerogative to tax the dividend, either in the hands of the recipient9 of the dividend or otherwise10.

Section 115-O is a complete code in itself, in so far as levy and collection of tax on distributed profits is concerned. Charge in the form of additional income tax (i.e., DDT) is created on amount declared, distributed or paid by domestic company by way of dividend. Further, DDT is a tax on “distributed profits” and not a tax on “dividend distributed”. The non-obstante nature of provision is an indication that the charge under the DDT provisions is independent and divorced from the concept of “total income” under the ITL.

DDT is liability of the company and not payment on behalf of the shareholders as DDT paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends. The fact that no further credit or deduction can be claimed by the company or by any other person also suggests that shareholder does not enter the domain of DDT. The payee’s right to recover excess taxes which are deducted/collected at source or the right of subrogation in the event when payer pays excess over and above what he/she has to pay to the payee, is absent in the entire scheme of DDT provisions under the Act.

8    (ITA No. 6997/Mum/2019)
9    Classical/progressive system
10    Simplistic system where the company which distributes the dividend is required to discharge the tax liability on the sum distributed by way of dividend as an additional income tax on the company itself and consequently such dividend income was exempt in the hands of shareholders
  • The SC in the case of Tata Tea Co. Ltd11 did not deal with the nature of DDT, i.e., whether it is tax on the company or a tax on the shareholder. Reliance placed by the assessee on the said SC decision to suggest that DDT is a tax paid on behalf of the shareholder is not valid. The decision of SC in Tata Tea (supra) does not support that DDT is tax paid on behalf of the shareholders or that DDT is not the liability of the company. The SC, in that case, upheld the constitutional validity of DDT levy in respect of dividend paid out of that portion of profit of tea manufacturing company which is regarded as agricultural income of the company. The SC held that dividend does not bear the same character as profits from which it is paid and ruled that dividend is included within the definition of ‘income’ under the ITL.
  • Assessee’s reliance on the SC ruling in case of Godrej & Boyce Mfg. Co Ltd.12 to contend that DDT is paid on behalf of the shareholder and has to be regarded as payment of liability of the shareholder, discharged by the domestic company paying DDT is also not correct. The observation of the underlying Bombay HC decision regarding the legal characteristics of DDT is that it is tax on a company paying the dividend, is chargeable to tax on its profits as a distinct taxable entity, the domestic company paying DDT does not do so on behalf of the shareholder, and nor does it act as an agent of the shareholder in paying DDT. The conclusion cannot be said to have been diluted or overruled by the SC. The SC by taking a different basis reached the same conclusion that DDT is not a tax paid by the domestic company on behalf of the shareholder.
11    [(2017) 398 ITR  260 (SC)]
12    394 ITR 449
  • As against above, the Bombay HC in the case of Small Industries Development Bank of India13 (SIDBI) held that DDT is not a tax on dividend in the shareholder’s hands but an additional income-tax payable on the company’s profits, more specifically on that part of the profits which is declared, distributed or paid by way of dividend.
  • Interplay of DDT and DTAA
  • DTAAs need to be considered from the perspective of the recipients of income, i.e., shareholders. Where DDT paid by the domestic company in India, is a tax on its income distributed and not tax paid on behalf of the shareholder, the domestic company does not enter the domain of DTAA at all.
  • The DTAAs should specifically provide for treaty benefit in case of DDT levied on domestic company. Illustratively, the protocol to India-Hungary DTAA has extended the treaty protection14 to DDT wherein it has been stated that when the company paying the dividends is a resident of India then tax on distributed profits shall be deemed to be taxed in the hands of shareholder and will be eligible for reduced tax rate as provided in the DTAA.
  • Thus, wherever the Contracting States intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA.
13    133 taxmann.com 158
14    Protocol to India-Hungary DTAA provides: “When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend”

Article 28 of India-Malaysia DTAA – Article 28 cannot be invoked if the company is having substance in the form of employees, revenue and is set up for valid business reasons; Article 12 of India-Malaysia DTAA – Sub-licensing payment to a Malaysian company for: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets, in respect of the cricket matches outside India, is not in nature of royalty under Article 12 of India-Malaysia DTAA.

19. ITO vs. Total Sports & Entertainment India Pvt Ltd
[TS-145-ITAT-2023(Mum)]
[ITA No: 5717 & 6129/Mum/2016]
A.Y.: 2014-15
Date of order: 27th March, 2023

Article 28 of India-Malaysia DTAA – Article 28 cannot be invoked if the company is having substance in the form of employees, revenue and is set up for valid business reasons; Article 12 of India-Malaysia DTAA – Sub-licensing payment to a Malaysian company for: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets, in respect of the cricket matches outside India, is not in nature of royalty under Article 12 of India-Malaysia DTAA.
 
FACTS

Assessee, an Indian company, was engaged in the business of seeking rights sponsorships for any sports and entertainment event. It is a WOS of a Cayman Islands company (Cayman Hold Co). Cayman Hold Co was a holding company of 11 companies around the world including the assessee and a Malaysia company.

Cayman Hold Co had acquired advertisement rights of the Sri Lanka National Cricket Team1. The rights included: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets. Cayman Hold Co had sub-licensed these rights to the Malaysian company which in turn further sub-licensed them to the assessee.

The Assessee monetized these rights to an Indian company and made sub-licensing payment to Malaysian company without deducting TDS.

Article 28 of India-Malaysia DTAA provides that a person shall not be entitled to its benefits if its affairs were arranged in such a manner as if the main purpose or one of the main purposes was to take the benefits of India-Malaysia DTAA. On the footing that: a) payments were in nature of royalty and b) Malaysian Company was interposed between the assessee and Cayman Hold Co to avail DTAA benefits of India-Malaysia DTAA, AO invoked Article 28 of India-Malaysia DTAA. Accordingly, AO held the assessee to be in default. CIT(A) held that Article 28 was not applicable to case of the assessee. CIT(A) bifurcated the payments in two parts in the ratio of 60:40. He considered 60 per cent of payment as advertisement charges for display of logo and content of billboard and held they were not in nature of royalty. He considered balance 40 per cent of payment as for the use of name ‘official partners’ or ‘official advertisers’ providing links on the website of the assessee and use of various items (which included photographs, etc.) of the teams for promoting products related to the assessee’s clients, and regarded them as royalty. Being aggrieved both parties appealed to ITAT.

HELD

Article 28 of India-Malaysia DTAA

After considering the following facts, the ITAT held the that Malaysian company was not a conduit or paper company set up to avail benefits under India-Malaysia DTAA.

  • All the senior management team members (CEO, COO, CFO, etc.) were located in Malaysia.
  • Rights obtained by Hold Co or other companies in the group were generally sub-licensed to the Malaysia company as the head office entity.
  • Practice of sub-licensing was followed for companies across world and not only for India.
  • Turnover of the Malaysian company was much higher than the revenue earned by it from the assessee.
  • The Malaysian company was in existence much prior to the Hold Co and the assessee.
  • Conclusion could have been different if the entire setup would have been in Cayman Islands and the Malaysian entity would have been a mere name lender in this set of transactions with no role to play.
1. Similar was the arrangement in arrangement in case of sponsorship rights of the West Indies Cricket Team.

ROYALTY TAXATION

  • ITAT followed Delhi HC judgment in the case of Sahara India Financial Corporation Ltd2, in which it was held as follows.
  • Payment towards various sponsorship rights in respect of ICC tournament was not in connection with the right to use, or by way of consideration for the right to use, any of the three categories3 mentioned in Article 13 of the DTAA.
  • There was no transfer of, copyright or, the right to use the copyright, flowing to the assessee. Therefore, payment made by the assessee would not fall within article 13(3)(c) of the said DTAA.
2     [2010] 321 ITR 459 (Delhi)
3    (a) any patent, trademark, design or model, plan, secret formula or process;
(b) industrial, commercial or scientific equipment or information concerning industrial, commercial or scientific experience; and
(c) any copyright of literary, artistic or scientific work cinematographic films and films or tapes for radio or television broadcasting.

Article 13(4A) of India – Singapore tax treaty – Tax authorities cannot go behind TRC issued by Singapore tax authorities. Gain on sale of shares acquired prior to 1st April, 2017 is not taxable in India.

18 Reverse Age Health Services Pte Ltd vs. DCIT
[TS-67-ITAT-2023(Del)]
 [ITA No: 1867/Del/2022]
A.Y.: 2018-19
Date of order: 19th February, 2023

Article 13(4A) of India – Singapore tax treaty – Tax authorities cannot go behind TRC issued by Singapore tax authorities. Gain on sale of shares acquired prior to 1st April, 2017 is not taxable in India.

FACTS

The assessee, a tax resident of Singapore, sold shares of an Indian Company (ICO). It claimed a refund of TDS on the grounds that capital gain income is not taxable in India as per Article 13 of India – Singapore DTAA3. AO denied benefit under Article 13(4A) of the India – Singapore DTAA on the grounds that the assessee had no economic or commercial substance and that it was a “shell” or a “conduit” company as per Article 3(1) of protocol to India-Singapore DTAA4. DRP upheld AO’s order.

Being aggrieved, the assessee filed an appeal to ITAT.

HELD

  •     ITAT placed reliance on Delhi High Court decision in the case of Black Stone Capital Partners5 which held that Indian tax authorities cannot go behind TRC issued by Singapore tax authorities.

ITAT took note of the following facts and documents and granted benefit of capital gains exemption under Article 13 of DTAA.

The assessee furnished TRC for relevant year issued by Singapore Tax authorities.

Two of the shareholders of assessee were also tax residents of Singapore.

Audited financial statements, return of income filed and tax assessment orders by Singapore Tax Authority.

GAAR provisions are not applicable as the tax on the gains was less than Rs 3 crores6 as also the fact that investment was made prior to 1st April, 2017 which is grandfathered7. 

 

3   Shares
were acquired by the assessee prior to 31st March, 2017. As per Article 13(4A)
gains from the alienation of shares acquired before 1st April, 2017 in a
company which is a resident of a Contracting State shall be taxable only in the
Contracting State in which the alienator is a resident.

4   Article
24A(1) of amended India- Singapore DTAA

5   W.P.(C)
2562/2022 decided on 30.01.2023

6   Rule
11U(1)(a)

7   Rule 11U(1)(d)

 

Article 12 of India – Singapore tax treaty – Uplinking and Playout Services are not royalty or FTS

17 Adore Technologies (P) Ltd vs. ACIT

[ITA No: 702/Del/2021]

A.Y.: 2017-18

Date of order: 19th December, 2022

Article 12 of India – Singapore tax treaty – Uplinking and Playout Services are not royalty or FTS

FACTS

The assessee, a tax resident of Singapore provides satellite-based telecommunication services. He earned income from disaster recovery uplinking and playout services1. The AO held that the disaster recovery uplinking service of the assessee is nothing but a part of a process wherein signals are taken from the playout equipment and sent to the satellite for broadcasting them to cable operators/direct to home operators. The AO relied on Explanation 6 to section 9(1)(vi) to assess the remittance as process royalty. Further, playout services were held to be inextricably linked with uplinking services and were taxable as FTS under Act and DTAA. DRP upheld order of AO. Being aggrieved, the assessee appealed to ITAT.

 

 

1   Uplinking service is a process wherein
signals are taken from the playout equipment and sent to the satellite for
broadcasting them to cable operators / direct to home operators. The disaster
recovery playout service involves provision of uninterrupted availability of
the playout service at a predetermined level.

 

 

HELD

Up-linking services

  •     The term ‘process’ in definition of royalty under the treaty has been used in the context of’ know-how’ and intellectual property.

 

  •     Royalty in relation to ‘use of a process’ envisages that the payer must use the ‘process’ on its own and bear the risk of its exploitation. If the ‘process’ is used by the service provider himself, and he bears the risk of exploitation or liabilities for the use, then service provider makes his own entrepreneurial use of the process.

 

  •     Considering the following facts, ITAT held that income cannot be considered as royalty.

 

  •     Satellite-based telecommunication services provided by the assessee are standard services. There is no ‘know how’ or ‘intellectual property’ involved.

 

  •     Services do not envisage granting the use of, or the right to use any technology or process to the customers.

 

  •     The assessee is responsible for maintaining the continuity of the service using its own equipment and facilities since the possession and control of equipment is with the assessee.

 

  •     Customers are merely availing a service from the assessee and are not bearing any risk with respect to exploitation of the assessee’s equipment involved in the provision of such service.

 

  •     Explanation 6 to section 9(1)(vi) of the Act is not applicable for interpretation of definition of royalty under DTAA. Reliance was placed on undernoted decisions2.

.

2 New Skies Satellite BV ((382 ITR 114) and NEO  Sports Broadcast Pvt Ltd. (264 Taxmann.com 323)

 

PLAYOUT SERVICES

 

  •     Playout service involves broadcasting and/ or transmission of channels by the assessee for its customers, without any involvement in decision-making with respect to the playlists and the content being broadcasted. The assessee does not have a right to edit, mix, modify, remove or delete any content or part thereof as provided by the customer.

 

  •     Services are not in nature of FTS as envisaged under Article 12(4)(a) of the DTAA as they are not ancillary or subsidiary to disaster recovery uplinking and allied services.

 

  •     Services also do not make available any technical knowledge, experience, skill, knowhow, or process or consist of the development and transfer of any technical plan or technical design.

 

  •     The taxpayer is accordingly not chargeable to tax in respect of entirety of its income towards uplinking and playout services.

 

Article 13 of India – UK DTAA – Where payment for use of the software is not taxable, services intricately and inextricably associated with use of software are also not taxable.

16 TSYS Card Tech Ltd vs. DCIT

[TS-36-ITAT-2023(Del)]

[ITA No: 2006/Del/2022]

A.Y.: 2019-20

Date of order: 24th January, 2023

Article 13 of India – UK DTAA – Where payment for use of the software is not taxable, services intricately and inextricably associated with use of software are also not taxable.

FACTS

The assessee, a tax resident of the UK, earned income from the sale of software licenses, provision of implementation services, enhancement services, annual maintenance services and consultancy services. The assessee relying upon provisions of the DTAA claimed income was not taxable in India.

AO taxed income as royalty and FTS under provisions of Act as also the DTAA. DRP, following decision of Supreme Court in Engineering Analysis Centre of Excellence (P) Ltd. vs. CIT [2021] 281 Taxman 19, ruled that payment for software license is not taxable in India. However, the implementation services, enhancement services, annual maintenance services and consultancy services, as per request of Indian customers, were held to be separate from software license, and were taxable under the Act and Article 13 of DTAA. It appears from the observations of the ITAT that AO and DRP merely relied upon the words “Make Available” found in the agreement with Indian customers to hold that make available clause stood satisfied under Article 13 of treaty. Being aggrieved, assessee filed an appeal to ITAT. Dispute before ITAT only related to services income earned by the assessee.

HELD

  •     Services like training and updates are in connection with utilization of the base software licenses. As software income is not taxable, training and related activities concerned with utilization and installation cannot be taxed as FTS.

 

  •     Mere use of ‘make available’ in agreement does not satisfy the requirement of Article 13(4)(c) in DTAA. Burden is on tax authorities to satisfy that requirement of make available clause are satisfied.

Article 4 of India – Singapore tax treaty – Tie Breaker in case of individual breaks in favor of Singapore since the assessee stayed in a rental house with his family in Singapore. The Indian house was rented and the assessee paid tax on Singapore income.

15 Sameer Malhotra vs. ACIT
[2023] 146 taxmann.com 158 (Delhi – Trib.)
[ITA No: 4040/Del/2019]
A.Y.: 2015-16
Date of order: 28th December, 2022

Article 4 of India – Singapore tax treaty – Tie Breaker in case of individual breaks in favor of Singapore since the assessee stayed in a rental house with his family in Singapore. The Indian house was rented and the assessee paid tax on Singapore income.

FACTS

The assessee received salary income from the Indian Company (ICO) for the period 1st April, 2014 to 25th November, 2014 and from Singapore Company (Sing Co) from 15th December, 2015 to 31st March, 2015. The assessee did not offer salary received from Sing Co to tax in India on the basis that under India-Singapore DTAA he was a resident of Singapore. The AO held that the assessee was a resident of India under Act as he was physically present in India for more than 182 days. Further, the assessee was an Indian resident even under the tie-breaker test of the DTAA. CIT(A) upheld the order of the AO. Being aggrieved, assessee appealed to Tribunal.
 

HELD

  • The assessee shifted with his family to Singapore, stayed there for the whole of the remaining period in the relevant assessment year and earned the income while serving in Singapore itself.

  • The assessee had an apartment on rent in Singapore, obtained a Singapore driving license, had overseas Bank Account, showed Singapore as his country of residence in various official forms and even paid taxes in Singapore while working from there.

  • With respect to tie-breaker test the Tribunal held that:

  • Permanent Home – The permanence of home can be determined on qualitative and quantitative basis. Although the assessee owned a home in India, it was not available to him as it was rented out by him.

  • Centre of Vital Interests Test: The CIT(A) held that the centre of vital interests of the asssessee was in India and not in Singapore, as the majority of the savings, investments and personal bank accounts are in India. However, the assessee worked in Singapore during the period under consideration and stayed there along with his family for the purpose of earning income. Thus, his personal and economic relations remained in Singapore only.

  • Habitual Abode: Habitual abode does not mean the place of permanent residence, but in fact it means the place where one normally resides. Since the assessee had an apartment on rent in Singapore and resided therein only, he had a habitual abode in Singapore.

  • Based on above, it was held that assessee was a tax resident of Singapore. Accordingly, as per Article 15(1) of the India-Singapore DTAA, which states that remuneration derived by a resident of a contracting state in respect of an employment shall be taxable only in that State unless the employment is exercised in the other contracting state, the assessee’s income earned in Singapore was held to be non-taxable in India.

Article 5 of India-Switzerland DTAA – Liaison Office (LO) does not constitute PE as long as it is adhering to the approval conditions imposed by RBI

14 S.R Technics Switzerland Ltd vs. ACIT (International Taxation)

[ITA No: 6616/Mum/2018]

A.Y.: 2015-16

Date of order: 25th November, 2022

Article 5 of India-Switzerland DTAA – Liaison Office (LO) does not constitute PE as long as it is adhering to the approval conditions imposed by RBI

FACTS

Assessee, a Swiss Company was engaged in the maintenance, repair and overhaul for aircrafts, engines and components. It had a subsidiary company in Switzerland (Swiss Sub Co). Swiss Sub Co had set up a LO in India. The AO alleged that the said LO constituted the PE of the assessee in India. The assessee appealed to the DRP. The DRP upheld the order of the AO. Being aggrieved, the assessee appealed to the Tribunal.

HELD

Tribunal took note of following factual aspects:

  • Employees of the LO do not negotiate, finalize or discuss contractual aspects including pricing with the assessee’s customers.
  • Employees of LO are acting as a communication link between the assessee and customers.
  • The LO did not carry any activity, beyond that permitted by the RBI
  • LO did not have any infrastructure, facilities or stock of goods to carry out maintenance activities or render services.
  • Staff was not of seniority who can negotiate with the customers, sign and finalize the contracts
  • Activities carried by LO are preparatory and auxiliary in nature. RBI accepted the functioning of the LO indicating that the LO could not carry on any business or trading activity.

Article 13(4) of India-Mauritius DTAA (prior to its amendment) — Capital gain arising on sale of shares of Indian company is not taxable in India.

6. [TS-389-ITAT-2023(Del)]
SAIF II SE Investments Mauritius Limited vs. ACIT
[ITA No: 1812/Del/2022]
A.Y.: 2018-19               
Dated: 14th August, 2023

Article 13(4) of India-Mauritius DTAA (prior to its amendment) — Capital gain arising on sale of shares of Indian company is not taxable in India.

FACTS

Assessee is a Mauritius-based investment-cum-holding company. It derived long-term capital gains from sale of shares of NSE, an Indian company. Assessee contended that such long term capital gains were exempt under Article 13(4) of India-Mauritius DTAA. AO denied such exemption on the following grounds:

(a) Assessee was a conduit and the real owners of the income were ultimate holding companies, which were based in Cayman Islands.

(b) TRC was not sufficient to establish the tax residency of assessee, if substance established otherwise.

(c) There was no commercial rationale for establishment of the assessee company in Mauritius.

(d) Control and management of assessee was not in Mauritius.

DRP upheld order of AO.

Being aggrieved, assessee appealed to ITAT.

HELD

•    NSE was a regulated entity. Acquisition and sale of shares of NSE was approved by various regulatory authorities, such as, FIPB, SEBI, RBI, NSE. It can be assumed that regulatory authorities would have gone into the shareholding and financial structure of the assessee and its parent companies and all other relevant factors.

•    AO’s conclusion that assessee was an entity without commercial substance is contrary to the conclusion reached by above authorities.

•    TRC issued by an authority in the other tax jurisdiction is the most credible evidence to prove the residential status of an entity and the TRC cannot be doubted.

•    Accordingly, long term capital gains arising to assessee qualified for exemption under Article 13(4). Hence, it could not be taxed in India.  

Article 12 of India-USA DTAA — Payment received by Amazon for cloud services provided by it is not royalty or fees for included services in terms of Article 12 of DTAA.

5. [2023] 153 taxmann.com 45 (Delhi – Trib.)
Amazon Web Services, Inc. vs. ACIT
[ITA No: 522&523/Del/2023]
A.Y.: 2014-15 & A.Y.: 2016-17            
Dated: 1st August, 2023

Article 12 of India-USA DTAA — Payment received by Amazon for cloud services provided by it is not royalty or fees for included services in terms of Article 12 of DTAA.
 
FACTS

Assessee provided standard and automated cloud computing services named AWS Services to its customers across the globe. The customers electronically executed a standard contract available on its website. Case was reopened under section 147 of the Act. Assessee had contended that its income is not chargeable to tax. However, AO had passed order treating income of assessee as royalty/fees for included services under the Act and DTAA. DRP confirmed addition proposed by AO.
Being aggrieved, assessee appealed to ITAT.

HELD

Vis-à-vis taxation as Royalty
•    AWS Services are standard and automated services. They are publicly available online to everyone who executes a standard contract with the assessee.

•    For the following reasons, receipt is not in nature of royalty:

  •  Customers are granted a non-exclusive and non-transferable license to access services without the source code of the license.

  •     Customers have no right to use or commercially exploit the IP and no equipment is placed at the disposal of the customers.

  •     Customer has a limited, non-exclusive, revocable, non-transferable right to use AWS trademarks. Such use is only for identification of the customer who is using AWS Services for their computing needs.

  •     Incidental/ancillary support provided to the customers includes answering queries/troubleshooting for use of AWS Services subscribed by them. Support does not include code development, debugging, performing administrative task.

•    In reaching its conclusion, Tribunal followed the decision in undernoted cases where it was held that payment was not in nature of royalty.

Vis-à-vis taxation as fees for includes services

•    The services provided were in the form of general support, troubleshooting, etc. They did not result in any transfer of technology or knowledge which enabled the customers to develop and provide cloud computing services on their own in future.

•    AWS services provided by the assessee were standardised services that did not provide any technical services to its customers.

Article 5 of India-Singapore DTAA; Section 9(1) of the IT Act – (i) Since the Indian parent company of Singapore subsidiary (Sing Sub) carried on all material activities, and since the Singapore subsidiary was merely shipping goods to Indian customers, fixed place PE of Sing Sub was constituted as what is relevant to be seen is the scope of activities carried out; (ii) on facts, dependent agent PE was constituted; (iii) the AO was directed to compute profit and attribute the same to PE as per directions given and various decisions on the issue.

Redington Distribution Pte. Ltd. vs. The DCIT
TS-908-ITAT-2022-Chny
ITA No: 14/Chny/2020
A.Y..: 2011-12
Date of order: 16th November, 2022

Article 5 of India-Singapore DTAA; Section 9(1) of the IT Act – (i) Since the Indian parent company of Singapore subsidiary (Sing Sub) carried on all material activities, and since the Singapore subsidiary was merely shipping goods to Indian customers, fixed place PE of Sing Sub was constituted as what is relevant to be seen is the scope of activities carried out; (ii) on facts, dependent agent PE was constituted; (iii) the AO was directed to compute profit and attribute the same to PE as per directions given and various decisions on the issue.

FACTS

Sing Sub, a Singapore entity is a tax resident of Singapore. It is a subsidiary of I Co, a listed Indian company and a leading supply chain solutions provider worldwide. Sing Sub was also engaged in the same business.

In the course of survey conducted at the premises of I Co, the tax authority found certain evidences, such as, emails, correspondence between I Co and Sing Sub, documents, etc. It also recorded statements of certain employees of I Co who were providing certain services to Sing Sub. In the process, it identified employees involved in sales function, who comprised a team called ‘Dollar Business’. It was found that ‘Dollar Business’ pertained to the USD business of Indian customers. Factually, the ‘Dollar Business’ was the same business with the the only difference being that based on request of customers (usually, those having Units in SEZ, etc.). its billing was done in USD instead of INR.

Analysis of the statements and documentary evidences showed that entire ‘Dollar Business’ beginning with the identification of customers, submitting quotes for various equipment, fixing price, granting of credit and ending with collection of receivables was performed by the ‘Dollar Team’. Thus, except for shipping of the equipment from Singapore, all other functions were undertaken by the ‘Dollar Team’ in India. Further, ‘Dollar Team’ directly reported to Singapore office. It was also noted that in Singapore, Sing Sub had employed very few employees because the only operation carried out in Singapore was shipping of goods.

Accordingly, with regards to Explanation 2 to Section 9(1) (i) of the Act, and Article 5 of India-Singapore DTAA, the AO concluded that Sing Sub had a PE in India. Further, in addition to all the aforementioned functions, I Co also appointed staff for activity of Sing Sub. Therefore, the AO further concluded that Sing Sub also had a dependent agent PE in India.

The DRP held that since entire sales function was habitually performed in India through ‘Dollar Team’, all the conditions of PE were satisfied and further, the ‘Dollar Team’ also constituted dependent agent PE of Sing Sub in India.

Before the Tribunal, Sing Sub contended as follows.

  • Sing Sub had taken support of the‘Dollar Team’ for certain back-office operations and ‘Dollar Team’ mainly acted as a communication channel between Sing Sub and the customer/vendor and channel partners.

  • The AO had mainly relied upon the statement of one junior employee who was not even employed with I Co during the relevant assessment year. Further, the AO not only ignored the statements of other employees, employed during the relevant assessment year, but also ignored statements given by clients of Sing Sub.

  • It was evident from these statements that clients had directly negotiated with original equipment manufacturers (“OEM”). Even though ‘Dollar Team’ provided quotations to Indian customers, they were subject to approval of OEMs. ‘Dollar Team’ did not have any role, either in negotiating the price or in concluding the contract.

  • To constitute a fixed place PE under Article 5 of India-Singapore DTAA, the premises where the non-resident was carrying out its operations should be at its disposal.

However, the AO had not shown that any employee of Sing Sub had travelled to India and that premises of I Co were occupied by them, or that premises were habitually available at the disposal of Sing Sub1.

To constitute a dependent agent PE: the agent should be legally and economically dependent on the foreign principal; the agent should have authority to conclude contracts in India; and it should have habitually exercised such authority. However, I Co is a listed Indian company, which is much larger than Sing Sub. Hence, it cannot be said to be dependent on I Co2.

For computing the profit attributable to Indian operations, the AO also included sales of non-Indian operations. This was against the principles of taxation. Further, the AO had determined attribution percentage in an arbitrary manner whereby only 10.35 per cent was attributed to Sing Sub whereas 89.65 per cent was attributed to the PE. If at all it is held that Sing Sub had a PE in India, only reasonable profit should be attributed to PE3.

1. In support of its contention, F Co relied on the decisions in E-funds IT Solution Inc. [2017] 399 ITR 34 (SC), UOI vs. UAE Exchange Centre Ltd. [2020] 425 ITR 30 (SC) and in Airlines Rotables Ltd. vs. JDIT [2011] 44 SOT 368 (Mum ITAT).

2. In support of its contention, F Co relied on the decision in Varian India (P) Ltd. vs. ADIT [2013] 142 ITD 692 (Mum ITAT).

3. In support of its contention, F Co relied on the decisions in Annamalais Timber Trust & Co. vs. CIT [1961] 41 ITR 781 (Mad.) and in Motorola Inc. [2005] 95 ITD 269 (SB).
Before the Tribunal, the department’s representative reiterated the contentions of the AO in his order. He further mentioned that the appellant’s representative had merely questioned and challenged the evidences collected by the tax authority in the course of survey, but had not provided any material evidence to establish that Sing Sub had carried out all business activities only in Singapore.

HELD

(i) Fixed Place PE

  • Based on the analysis of the statements and documentary evidences collected during the survey, the AO had discussed the modus operandi of business of Sing Sub and I Co. On the basis of findings of survey, Sing Sub and I Co had the same customers. I Co routed business through Sing Sub when those customers required import duty benefit. ‘Dollar Team’ exclusively worked for Sing Sub right from identifying the customers, negotiating the price, following up for outstanding receivables, etc. The sales manager of ‘Dollar Team’ had categorically admitted that he had negotiated with Indian customers, had also fixed terms and conditions of sales and further, that except for preparation of shipping documents for shipment of goods by Sing Sub, all other activities were carried out by I Co.

  • In terms of Article 5(1) of India-Singapore DTAA, ‘PE’ means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

  • It was abundantly clear from the nature of work carried out by ‘Dollar Team’ that it was the backbone of Sing Sub’s business. The fact that customers of I Co and Sing Sub were same supported this proposition.

  • There is no dispute that in terms of decision in E-funds IT Solution Inc. [2017] 399 ITR 34 (SC), it was essential that premises of I Co should be at the disposal of Sing Sub and business of Sing Sub should be carried on through that place. In this case, since ‘Dollar Team’ carried out its functions from premises of I Co, there was no dispute that premises of I Co were at the disposal of Sing Sub.

  • In UOI v. UAE Exchange Centre Ltd. [2020] 425 ITR 30 (SC), it was held that if the services rendered by the subsidiary or holding company are in the nature of preparatory or auxiliary, then no PE was constituted. However, in this case, services rendered by the ‘Dollar Team’ of I Co were neither preparatory nor auxiliary, but main functions of a business entity.

  • In Airlines Rotables Ltd. vs. JDIT [2011] 44 SOT 368 (Mum ITAT), it was held that there should not only be a physical location through which the business of foreign enterprise should be carried out, but it should also have some sort of a right to use such place for its business. In this case, ‘Dollar Team’ of I Co continuously occupied premises of I Co and also carried out the business of Sing Sub from there.

  • The facts brought out by the AO from the evidences collected during survey clearly indicated fixed place PE was constituted in India.

(ii) Dependent Agent PE

  • In terms of Article 5(8) of India-Singapore DTAA, a ‘dependent agent’ PE is constituted when a person, other than an agent of an independent status, habitually exercises authority to conclude contracts on behalf of the enterprise, and also habitually secures orders wholly or almost wholly for the enterprise.

  • As regards a dependent agent PE, the Revenue should not only prove that ‘Dollar Team’ acted as agent and it habitually exercised authority to conclude contracts but also that the agent was legally and economically dependent. As discussed earlier, except for thepreparation of shipping documents for shipment of goods by Sing Sub, all other activities were carried out by ‘Dollar Team’. This was supported by the facts brought on record and evidences collected in the course of assessment proceedings. Therefore, the activities undertaken by ‘Dollar Team’ of I Co constituted dependent agent PE of Sing Sub. The assessee has relied upon decision in Varian India (P) Ltd. vs. ADIT [2013] 142 ITD 692 (Mum ITAT) and argued that independent agent cannot constitute a PE. Since ‘Dollar Team’ of I Co constituted dependent agent PE, the said decision has no application in case of Sing Sub.

(iii) Attribution of Profits

  • For the purpose of computing the profit of Sing Sub for attribution to PE, the AO considered the unaudited profit before tax. When audited figures are available, unaudited figures should not be considered. The AO should distribute profits showm in the books of Sing Sub between Sing Sub and PE in India. Further, the AO had considered profit margin of I Co for attribution of profit to PE. However, the AO should have adopted the profit margin of Sing Sub and attributed the same between PE in India and Sing Sub.

  • Sing Sub has also disputed inclusion of non-Indian sales by the AO for computing profits and contended that only sales in INR to end-customers should be considered. Sing Sub has also disputed inclusion of royalty in turnover. The assessee has relied upon decisions in Annamalais Timber Trust & Co. vs. CIT [1961] 41 ITR 781 (Mad.) and in Motorola Inc. [2005] 95 ITD 269 (SB) and submitted that the AO may be directed to attribute a reasonable amount of profits to PE in India. The DRP has directed the AO to consider audited financial statements.

  • However, as the facts are not clear, and also because Sing Sub was unable to provide correct computation of sales made through Indian PE to compute profit attributable to PE in India, the AO was directed to reconsider the issue as per directions given by DRP, the Tribunal and also decisions in Annamalais Timber Trust & Co. vs. CIT [1961] 41 ITR 781 (Mad.) and in Motorola Inc. [2005] 95 ITD 269 (SB).