BCAJ | Bombay Chartered Accountant Journal

4 Article 12 & Article 14 of India-Germany DTAA – Article 14 applies to payments made for obtaining scientific services from a non-resident individual; Article 14 being more specific provision applicable to professional services rendered by individuals shall prevail over Article 12

TS-492-ITAT-2018

Poddar Pigments Limited vs. ACIT

A.Y: 2008-09; Date of Order: 23^rd
August, 2018

Article 12 & Article 14 of
India-Germany DTAA – Article 14 applies to payments made for obtaining
scientific services from a non-resident individual; Article 14 being more
specific provision applicable to professional services rendered by individuals
shall prevail over Article 12

Facts

The Taxpayer, an
Indian company, was engaged in the business of manufacturing master batches and
engineering plastic compounds. During the year, the Taxpayer entered into a
technical services agreement with a German scientist (Mr. X). As per the
agreement, Mr X was required to invent different processes of polymers by
applying different chemistry to raw materials used by the Taxpayer.

The Taxpayer
contended that payments made to Mr X was in the nature of independent
scientific services and hence, it qualified as independent personnel services
(IPS) under Article 14 of India-Germany DTAA. Since Mr X did not have a fixed
base in India and his stay in India did not exceed 120 days, payments made to
Mr X were not taxable in India as per Article 14 of India –Germany DTAA.

The AO rejected the
Taxpayer’s contention and held that the payments were in the nature of ‘fees
for technical services’ under Article 12 of DTAA as well as ITA. Hence, they
were subject to withholding of tax. Since the Taxpayer made payments to Mr X
without withholding tax, AO disallowed such expense u/s. 40(a)(i) of the Act.

The CIT (A) upheld
AO’s contention. Aggrieved, the Taxpayer filed an appeal before the Tribunal.

Held

– As per Article 14 of
India- Germany DTAA, income derived by an individual resident of Germany from
the performance of professional services or other independent activities is
chargeable to tax only in Germany, if the individual German resident does not
have any fixed base regularly available to him in India for performing his activities
and further, if he has not stayed in India for a period or period exceeding 120
days in the relevant previous year. Also, professional services for the
purposes of Article 14 includes ‘independent scientific services’.

– ITAT noted the documentary
evidence submitted by the Taxpayer and held that the services rendered by Mr X
were in the nature of scientific services. Hence, they would qualify as
professional services under Article 14 of the DTAA.

– ITAT also noted that such
services would also qualify as technical services under the FTS Article of the
DTAA which would trigger source taxation in India. The issue, therefore was,
which of the two Articles governed taxability of Mr. X.

– In the facts of the case,
Article 14 is applicable and not Article 12 for the following reasons:

• Article 14 deals with income from
professional services of an “individual” taxpayer whereas Article 12 deals with
all the taxpayers (including individuals)

• Article 12 is broader in scope and general
in nature as compared to Article 14 of DTAA. Accordingly, Article 14 would
apply on the facts of the case.

• It is a general rule of interpretation that
specific or special provisions prevail over and take precedence over the
general provisions.

– Thus,
in absence of a fixed base of the Taxpayer in India, and since the Taxpayer was
not present in India for a period exceeding 120 days, income from such services
was not taxable in India by virtue of Article 14 of the DTAA.

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3 Article 11(3) of India-Mauritius DTAA – clarification issued by CBDT; Circular No. 789; Tax Residency Certificate can be the basis for determining beneficial ownership of interest income

TS-460-ITAT-2018

HSBC Bank (Mauritius) Limited vs. DCIT

A.Y: 2011-12; Date of Order: 2^nd
July, 2018

Article 11(3) of India-Mauritius DTAA –
clarification issued by CBDT; Circular No. 789; Tax Residency Certificate can
be the basis for determining beneficial ownership of interest income

Facts

The Taxpayer was a
limited liability company incorporated, registered and tax resident, in
Mauritius and was engaged in banking business. During the year under
consideration, the Taxpayer earned interest from investments in debt securities
in accordance with the SEBI Regulations. The Taxpayer claimed that its income
was exempt in India in terms of Article 11(3)(c) of the India-Mauritius DTAA.

The AO, in
conformity with the directions of DRP, denied the exemption on the ground that
the Taxpayer did not fulfil the following three conditions prescribed in
Article 11(3)(c) of the India-Mauritius DTAA.

(i) the interest was not “derived” by the
Taxpayer;

(ii) interest was not “beneficially owned” by the
Taxpayer; and

(iii) the Taxpayer did not carry on bonafide
banking business.

Aggrieved, the
Taxpayer appealed before the Tribunal. The Tribunal held that the Taxpayer
derived interest income and that it was carrying on bonafide banking
business. As regards the third condition pertaining to ‘beneficial ownership’,
the Tribunal remanded the matter to AO.

The Taxpayer
agitated the issue through miscellaneous application before the Tribunal.
Thereafter, the Tribunal recalled its order insofar as it pertained to
‘beneficial ownership’. To support its proposition of being beneficial owner of
interest, the Taxpayer primarily relied on the Tax Residency Certificate (TRC)
issued by the Mauritian Revenue authorities.

Held

– Clarification issued by
CBDT on circular no. 789 dated 13.04.2000 states that wherever a Certificate of
Residency is issued by the Mauritian authority, such Certificate will
constitute sufficient evidence for accepting the status of residence as well as
the beneficial ownership for applying the provisions of the India-Mauritius
DTAA.

– While the aforesaid CBDT
Circular was issued specifically in the context of income by way of dividend
and capital gain on sale of shares, same shall also be applicable in the
context of interest income under Article 11(3)(c) of the India-Mauritius Tax
Treaty. Reliance was placed on Bombay HC in case of Universal International
Music B.V (TS-56-HC-2013) wherein HC had relied upon the aforesaid Circular
in the context of royalty income.

– Basis the Circular, TRC
obtained by the Taxpayer from Mauritian tax authority was sufficient evidence
that the ‘beneficial ownership’ of the impugned interest income was of the
Taxpayer.

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Article 13 of India-UK DTAA; section 9 of the Act – As subscription income from provision of deal matching system for foreign exchange dealing was providing ‘information concerning industrial, commercial or scientific work’, income was royalty

6. [2018] 96 taxmann.com
354 (Mumbai – Trib.)

DCIT vs. Reuters Transaction Services Ltd.

ITA Nos.: 1393 & 2219 (Mum.) of 2016

Date of Order: 3^rd August, 2018

A.Ys.: 2012-13

Article 13 of India-UK DTAA; section 9 of the Act – As
subscription income from provision of deal matching system for foreign exchange
dealing was providing ‘information concerning industrial, commercial or
scientific work’, income was royalty

Facts

The Taxpayer was a company
incorporated in, and tax resident of the UK. It was providing access to its
electronic deal matching system for foreign exchange dealings. Its server was
located in Switzerland. The Taxpayer had entered into an agreement with its
group company in India for marketing of its system.

In the course of assessment
proceedings, the AO observed that: the income of the Taxpayer was not covered
under Article 13(6) of India-UK DTAA; the Taxpayer had a PE in India; and
therefore, the income of the Taxpayer was taxable as royalty. However, since
the Taxpayer had disputed the existence of the PE, Article 13(6) was held to be
inapplicable.

Following the Tribunal decision in
case of the Taxpayer in earlier years, the DRP upheld the draft order of the AO
to the effect that the payment received by the Taxpayer from its subscribers
was for use of its equipment and process and hence, it qualified as royalty, both under the Act and India-UK
DTAA. The DRP further held that the server of the Taxpayer in Switzerland
extended to the equipment provided in India by the Taxpayer to the subscribers
constituted an equipment PE in India of the Taxpayer.

Held

u In the earlier years, the
Tribunal had held that income received by the Taxpayer from subscribers in
India was royalty.

u The Taxpayer had failed to
bring on record any evidence to counter the finding of facts by the Tribunal.

u Hence, the subscription
income received by the Taxpayer was in the nature of royalty. Since the
subscription income was in the nature of royalty, there was no need to examine
whether the Taxpayer had PE in India. Article 13(6) can be invoked only if
existence of a PE is not in dispute. Since the Taxpayer has contended before
the lower authorities that it does not have a PE in India, Article 13(6) cannot
be applied.

shailesh.kwebmaker

Article 13 of DTAAs; Section 9(1)(vii) – Payment made to non-resident LLPs towards professional services qualified as IPS.

21. TS-10-ITAT-2019 (Del) ACIT vs. Grant Thornton Date of Order: 10^th January, 2019 A.Y.: 2010-11

Article 13 of DTAAs; Section 9(1)(vii) –
Payment made to non-resident LLPs towards professional services qualified as
IPS.

FACTS

Taxpayer, an Indian company was engaged in
providing international accountancy and advisory services to various clients in
India and abroad. During the year under consideration, Taxpayer availed
services² of various foreign limited liability partnerships (NR
LLPs) to render services to its clients abroad and paid fees to such NR LLPs
without withholding tax. The taxpayer contended that services obtained from NR
LLPs were in the nature of ‘Independent Personal Services’ (“IPS”) rendered
outside India and in absence of a fixed base of the NR LLPs in India, tax was
not required to be withheld on such payments under the relevant DTAA.

The AO, however contended that services
rendered by NR LLPs were technical services which accrued or arose in India
u/s. 9(1)(vii). Further, the IPS article under the treaty applied only to an
individual (both in his own capacity or as a member of a partnership) and not
to an LLP. Thus, in absence of any withholding, AO disallowed the payments made
to NR LLPs.

Aggrieved, Taxpayer appealed before the
CIT(A) who reversed AO’s order on the ground that income derived by an
individual or a partnership firm by rendering professional services is exempt
from tax in India by virtue of IPS article. Further, as the services rendered
by the NR LLPs did not make available any technical knowledge or skill, it did
not qualify as FIS under the relevant DTAA.

_______________________________

2. Professional services pertaining to the
field of lawyering (giving reviews and opinions) and accounting e.g. SAS70
engagement, review and filing of form number1120, due diligence, review of US
GAAP financials etc

Consequently, AO appealed before the
Tribunal.

HELD

There is no dispute that the
services rendered by NR LLPs were professional services. The IPS article in
some of the DTAAs applied in respect of payments made to “residents”, while in
some other DTAAs, it applied to individual (both in his own capacity or as a member
of a partnership). Thus, there was no infirmity in the order of CIT(A) who had
upheld the applicability of IPS article on payments made to NR LLPs.

Further, in absence of
satisfaction of make available condition, the payment made to NR LLPs did not
qualify as FTS under respective DTAAs.

Thus, in absence of
chargeable income, there was no obligation on Taxpayer to withhold taxes on
payments made to NR LLPs.

shailesh.kwebmaker

Article 12(1) of India-Israel DTAA and India -Russia DTAA – since charge of tax on royalty arises only at the time of payment, tax is not required to be withheld when provisions for payment of royalty is made.

20. TS-676-ITAT-2018(Ahd) Sophos Technologies Pvt. Ltd. vs. DCIT Date of Order: 16^th November,
2018 A.Y: 2012-13

Article 12(1) of India-Israel DTAA and
India -Russia DTAA – since charge of tax on royalty arises only at the time of
payment, tax is not required to be withheld when provisions for payment of
royalty is made.

FACTS

Taxpayer was a private Indian Company
engaged in the business of development of network security software product. As
part of its business, Taxpayer procured anti-virus software and anti-spam
software from suppliers in Russia and Israel respectively and bundled them with
its own software product. This bundled software was sold by the Taxpayer to the
end customers.

In terms of the
understanding with the suppliers, Taxpayer was liable to pay royalty in respect
of such anti-virus and anti-spam software only on activation of the license key
by the end customer (i.e. the ultimate user of the bundled software).
Withholding obligation on such royalty payment was also discharged at the time
of actual payment to the suppliers.
Taxpayer recognised the income at the time of sale of the bundled
software and correspondingly made a provision for payment of the royalty in its
books of accounts. Withholding obligation on such royalty payment was
discharged at the time of actual payment to the suppliers and not at the time
of making provision in the books.

Taxpayer contended that the liability to
withhold taxes arises only on the activation of the key by the actual customer.

The AO, however, was of the view that
Taxpayer was required to withhold taxes at the time of making the provision for
royalty and as Taxpayer had failed to withhold taxes at that time, AO
disallowed the expenses claimed towards such provision. Aggrieved, the Taxpayer appealed before the
CIT (A) who upheld AO’s order.

Aggrieved, the Taxpayer appealed before the
Tribunal.

HELD

Article 12(1) of
India-Russia DTAA and India-Israel DTAA are identically worded and provide that
“royalty arising in a Contracting State and paid to a resident of the other
Contracting State may be taxed in that other State”. Thus, in terms of the
DTAA, royalty is taxable only at the point of time when the royalty is paid to
the resident of the other Contracting State.

The liability to deduct tax at source arises
only when the income embedded in the relevant payment is eligible to tax.

In the present case, royalty
in respect of the bundled product became payable when the product was activated
and not at the point of sale of bundled software. Thus, the taxes were also
required to be withheld only upon activation of license keys.

shailesh.kwebmaker

Article 5(2)(h) of India-UAE DTAA – Grouting activity undertaken in India by UAE Company for a period of 9 months does not result in construction PE under India-UAE DTAA

19.
TS-741-ITAT-2018 (Del) ULO Systems LLC vs. ADIT Date of Order: 29^th December,
2018 A.Y.: 2007-08

Article 5(2)(h) of India-UAE DTAA –
Grouting activity undertaken in India by UAE Company for a period of 9 months
does not result in construction PE under India-UAE DTAA

FACTS

Taxpayer, a UAE company, was engaged in
providing grouting and precast solutions to support and protect subsea
pipelines, cables and structures. As part of grouting activity, a neat mixture
of cement and water (grout) is mixed and pumped into water in certain shapes
and forms, which acts as a support and stabilises the subsea pipelines and
cables. It also helps in preventing the corrosion of the pipelines.

During the year
under consideration, Taxpayer undertook several projects in India for which it
was present in India for an aggregate period of 264 days. Further, presence for
any single project did not exceed the threshold specified in India-UAE DTAA.
Also, the projects were unconnected and were performed for unrelated
third-party customers in India.

Taxpayer believed that the grouting activity
carried out in India was in the nature of construction activity as contemplated
in Article 5(2)(h) of India-UAE DTAA, and as the presence in India did not
exceed 9 months, it did not create its Permanent Establishment (“PE”) in India.
Further, since the contracts were not inter-connected, time spent on such
projects could not be aggregated for calculating the 9-month threshold.

The AO, however, held that that the grouting
activity would create a fixed place PE under Article 5(1) of the DTAA. AO also
alleged that Taxpayer circumvented the 9-month threshold by manipulating the
number of days of presence in India.

Aggrieved, the Taxpayer approached the
Dispute Resolution Panel (DRP) which confirmed AO’s order.

Aggrieved, the Taxpayer appealed before the
Tribunal.

HELD

It is a settled legal
principle that a specific provision would override a general provision. Thus,
Article 5(1) could not be applied where activities are covered under the
specific construction PE article [Article 5(2)(h)] of the DTAA.

Article 5(2)(h) does not
differentiate between a simple/complex construction work. Thus, the fact that
grouting activity is not a simple masonry work and involves complex aspects is
not relevant for determining whether it is covered by construction PE article.

Evaluation of whether there
exists a PE needs to be made on a year to year basis.

While construction PE clause
of some treaties (like India-Australia and India-Thailand) are worded in a
manner to specifically aggregate the time spent on multiple projects, Article
5(2)(h) of India-UAE DTAA is worded differently and uses singular expressions ‘a
building, site or construction or assembly project’. Thus, time spent on
multiple projects in India cannot be aggregated for calculating the threshold
period under India-UAE DTAA.

Since the Taxpayer’s
presence in India in the relevant year for carrying on each of the grouting
project was less than 9 months, there was no construction PE of the Taxpayer
was constituted in India.

shailesh.kwebmaker

Article 2 & Article 12 of India-Japan DTAA; rate prescribed in DTAA is total withholding rate inclusive of surcharge and cess.

18.
TS-721-ITAT-2018 (Ahd) ACIT vs. Panasonic Energy India Co. Ltd. Date of Order: 3^rd December, 2018 A.Y.: 2008-09

Article 2 & Article 12 of India-Japan
DTAA; rate prescribed in DTAA is total withholding rate inclusive of surcharge
and cess.

FACTS

Taxpayer, a private limited company was
engaged in the business of manufacturing, trading, and export of dry Batteries
along with spare parts of dry batteries. During the year under consideration,
the Taxpayer paid brand usage fee and royalty fee to a Japanese company (FCo)
after withholding tax on such sum at the rate of 20%¹ on the gross
amount.

The Assessing Officer (AO), however, was of
the view that the taxes were required to be withheld at the rate of 22.66%
after considering surcharge and education Cess of 2.66% and thus disallowed the
proportionate expenditure on account of short deduction of taxes on such
payments to FCo.

______________________________________

1. India-Japan DTAA provided ceiling of 10%.
However, it is not clear from the decision as to why the Taxpayer withheld tax
@20%.

Taxpayer argued that the scope of Article 2
of the DTAA covered both surcharges and education cess. Even otherwise, as per
the provision of Article 12 of the DTAA, the payment was liable to tax at the
rate not exceeding 10% whereas Taxpayer had withheld tax @20% which was
adequate to cover the amount of surcharge and education cess. However, AO disregarded
the Taxpayer’s contentions and disallowed the proportionate expenses on account
of short withholding of tax.

Aggrieved, the Taxpayer filed an appeal
before the CIT(A) who reversed AO’s order on the ground that disallowance can
be made only if there was either no deduction or after deduction of tax, the
same was not paid on or before due date of filing of return. However, since
Taxpayer had withheld taxes appropriately at the rates prescribed in DTAA and
also paid the same before the due date of filing of return, no disallowance
could be made.

Aggrieved, the AO appealed before the
Tribunal.

HELD

Article 2 of
India-Japan DTAA provides that the term “taxes” referred to in the DTAA for
Indian purposes means the income tax including surcharge thereon. A plain
reading of the provisions of DTAA reveals that the amount of tax includes
surcharge.

Further as
per Article 12, the tax that can be charged on royalty is restricted to 10% of
the gross amount of royalty. Having regard to the definition of “taxes” in
Article 2, the total tax including surcharge is restricted only to 10% under
Article 12. Therefore, Taxpayer was not liable to withhold tax on the payment
made to FCo after including the surcharge over and above the tax rate as
specified under Article 12 of India-Japan DTAA.

Further, as
held in the case of DIC Asia Pacific Pte. Ltd. (18 ITR 358), since
education cess is charged on the income tax, it partakes the character of the
surcharge. Therefore, Taxpayer was not liable to include education cess over
and above the taxes withheld by the Taxpayer.

shailesh.kwebmaker

26. [2018] 96 taxmann.com 17 (Delhi – Trib) Ciena India (P) Ltd vs. ITO ITA Nos: 959 & 984 (Delhi) of 2011 A.Ys.: 2007-08 and 2008-09 Date of Order: 29th June, 2018 Articles 5, 12 of India-Netherlands DTAA; Section 9 of the Act – in absence of PE of the non-resident in India, purchaser of shrink-wrapped off-the-shelf software was not liable to withhold tax from payment.

Facts

The Taxpayer was an Indian Company.
It was a wholly owned subsidiary of an American Company (“USCo”). It was set up
as a 100% EOU under STPI Scheme of Government of India. The Taxpayer was
providing software development support to USCo. During the relevant years, the
Taxpayer made payments to a Netherlands based company for supply of computer
hardware, software and related support services for installation and
maintenance. It did not withhold any tax while remitting the said payments. The
software supplied was shrink-wrapped software, which was sold off-the-shelf in
retail.

The AO held that payments made for
software were in the nature of royalty and payments made for services were in
the nature of FTS. Hence, the Taxpayer was liable to withhold tax on both kinds
of payments.

Held

Sale of hardware together
with embedded software was not taxable in absence of PE of the non-resident in
India.

Installation and other
services did not make available any technical knowledge or technical knowhow.
This was a pre-requisite for bringing such services within the ambit of Article
12(5)(b) of India-USA DTAA.

Hence, payments in
respect of them could not be considered as FTS. Therefore, the order of the AO
was to be set aside.

shailesh.kwebmaker

Article 5, 13 of India-UK DTAA; section 9 of the Act – if the entire profits of a UK partnership are taxed in UK, the partnership would qualify for benefits under India-UK DTAA; as the expression “any twelve-month period” in Article 5(2)(k)(i) is not defined in India-UK DTAA, it should be read as ‘previous year’ as defined in section 3 of the Act

5. [2018] 97 taxmann.com
464 (Mumbai – Trib.)

Linklaters LLP vs. DCIT

ITA No.: 1540 (Mum) of 2016

Date of Order: 29^th August, 2018

A.Y.: 2012-13

Article 5, 13 of India-UK DTAA; section 9 of the Act – if the
entire profits of a UK partnership are taxed in UK, the partnership would
qualify for benefits under India-UK DTAA; as the expression “any twelve-month
period” in Article 5(2)(k)(i) is not defined in India-UK DTAA, it should be
read as ‘previous year’ as defined in section 3 of the Act

Facts

The Taxpayer was a UK LLP. The
Taxpayer provided legal consultancy globally to its clients, including clients
from India.

The Taxpayer contended that such
income was not taxable in India in absence of a Permanent establishment (PE) in
India.

The AO sought
further information from the Taxpayer and found that the Taxpayer had provided
legal services to several clients and the work relating to such services was
performed partly in India and partly outside India. Thus, AO held that Taxpayer
had a PE in India because its employees and other executives had stayed in
India for more than ninety days. The AO also held that the Taxpayer was not
liable to tax in UK and hence, it was not entitled to the benefits under
India-UK DTAA. Thus, the AO held that the income received by LLP was taxable as
FTS in terms of section 9(1)(vii) of the Act. Without prejudice, the AO also
held that such income also qualified as FTS under the DTAA.

The DRP rejected the objections of
the Taxpayer and directed the AO to finalise the assessment.

Held

Following its ruling in
the Taxpayer’s own case for the earlier years, the Tribunal held as follows.

• If
the entire profits of the partnership are taxed in UK, irrespective of whether
in the hands of the firm or in the hands of the partners, the LLP would be
entitled to benefits under India-UK DTAA.

• Income
of the Taxpayer from legal advisory services was not FTS as contemplated under
Article 13 of India-UK DTAA. Further, having regard to section 90(2), such
income cannot be brought to tax as FTS in terms of section 9(1)(vii) of the
Act.

Interpretation of the
expression “any twelve-month period” in Article 5(2)(k)(i)

• Article
5(2)(k)(i) of India-UK DTAA uses the expression “any twelve-month period”¹. This expression has not been defined in
India-UK DTAA.

• Under
the Act, a twelve-month period would mean ‘previous year’ or financial year in
terms of section 3 of the Act. Harmonious reading of Article 5(2)(k)(i) with
the Act would lead to the conclusion that “any twelve-month period”
would mean previous year or financial year in terms of section 3 of the Act.

• As
contended by the Taxpayer, during the relevant previous year or financial year,
the personnel of the Taxpayer had rendered services in India for a period
aggregating to seventy-seven days.

• This
factual aspect was not verified by AO as Taxpayer had not raised this issue
before the lower authorities. Hence, the Tribunal restored the issue to the AO
directing him to verify the facts.

__________________________________________

1 In
terms of Article 5(2)(k)(i), a PE is constituted if: the enterprise furnishes
services (including managerial services) other than services taxable as
Royalties and FTS through its personnel; and if such activities continue for a
period or periods aggregating to more than 90 days within “any twelve-month
period’.

shailesh.kwebmaker

25. [2018] 95 taxmann.com 280 (Hyderabad – Trib) Customer Lab Solutions (P) Ltd vs. ITO ITA No: 438 (Hyd.) of 2017 A.Y.: 2006-07 Date of Order: 4th July, 2018 Article 12 of India-USA DTAA; Section 9 of the Act – as there was no transfer of technical know-how or use of technical knowledge, affiliation fee paid by an Indian Company to an American Company was not royalty, either under the Act or under India-USA DTAA.

Facts

The Taxpayer was an Indian Company.
During the relevant year, the Taxpayer entered into an agreement with an
American Company (“USCo”) in connection with its consultancy business. The
Taxpayer paid fee under the agreement and claimed deduction of the same as
license fee. According to the Taxpayer, the payment was affiliation fee and had
no connection to use of any right for use of any material or service supplied
by US Co. Since no income accrued to USCo in India, no tax was required to be
withheld in India.

The AO held that the fee was
royalty u/s. 9(1)(vi)(b) of the Act and disallowed the payment u/s. 40(a)(i)
since the Taxpayer had not withheld tax.

The CIT(A) held that the payment
was royalty under the Act as well as India-USA DTAA.

Held

The agreement provided
for two kinds of fee. One was an annual affiliation fee. The affiliation fee
did not provide for any transfer of technology. The other was “fees on
consulting and reports”. It provided for payment to be made based on
performance and achievement of targets.

The claim of the Taxpayer
was only in respect of the affiliation fee and not consulting fee. In
consideration of the payment towards affiliation fee, the taxpayer received
only a periodical magazine having various articles. This could not be
considered right to use copyright.

Accordingly, as there was
no transfer of technical know-how or use of technical knowledge, the
affiliation fee could not be considered as royalty, either under the Act or
under India-USA DTAA. This view is also supported by the decision in Hughes
Escort Communications Ltd vs. DCIT [2012] 51 SOT 356 (Delhi).

Since USCo did not have
any PE in India, Tax was not required to be withheld in India.

shailesh.kwebmaker

18 Section 9(1)(v) of the Act – a non-resident, earned interest income on FCCBs issued by an Indian company abroad, entire proceeds of FCCBs had been utilised by Indian company in said country for repayment of an acquisition facility, interest income in question was not liable to tax in India as per exception carved out in section 9(1)(v)(b).

[2018] 94 taxmann.com 118 (Mumbai – Trib.)

Clearwater Capital Partners (Cyprus) Ltd.
vs. DCIT

A.Y.: 2011-12

IT Appeal Nos. : 843 and 1025 (Mum.) of 2016

Date of Order: 2^nd May, 2018

Facts

The Taxpayer was a
tax resident of Cyprus. It had invested in FCCB issued by an Indian (“ICo”)
company engaged in the business of wind power generation, carrying on business
both in India and outside India. ICO had utilised the entire proceeds of FCCB
for repayment of funds borrowed for financing acquisition of a foreign company
(“FCo”). During the relevant year, the Taxpayer had received interest and
incentive fee from ICo.

The Taxpayer
claimed that since FCCB proceeds were raised and utilised outside India, in
terms of exception carved out in section 9(1)(v)(b)⁴, interest on
FCCB did not accrue or arise in India.

______________________________________________________________________________

4
Section 9(1)(v), inter alia, provides that interest payable by a resident to a
non-resident in respect of debt incurred or moneys borrowed and used by
resident for a business carried on outside India by him or for earning any
income from any source outside India by him, is not deemed to accrue or arise
in India.

The AO rejected the
claim of the Taxpayer.

The DRP, directed
the AO to exclude the interest income received by the Taxpayer from the FCCB
after verifications.

Held

– The entire FCCB proceeds
were utilized by ICo for repayment of funds borrowed for financing acquisition of a FCo.

– If interest is payable by a
resident to a non-resident in respect of any debt incurred or moneys borrowed
and used for the purpose of business or a profession carried on by such person
outside India or for the purpose of making or earning any income from any source
outside India, such interest shall not be deemed to have accrued or arisen in
India.

– Lower authorities had not
rebutted the contention of the Taxpayer that the money borrowed by ICo was used
for business carried on outside India or earning income from source outside
India.

– Accordingly, the view taken by DRP was
correct.

– DRP had
observed that FCCB were issued outside India and the moneys borrowed were
utilized by ICo outside India. Therefore, in view of the exception carved in
section 9(1)(v)(b) of the Act, the interest received on such FCCB by the
Taxpayer from ICo was not chargeable to tax in India.

shailesh.kwebmaker

17 Article 5 of India-Finland DTAA; S. 9(1)(i) of the Act – [Majority view] in absence of PE, income from off-shore supply of equipment, which was installed by WOS of the non-resident under independent contracts from customers for separate remuneration was not taxable in India; negotiation, signing, network planning being preparatory or auxiliary activities, even if carried on from a fixed place did not constitute PE; since none of the parties had acknowledged any interest on delayed payment nor was any such interest paid by the customers, notional intertest could not be charged; – [Minority view] negotiation, signing, network planning were core marketing and core technical support functions vital to business could at least be equated with marketing services rendered by Indian PE for which profit was attributable to PE.

[2018] 94 taxmann.com 111 (Delhi – Trib.)
(SB)

Nokia Networks OY vs. JCIT

A.Ys.: 1997-98 & 1998-99

IT Appeal Nos.: 1963 & 1964 (Delhi) of
2001

Date of Order: 6^th June, 2018

Facts

The Taxpayer was a company incorporated in,
and tax resident of, Finland. It was engaged in manufacturing and trading of
telecommunication systems, equipment, hardware and software. In 1994, it
established a LO in India, and in 1995, it established a wholly owned
subsidiary in India (“ICo”). The Taxpayer had entered into contracts for
off-shore supply of equipment. After incorporation of ICo, installation of the
equipment was undertaken by ICo under independent contracts with Indian Telecom
Operators. The Taxpayer did not file return of its income in respect of
off-shore supply contending that there was neither any business connection nor
was there a PE in India and hence, it was not liable to tax in India.

The AO completed the assessment holding that
both LO and ICo constituted PE of the Taxpayer. The AO held that 70% of the
revenue from supply of hardware was attributable to PE in India and 30% of the
revenue was attributable to supply of software. On the ground that the software
was licensed to telecom operators, the AO treated the revenue attributable to
supply of software as ‘royalty’ (on gross basis) both, under Article 13 of
India-Finland DTAA and u/s. 9(1)(vi) of the Act. The AO further added notional
interest on the ground that the Taxpayer had provided credit to customers but
had not charged interest.

Through successive stages, the matter
reached Delhi High Court, which remanded the matter to Tribunal for
adjudicating on following specific issues:

1 Whether having
regard to India-Finland DTAA, the Tribunal’s reasoning in holding that ICo was
a PE of the Taxpayer was right in law?

2 Whether the Tribunal was right in law in
holding that a perception of virtual projection of the foreign enterprise in
India resulted in a PE?

3 Without prejudice, if the answers to Q.1
& Q.2 were in affirmative, whether any profit was attributable to signing,
network planning and negotiation of offshore supply contracts in India and if
yes, the extent and basis thereof?

4 Whether in law the notional interest on
delayed consideration for supply of equipment and licensing of software was
taxable in the hands of the Taxpayer as interest from vendor financing?

Held [majority view]

1 Whether ICo was a PE under India-Finland
DTAA?

(i) Whether ICo was PE under Article 5(2)?

? A fixed place PE is
constituted if the business is carried on through
a fixed place of business. The term “through” assumes great significance since
even if the place does not belong to the non-resident but is at his disposal,
it would be his place of business. In Formula One World Championship Ltd vs.
CIT [2017] 394 ITR 80 (SC), the Supreme Court has observed that the
‘disposal test’ is paramount to ascertain existence of fixed place PE.

– The Tribunal
observed as follows.

(a) Neither AO nor CIT(A) had given any
categorical finding of fixed place PE except mentioning about co-location of
employees and availing of common administrative services.

(b) Presence of foreign expatriate employees
of ICo may support the case for a service PE but not fixed place PE. Indeed, in
absence of specific provisions in DTAA, PE would not be constituted.

(c) Post-incorporation of ICo, no evidence
of MD of ICo having signed contracts was adduced. Even assuming that he was
acting as representative of, or that he was receiving remuneration from, the
Taxpayer, it would not be relevant for examining fixed place PE.

(d) After incorporation of ICo the Taxpayer
had not carried out any other activity except off-shore supply of equipment.
ICo was an independent entity, which had entered into independent contracts and
income earned from such contracts was taxed in India.

(e) ICo was providing technical and
marketing support services to the Taxpayer for which it was remunerated at cost
plus 5% and in respect of which the AO had not taken any adverse action
possibly, because it was considered arm’s length remuneration.

(f) While administrative activities were
carried out by ICo, the AO had not alluded to any premise or a particular
location having been made available to the Taxpayer. Thus, ICo had not provided
any place ‘at the disposal’ of the Taxpayer.

(g) Provision of minor administrative
support services such as telephone, conveyance, etc. cannot form fixed
place PE.

(ii) Whether negotiation, signing,
network planning, etc. created PE?

– The scope of
remand of the High Court was to examine whether signing, networking, planning
and negotiation would constitute PE. Article 5(4) of India-Finland DTAA
specifically excludes preparatory and auxiliary activities from being treated
as PE. The aforementioned activities were in the nature of ‘preparatory or auxiliary’
activities.

– Even if it is
assumed that these activities created some kind of a fixed place, since they
were preparatory or auxiliary in character, that place could not be considered
a PE.

(iii) Whether ICo was dependent agent PE
(“DAPE”) under Article 5(5)?

– A DAPE would be constituted if a dependent agent habitually
exercises authority to conclude contracts on behalf of a non-resident.

– The contract for supply of
off-shore equipment was concluded by the Taxpayer outside India. Further, no
activity relating thereto was performed in India. There was nothing on record
to show that ICo had concluded contract on behalf of the Taxpayer.

– To constitute a DAPE, the
activities of the agent should be under instructions, or comprehensive control,
of the non-resident and the agent should not bear any entrepreneurial risk. ICo
neither had authority to conclude supply contract nor any binding contract on
behalf of the Taxpayer. ICo was an independent entity, which had entered into
independent contracts with customers on principal-to-principal basis. ICo was
bearing its own entrepreneurial risk.

– After becoming MD, the
erstwhile representative had not signed any contract for off-shore supply.
Monitoring by the Taxpayer of warranty and guarantee provided by ICo did not
yield any income to the Taxpayer but the income arose to ICo. Such income was
duly taxed in India.

– Accordingly, on facts, the
Taxpayer did not have DAPE under Article 5(5).

(iv) Whether ICo
was deemed PE under Article 5(8)?

– Article 5(8) of
India-Finland DTAA specifically provides that control over the subsidiary does
not result in creation of PE. of a non-resident in source state cannot give
rise to PE of the non-resident.

– OECD and UN Model
Conventions also clarify this. Further, in ADIT vs. E Fund IT Solutions
[2017] 399 ITR 34 (SC), Supreme Court has also held accordingly.

(v) Whether ICo had ‘business connection’ under
the Act?

– This issue is academic
since the Taxpayer did not have PE in India under India-Finland DTAA.

– In case of the Taxpayer,
Delhi High Court has concluded that LO did not constitute PE, and that there
was no material which could support that LO could be ‘business connection’, of
the Taxpayer. Further, while place of negotiation, place of signing of
agreement or formula acceptance thereof or overall responsibility of the
Taxpayer are relevant circumstances, since the transaction pertains to sale of
goods, the relevant and determinative factor was where the property in goods
passed. However, supply under the agreement was made outside India and property
in goods was also transferred outside India.

– Both marketing (for the
Taxpayer) and installation (for telecom operators) activities were undertaken
by ICo on principal-to-principal basis. For marketing activity, the Taxpayer
had remunerated on cost plus markup basis. Income from both were taxable in
India. Since there was no material change, conclusion of Delhi High Court in
case of LO would also apply in case of ICo.

2 Whether ICo was virtual projection in
India of the Taxpayer?

– Concept of ‘virtual
projection’ postulates projection of a non-resident on the soil of the source
country. It is not relevant on a standalone basis.

– If, on facts, a fixed place
is not established and disposal test is not satisfied, then virtual projection
by itself cannot create a PE.

3 Whether profit attributable for signing,
network planning, negotiation, etc.?

– Since nothing was taxable
on account of negotiation, signing, network planning as they were preparatory
or auxiliary activities which were excluded from being treated as PE, question
of attribution of income on account of these activities would not arise.

4
Whether notional interest taxable as interest from vendor finance?

– Income tax is levied on
real income, i.e., on the profits determined on commercial principles. The
revenue had not brought on record that the Taxpayer had charged interest on
delayed payment or that any customer had actually paid such amount. Further,
the Taxpayer had not debited account of any of the customers for such interest.
Also, none of the parties had either acknowledged the debt or any corresponding
liability of the other party to pay such interest. Thus, no actual or
constructive ‘payment’ of interest had taken place.

– Therefore, income which had
neither accrued nor was received by the Taxpayer could not be taxed on notional
basis.

Held [minority view]

– The Taxpayer carried out
entire marketing and administrative support work in India through ICo, at a
fixed place in India and without adequate arm’s length consideration. The
visiting employees of the Taxpayer also used the premises of ICo and carried
out important core business functions from the place of ICo. At no stage the
Taxpayer had submitted details about names and duration of stay of the expatriate
employees who availed such support from ICo.

– ICo was working wholly and
predominantly for the Taxpayer. The Taxpayer had given specific undertaking to
the end-customers of ICo that during the currency of their agreements with ICo,
the Taxpayer will not dilute its equity ownership below 51%.

– All the installation work
generated for ICo was entirely in the control, and at the mercy, of the
Taxpayer. Operational personnel in ICo also included number of expatriates on
deputation, secondment or assignment from the Taxpayer. The role of the
Taxpayer was omnipotent in all the operations of ICo, not only because of the
ownership of ICo but also because of the business module adopted by the
Taxpayer. Installation and other post-sale services rendered by ICo were
complementary to the core business operations of the Taxpayer. ICo, in
substance and in effect, was a proxy of the Taxpayer in performance of
commercial activities. Accordingly, the office of ICo constituted the fixed
place of business through which the business of the Taxpayer was wholly or
partly carried out.

– Since ICo was acting as
proxy and as an agent, the disposal test had to be vis-à-vis ICo and not
the Taxpayer directly. Thus, the Taxpayer carried on the business in India
through a fixed place of business, which was office of ICo. Consequently,
office of ICo was PE of the Taxpayer.

– Negotiation, signing,
network planning are core marketing functions and core support technical
functions which are vital to the business of sale of equipment. These services
can be equated with marketing services rendered by the Taxpayer through its PE
in India. Thus, all the crucial marketing and support functions were rendered
by the Indian PE (i.e., ICo).

– ICo rendered the important
and vital services on a non-arm’s length consideration and without adequate
compensation. Hence, following Rolls Royce plc vs. DCIT [2011] 339 ITR 147
(Del), 35% of the total profits should be attributable to PE.

shailesh.kwebmaker

16 Article 7 of India-UK DTAA; Section. 28(va) of the Act – non-compete fee received by the Applicant was ‘business income’ u/s. 28(va) of the Act; since the Applicant did not have PE in India, non-compete fee was not taxable in India in terms of Article 7 of India-UK DTAA.

[2018] 94 taxmann.com 193 (AAR – New Delhi)

HM Publishers Holdings Ltd., In re

A.A.R. No. 1238 of 2012

Date of Order: 6^th June, 2018

Facts

The Applicant was a company incorporated in
UK. The Applicant owned majority equity shares of an Indian Company (“ICo”).
Shares of ICo were listed on stock exchanges in India. The Applicant entered
into a Share Purchase Agreement (“SPA”) with an Indian company for sale of its
shareholding in ICo. Under the SPA, the purchaser agreed to pay the
consideration towards purchase price of shares (INR 37.38 crore), which was
computed on the basis of the price of the shares on the stock exchange and
non-compete fee (INR 9.30 crore). The non-compete fee was to be paid in
consideration of the Applicant not competing with the business of ICo, not
soliciting employees of ICo and generally not disclosing any information about
ICo.

Before the AAR, the Applicant contended
that: the non-compete fee received by it from the purchaser was in the nature
of business income u/s. 28(va) of the Act²; and since it did not
have any PE in India, such income was not taxable in terms of Article 7 of
India-UK DTAA³.

_________________________________________________________________

2
The Applicant relied on the decision in CIT vs. Chemtech Laboratories Ltd [Tax
case appeal No 1492 of 2007] (Madras)

3 The Applicant relied on the decision in Trans
Global PLC vs. DIT [2016] 158 ITD 230 (Kolkata – Trib)

Held

(i) Whether non-compete fee covered u/s
28(va)?

– The Applicant
was a shareholder of ICo but did not have any legally enforceable right to
carry on business which could be treated as ‘capital asset’ u/s. 2(14) of the
Act. Hence, question of transfer of right to carry on business did not arise.

– The fee
received by the Applicant was for a negative covenant (i.e., not to compete
with ICo) and not for transfer of a right to carry on business to the
purchaser.

– Since there was
no right, there was no extinguishment of right in a capital asset. Hence,
question of ‘transfer’ u/s. 2(47)(ii) of the Act did not arise. The term ‘extinguishment’ denotes
permanent destruction. The negative covenant was for a period of three years.
Thus, the right of the Applicant to carry on business was restricted only for
three years but was not permanently destroyed. Accordingly, such restriction
could not be said to be extinguishment. Consequently, there was no income
chargeable under the head ‘Capital Gains’.

– Section 28(va)
is attracted in case where consideration is for agreeing not to carry on any
activity in relation to any business. It is not required that the recipient
should already be carrying on business. Accordingly, it is irrelevant whether
the recipient was carrying on the same business or a different business than
that of the payer.

– Therefore,
non-compete fee received by the Applicant was taxable as business income u/s.
28(va) of the Act.

(ii) Whether non-compete fee taxable in
India?

– The Applicant
did not have any PE in India. Hence, in terms of Article 7 of India-UK DTAA,
the business income (i.e., non-compete fee) of the Applicant will not be
taxable in India.

shailesh.kwebmaker

15 Articles 5, 7, 12 of India-Luxembourg DTAA; Section 9(1)(i) of the Act – on facts, absolute control of non-resident over operations and management constituted hotel in India as a fixed place PE; hence, income earned by non-resident was attributable to PE and taxable as ‘business income’ u/s. 9(1)(i) of the Act.

[2018] 94 taxmann.com 23 (AAR – New Delhi)

FRS Hotel Group (Lux) S.a.r.l. In re

A.A.R. No. 1010 of 2010

Date of Order: 24^th May, 2018

Facts

The
Applicant was a company incorporated in Luxembourg. It was
a member-company of a hospitality group engaged in development, operation and
management of chain of hotels, resorts and branded residences. The Applicant
provided management and operation services for hotels, of which, majority were
owned by third parties. The hotels were managed under different brands which
were licensed by one of the member-companies of the group. The Applicant was engaged by an Indian Company (“ICo”) for development and
operation of hotel of ICo. For this purpose, the Applicant and ICo entered into
five agreements for provision of services. ICo compensated the Applicant for
these services, either by way of, lumpsum payment (for technical services), or
percentage of revenue/market fee/construction costs.

Before the AAR, the Applicant raised limited
issue in respect of compensation under Global Reservation Services (“GRS”)
agreement (one of the five agreements), as to whether the receipt was
chargeable to tax as FTS or Royalty?

The tax authority contended that the primary
issue was whether the hotel in India constituted a PE of Applicant and
consequently, whether all income streams, including GRS, was business income.
The Applicant contended that since the question raised was limited to FTS or
Royalty, AAR should not adjudicate on the existence of PE.

Held

(i) Power of AAR to deal with issues other
than questions raised

– The activity of
the Applicant is integrated and cannot be split into one or the other. The five
agreements are part of a wholesome arrangement. Hence, even though the issue
raised was on taxability of income under GRS agreement, it cannot be viewed on
standalone basis.

– Rule 12 of the
AAR (Procedure) Rules, 1996 provides that the AAR “shall at its discretion
considered all aspects of the questions set forth”. Hence, ruling only on
certain income stream and leaving other income streams open for regular
assessment will render the exercise of approaching AAR futile.

(ii) Constitution of fixed place PE

– In Formula
One World Championship Ltd vs. CIT [2017] 394 ITR 80 (SC), it is held that
fulfilment of following three conditions constitutes a fixed place PE:

(a) Existence of a fixed place.

(b) Such fixed place being at the disposal of
non-resident.

– In the case of the
Applicant:

(a) The hotel was a fixed place.

(b) Perusal of various clauses of all the
agreements shows that the hotel was at the disposal of the Applicant. After
completion of the hotel, its operation and management was not only the
responsibility of the Applicant but ICo had undertaken that it will not
interfere in exercise of exclusive authority of the Applicant over such
operation and management. Every operational right vested in the Applicant and
ICo was even barred from directly contacting any hotel staff. Core functions
such as sales, marketing, reservation, etc. were out sourced to the
Applicant.

(c) The business of the Applicant was operation
and management of the hotel and it had earned income through the different
agreements. The Applicant was carrying on all the activities from the hotel.
The relationship between the Applicant and ICo was that of
principal-to-principal and not principal-to-agent.

– Since all the
three conditions were fulfilled in case of the Applicant, hotel in India
constituted fixed place PE of
the Applicant.

(iii)
Whether GRS income was FTS or Royalty?

– Hotel in India
constituted fixed place PE of the Applicant. The income under the agreements
was attributable to the fixed place PE of the Applicant. Since such income will
be taxable as ‘business profits’, the question whether it can be characterized
as FTS or Royalty is academic.

– Even assuming
that it is characterized as FTS or royalty, having regard to Article 12(4) of
India-Luxembourg DTAA, it would be taxable as ‘business profits’ under Article
7.

– Consequently,
provisions of section 9(1)(i) of the Act will apply.

shailesh.kwebmaker

14 Article 5, 7 of India-Belgium DTAA – Since the Applicant was a not-for-profit organization undertaking activities only for the benefit of its members, on the doctrine of mutuality, membership fee and contribution received from members was not taxable in India; since the Applicant was not carrying on business, question of LO constituting a PE in India could not arise under India-Belgium DTAA.

[2018] 94 taxmann.com 27 (AAR – New Delhi)

International Zinc Association, In re

A.A.R. No. 1319 of 2012

Date of Order: 24^th May, 2018

Facts

The Applicant was a company incorporated in
Belgium, which was registered as an International Non-Profit Association. It
was a tax resident of Belgium. The Applicant helped to sustain long term global
demand for Zinc. The Applicant had obtained permission of RBI for establishing
a Liaison Office (“LO”) in India for promotion of uses of Zinc. The Applicant
received membership fee and contribution from members which were tax resident
in India.

Before the AAR, the Applicant raised the
following questions:

(i) Whether membership
fee and contribution received by the Applicant from its Indian members were
liable to tax in India under India-Belgium DTAA?

(ii) Whether LO
proposed to be established in India by the Applicant was liable to tax in India
under India-Belgium DTAA?

Held

– The Applicant
was hosting information of members on its website, publishing various material,
organising conferences, representing its members, etc. These activities
were not undertaken for deriving any profit for the Applicant and were undertaken
for the benefit of all members. They were performed in fulfilment of its
objects. Hence, they were not in the nature of ‘specific services’ as
contemplated in section 28(iii) of the Act.

– The LO was set
up on not-for-profit basis. The surplus that may be generated at the end of the
year cannot acquire the character of profit as contemplated under the Act
because the activities of the Applicant were not in the nature of business and
the surplus was to be utilised only for the objects of the Applicant. The
surplus was not to be distributed to the members. Accordingly, section 28(iii)
of the Act was not attracted. This view was also supported by the decision in CIT
vs. South Indian Films Chamber of Commerce [1981] 129 ITR 22 (Madras).

– The LO incurred
expenditure for organizing various events for which it did not charge any fee.
LO collected sponsorship fee only in case of large events and that too with
prior approval of RBI. Such fee was utilised for organizing the event without
the Applicant making any profit. The facts in CIT vs. Standing Conference of
Public Enterprises [2009] 319 ITR 179 (Delhi)¹ squarely applied in case of the Applicant.
Thus, the Applicant cannot be said to have violated the doctrine of mutuality.

________________________________________________________

1
The Supreme Court dismissed special Leave Petition of the revenue. Hence, the
decision of Delhi High Court stands affirmed.

– In ICAI vs.
DCIT [2013] 358 ITR 91 (Delhi) it was held that the purpose and the
dominant object for which an institution carries on its activities is material
to determine whether the activities constitute business or not. The object of
the Applicant is primarily to serve its members. Hence, merely because of
receipts from some non-members activities of the Applicant cannot be termed as
business. No clause of the Article of Association of Applicant indicated that
the Applicant intended, either to carry on any business or to provide any
services to non-members. Further, in case of dissolution of the Applicant, the
surplus was to be handed over to another non-profit-organization and was not to
be distributed to members. The test of mutuality is satisfied if members agree
and exercise their right of disposal of surplus in mutually agreed manner.

– Under Article 5
of India-Belgium DTAA, a PE is constituted if there is a fixed place of
business and the business of enterprise is wholly or partly carried on through
that fixed place. Since the Applicant was operating on the principle of
mutuality and was not set up for doing business or earning profit, the question
of the LO constituting a PE could not arise since there was no business.

– Accordingly,
membership fee and contribution received by the Applicant from its members were
not liable to tax in India, and the LO proposed to be established in India was
not liable to tax in India.

shailesh.kwebmaker

24. [2018] 95 taxmann.com 165 (Mumbai – Trib) Morgan Stanley Asia (Singapore) Pte Ltd vs. DDIT ITA Nos: 8595 (Mum) of 2010 and 4365 ( Mum) of 2012 A.Ys.: 2006-07 and 2007-08 Date of Order: 6th July, 2018 Article 13 of India-Singapore DTAA; Section 9, 195 of the Act – Amount received by a Singapore company from its AE in India towards reimbursement of salary of its deputed employee could not be considered as FTS since there was no income element.

Facts

The Taxpayer was a company
incorporated in, and tax resident of, Singapore. The Taxpayer had deputed one
of its directors/employees to India to set up and develop the business of its
associated entity (“AE”) in India (“ICo”) under a contract executed between
them. ICo was engaged in providing support services to group companies outside
India. The Taxpayer continued paying salary of its deputed employee, which was
reimbursed by ICo.

Before the AO, the Taxpayer
contended that the payment received by it was reimbursement without any income
element. However, the AO contended that the deputed employee was highly
qualified and having vast technical experience and expertise. The AO noted that
while salary is generally paid on a monthly basis, ICo had made single remittance
of consolidated amount. Further, there was no evidence to suggest that
provision of managerial and consultancy services to an AE was not the business
of the taxpayer. Therefore, the AO treated the reimbursement received by the
Taxpayer as FTS and charged further markup of 23.3% by determining ALP on the
basis of the order of the TPO.

The CIT(A) confirmed the order of
the AO.

Held

The contract between the
Taxpayer and ICo clearly provided that the Taxpayer will pay salary on behalf
of ICo and the same would be recharged by ICo. The tax authority had not
disputed that the payment was reimbursement of salary without any income
element.

Since the amount was
reimbursement of cost, it cannot be brought within definition of FTS in
explanation 2 to section 9(1)(vii) of the Act.

Hence, the reimbursed amount was to be regarded as salary in the
hands of the deputed employee. Relying on the decisions in United Hotels Ltd
vs. ITO [2005] 2 SOT 0267 (Delhi) and in ADIT vs. Mark and Spencer Reliance
India Pvt Ltd (2013) 38 taxmann.com 190 (Mum-Trib), the payment was
reimbursement of salary and not FTS under India-Singapore DTAA and the Act.
Accordingly, it could not be taxed in the hands of the Taxpayer.

shailesh.kwebmaker

23. [2018] 96 taxmann.com 80 (Delhi – Trib.) Cobra Instalaciones Y Servicios SA vs. DCIT ITA NO.: 2391 (Delhi) of 2018 A.Y.: 2014-15 Date of Order: 28th June, 2018 Article 7 of India-Spain DTAA; Sections 9, 37(1) of the Act – Exchange fluctuation loss in respect of advance received by a PE from its HO was allowable as a deduction from income since the advance was received towards working capital for execution of project in India.

Facts

The Taxpayer was a Spanish company
engaged in the business of providing consultancy services for Projects,
Engineering and Electrical Contractors and Suppliers. In respect of the
projects being executed in India, the Taxpayer had established a project office
(also a PE) in India.

During the relevant year, the
Taxpayer had earned income from supply of goods and services from project being
executed by it. For executing the project in India, PE was utilising the
advance received from the customer or the advance received from the HO (i.e.,
the Taxpayer). In accordance with RBI guidelines, PE was receiving the advance
from the HO in Euro and was also repaying the same in Euro. During the relevant
year the PE claimed deduction under the head ‘Exchange Fluctuation Loss’ in
respect of the advances received and repayable in foreign exchange.

According to the AO, funds received
by the PE from the HO were actually capital contribution and not debt incurred
in the course of business. The AO noted that Article 7 of India-Spain DTAA
specifically prohibits any deduction of expenses relating to HO except
imbursement towards actual expenditure. Accordingly, the AO disallowed the
exchange fluctuation loss claimed by the PE.

The CIT(A) upheld the order of AO.

Held

The loan received by the
PE was towards working capital for project execution. Hence, it did not bring
any capital asset into existence. Also, the PE had shown the amount as a
liability in its balance sheet.

Nothing was brought on
record to show that the PE had contravened any provision of FEMA. The tax
authority has not disputed that depreciation of rupee has resulted in exchange
fluctuation loss in respect of the outstanding amount of advance received by
the PE.

Since the advance was
received towards project execution, it was on revenue account and consequently,
the loss too was revenue loss. Also, the project office being a PE, it could
not borrow from banks in India for project execution. Further, the expenditure
was not a notional expenditure. It was to be noted that in subsequent year the
PE had earned exchange fluctuation gain and had accounted it as income. If, in
the opinion of the AO, exchange fluctuation loss is not deductible, exchange
fluctuation gain should not be taxed as income since the tax proceedings must
follow the rule of consistency.

Accordingly, the PE was
entitled to claim deduction of exchange fluctuation loss from its income.

shailesh.kwebmaker

Article 13 (4) of India-France DTAA – Make available condition of India-UK DTAA to be read into India-France DTAA. Advisory services for review of strategic and mergers and acquisitions options, do not qualify as FIS in absence of satisfaction of make available condition.

22. TS-767-ITAT-2018 (Mum) Entertainment
Network (India) Ltd vs. JCIT Date of Order: 21^st December, 2018
A.Y.: 2011-12

Article 13 (4) of India-France DTAA – Make available
condition of India-UK DTAA to be read into India-France DTAA. Advisory services
for review of strategic and mergers and acquisitions options, do not qualify as
FIS in absence of satisfaction of make available condition.

FACTS

Taxpayer, an Indian company made payment to a French Company (FCo)
towards professional services³ rendered during the relevant year.
Taxpayer contended that services rendered by FCo were not technical services
and hence did not qualify as FTS. Without prejudice, by virtue of the Most
Favoured Nation clause (MFN clause) in the India-France DTAA, the make
available condition of India-UK DTAA had to be read into India-France DTAA. In
absence of make available condition being satisfied, payment made to FCo did
not qualify as Fee for included services (FIS). Further, in absence of a
permanent establishment of FCo in India, such income was not liable to tax in
India.

However, AO contended that the services rendered by FCo qualified as FTS
and hence in absence of any withholding, disallowed the payments made to FCo.

Aggrieved, Taxpayer appealed before the CIT(A) who upheld the decision
of AO.

Consequently, Taxpayer appealed before the Tribunal.

HELD

By
virtue of the MFN clause, make available condition had to be read into
India-France DTAA. The phrase “make available” means that the knowledge,
experience, skill, knowhow, etc should be passed on to the service
recipient such that the service recipient can carry out the services on
its own.

ICo
would have to go back to FCo if it wished to avail similar services from
FCo in future. Hence, the advisory services rendered by FCo, did not make
available any technical knowledge, experience, skill, etc., to ICo.

Hence,
services rendered by FCo did not qualify as FIS and hence there was no
requirement to withhold taxes on payments made to FCo in India⁴.

___________________________________________

3. FCo rendered advisory services by way of review of strategic and
mergers and acquisition options for ICo.

4. It appears that FCo did not have a PE in India.

shailesh.kwebmaker

Article 12(4) of India-USA DTAA; Explanation 2 to section 9(1)(vii) – as consideration received for rendering on call advisory services in the nature of troubleshooting, isolating problem and diagnosing related trouble and repair services remotely, without any on-site support, did not satisfy make available condition under DTAA, it was not taxable in India.

13. [2018] 98
taxmann.com 458 (Delhi) Ciena Communications India (P.) Ltd vs. ACIT Date of
Order: 27^th September, 2018 A.Ys.: 2012-13 to 2014-15

Article 12(4) of India-USA DTAA; Explanation 2 to section 9(1)(vii) – as
consideration received for rendering on call advisory services in the nature of
troubleshooting, isolating problem and diagnosing related trouble and repair
services remotely, without any on-site support, did not satisfy make available
condition under DTAA, it was not taxable in India.

Facts

Taxpayer, an
Indian company, was engaged in the business of providing Annual Maintenance
Contract (‘AMC’) services and installation, commissioning services for
equipment supplied by its associated enterprises (“AEs”) to customers in India.

In relation to
such services, Taxpayer entered into an agreement with its US AE. In terms of
the agreement, the US AE was required to provide remote on-call support
services and emergency technical support services to facilitate Taxpayer in the
maintenance and repair of the equipment supplied to the customers in India.
These services were rendered by the US AE remotely from outside India. In some
cases, the equipment supplied to the customers in India was also shipped to the
US by the Taxpayer for undertaking repairs by the US AE.

Taxpayer
contended that the services rendered by US AE did not make available any
technical knowledge or skill. Further, as the services were rendered outside
India, there was no PE of the US AE in India and hence the payment made to US
AE was not taxable in India.

However, AO held that the services rendered by non-resident AE made
available technical knowledge, experience or skill and hence qualified as FTS
under the India US DTAA.

Therefore, the
Taxpayer appealed before the CIT(A) which upheld AO’s order. Aggrieved, the
Taxpayer appealed before the Tribunal.

Held

·
Article
12 of India-USA DTAA provides that payment made for technical services
qualifies as fee for included services (FIS), if such services make available
technical knowledge and skill to the recipient of service, such that the
service recipient is enabled to use such knowledge/skill on its own.

·
Services
provided by AE to Taxpayer involved provision of assistance in troubleshooting,
isolating the problem and diagnosing related trouble and alarms and equipment
repair services. These services were provided remotely outside India and no
on-site support services were rendered in India. Although, the technical
knowledge or skill was used by the US AE for rendering of the services, it did
not make available any technical knowledge or skill to the Taxpayer.

·
Thus,
the amount paid by Taxpayer to the US AE did not qualify as FIS and hence, it
was not taxable in India as per Article 12 of India US DTAA.

shailesh.kwebmaker

Article 5(1) & 5(2)(g) of India-Mauritius DTAA; – Ownership over oil or gas well is not a precondition for constitution of exploration PE under Article 5(2)(g) of India- Mauritius DTAA.

12.
TS-633-ITAT-2018 (Delhi) GIL Mauritius Holdings Ltd. vs. DDIT Date of Order: 22^nd
October, 2018 A.Y.: 2006-07

Article 5(1)
& 5(2)(g) of India-Mauritius DTAA; – Ownership over oil or gas well is not
a precondition for constitution of exploration PE under Article 5(2)(g) of
India- Mauritius DTAA.

Facts

The Taxpayer
was a company incorporated in Mauritius. During the year under consideration,
Taxpayer entered into a subcontracting arrangement for rendering certain
services in relation to oil and gas project in India under two separate
contracts with two Indian companies (ICo 1 and ICo 2). For executing the work
under the respective contracts, Taxpayer was required to establish a dedicated
project team headed by a project manager for proper execution of the subcontracted
work in India. It had also deployed certain vessels in India.

While the two
contracts were entered into on 1^st November 2004 and 15^th
September 2004 respectively, the Taxpayer considered the date of entry of
vessel in India (viz. 1^st February 2005 and 1^st December
2004 respectively) as the date of commencement of the contract and contended
that the duration of the two contracts was 109 days and 136 days respectively.
Hence, presence of such duration did not result in a PE in India.

The AO however,
held that the vessel used by the taxpayer for carrying on its activities in
India constituted a fixed place of business under Article 5(1) of the DTAA.
Hence, income from subcontracting was taxable in India.

Aggrieved, the
Taxpayer filed an appeal before the CIT(A) who noted that Taxpayer activities
were in relation to a project dealing with transportation of mineral oils, and
hence, such activities would create a PE under Article 5(1) as also under
Article 5(2)(g)² of the DTAA. (Both Article 5(1) and 5(2)(g) do not
provide for a time threshold for creation of a PE). Aggrieved, the Taxpayer
appealed before the Tribunal.

Held

Computation of
duration of the contract:

As
per the subcontracting agreement, subcontractor was required to commence the
work on the ‘effective date’ or such other date as may be mutually agreed
between the parties. On failure of Taxpayer to furnish information about
the effective date, the date of entering into the contract was held to be
the date of commencement of the contract.

Further,
it was held that the date of entry of the vessel into India cannot be
taken to be date of commencement of the work for the following reasons:

• The scope of work under the
main contract when coupled with the scope of work under the sub-contract did
not support the commencement of work necessarily from the date of entry of
vessel into India.

• The terms of subcontractor
agreement required not only the vessels to be mobilised in India but also
mobilisation of several key persons, equipment materials tools etc. Also, the
contract stated that the commencement of contract shall be from the date the
agreement is signed.

• The date of demobilisation of
the vessel was taken as the end date of the contract. Thus, duration of both
contracts was calculated as 201 days and 212 days respectively after taking
into account period from the date of signing the contract till the date of
demobilisation of the vessel in India.

__________________________________

2 Article
5(2)(g) deems a mine, an oil or gas well, a quarry or any other place of
extraction of natural resources as a fixed place PE

Applicability
of Article 5(2)(i)

• Since the duration of both the
separate contracts was less than the threshold period of 9 months Taxpayer did
not create a PE under Article 5(2)(i) of the DTAA.

Applicability
of Article 5(2)(g)

For
determination of an exploration PE under Article 5(2)(g) of
India-Mauritius DTAA, the only requirement is that there should be a fixed
place in the form of oil rig/ gas well/quarry at the disposal of the
Taxpayer through which it carries on its business. It is incorrect to say
that the Taxpayer should be owner of the oil or gas well for evaluating if
it has a PE under Article 5(2)(g).

Article
5(2) (including Article 5(2)(g) refers to various places which could be
included within the scope of PE, without attaching any condition that they
should be owned by the taxpayer. The only condition is that the business
of the taxpayer should be carried on through that place.

Since
nothing was brought on record to show that the project site was at the
disposal of the Taxpayer, and whether its business was carried on from
such project site, it cannot be held that Taxpayer had a PE under Article
5(2)(g) of the DTAA.

shailesh.kwebmaker

Article 5 & Article 12 of India-South Africa DTAA; Explanation 2 to section 9(1)(vii) of the Act – Payment for rendering line production services did not qualify as FTS/ royalty under the Act as well as the DTAA.

11. (2018) 98
taxmann.com 227 (Mum) Endemol South Africa (Proprietary) Ltd. vs. DCIT Date of
Order: 3^rdOctober, 2018 A.Y.: 2012-13

Article 5 & Article 12 of India-South Africa DTAA; Explanation 2 to
section 9(1)(vii) of the Act – Payment for rendering line production services
did not qualify as FTS/ royalty under the Act as well as the DTAA.

Facts

The Taxpayer, a
company incorporated in South Africa, entered into an agreement with an Indian
Company (“ICo”) to carry out Line Production Services¹. Under the
said agreement, the Taxpayer was required to provide certain administrative
services for facilitating and coordinating filming of episodes of television
series by ICo at various locations in South Africa.

The Taxpayer filed its return of income declaring nil income on the
contention that the fees received for rendering the aforesaid services was not
in the nature of FTS u/s. 9(1)(vii) of the Act and accordingly, it was not
taxable in India.

However, the AO
was of the view that the role of the Taxpayer was not that of a mere
facilitator and the amount received was for the use of copyright as well as for
rendering the managerial and technical services to ICo and hence it qualified
as royalty and Fee for Technical services (FTS) under the Act as well as the
DTAA.

Aggrieved, Taxpayer filed an objection before the DRP. On perusal of the
terms of agreement, DRP held that the Taxpayer was engaged in the co-production
of the television series in South Africa by providing the technical inputs and
technical manpower to ICo. Thus, the fees received by the Taxpayer was for
rendering managerial and technical services which qualified as FTS under the
Act as well as the DTAA. Further, the DRP also held that the Taxpayer had
assigned all its copyrights in the television series to ICo. Thus, the payments
received by Taxpayer also qualified as royalty under the Act as well as Article
12 of DTAA.

______________________________________

1. Line production services which were provided
by the Taxpayer included services like (i) arranging for crew and support
personnel, as may be requisitioned; (ii) props and other set production
materials; (iii) safety, security and transportation; and (iv) filming and
other equipment, as may be requisitioned.

Aggrieved, the
Taxpayer appealed before the Tribunal.

Held

Whether line
production services can be characterised as services of a managerial, technical
or consultancy nature for FTS:

·
Under
the line production agreement, Taxpayer rendered various coordination/
facilitation services to ICo in producing the television series, such as
arranging of all production facilities; providing a line producer, production
staff, local crew for providing stunt services, provision of transportation
necessary for stunts/ production of the show; arranging for a director, staff,
art department and production staff to set up and film the series; providing
for all required paper work and declaration regarding fair treatment meted out
to animals, insects etc.

·
For the
following reasons, it was held that various coordination/facilitation services
rendered by the Taxpayer did not qualify as FTS:

• Managerial
Services– The term managerial services, ordinarily means handling
management and its affairs. As per the concise oxford dictionary, the term
managerial services mean rendering of services which involves controlling,
directing, managing or administering a business or part of a business or any
other thing. Since the services rendered by the Taxpayer were administrative
services (such as making logistic arrangements etc), it would not tantamount to
provision of any managerial or management functional services to ICo. It,
therefore, would not fall within the realm of the term ‘managerial services’.

• Technical
Services– The term ‘technical services’ takes within its sweep services
which would require the expertise in technology or special skill or knowledge
relating to the field of technology. As the administrative services, viz.
arranging for logistics etc., by the Taxpayer neither involved use of any
technical skill or technical knowledge, nor any application of technical
expertise on its part while rendering such services, it could not be treated as
technical services.

• Consultancy Services– The
term consultancy services, in common parlance, means provision of advice or
advisory services by a professional requiring specialised qualification,
knowledge, expertise. Such services are more dependent on skill, intellect and
individual characteristics of the person rendering it. As the services rendered
by the Taxpayer did not involve provision of any advice or consultancy to ICo,
the same could not be brought within the ambit of “consultancy services”.

·
Since
the aforesaid services were purely administrative in nature, the consideration
received by the Taxpayer for rendering them could not be brought within the
sweep of the definition of “FTS” either under the Act or under DTAA.
Reliance was also placed on the ITAT decision in case of Yashraj Films Pvt.
Ltd. vs. ITO (IT) (2012) 231 ITR (T) 125 (Mum.) wherein on similar and
overlapping facts, the Tribunal had observed that as the services rendered by
the non-resident service providers for making logistic arrangements were in the
nature of commercial services, the same could not be treated as managerial, technical
or consultancy services within the meaning given in Explanation 2 to section
9(1)(vii) of the Act.

Whether the
consideration can be characterised as royalty income:

·
In sum
and substance, the agreement entered by the Taxpayer was for rendering of line
production services by the Taxpayer to ICo in order to facilitate and enable
ICo to produce the television series and not for grant of any licensing rights
in the television programme.

·
Further,
as ICo had commissioned the work to Taxpayer under the contract of service, ICo
qualified as the first owner of the work produced by the Taxpayer under the
South Africa Copyright Act No. 98 of 1978. Hence, it was incorrect to suggest
that there was an assignment of copyright by the Taxpayer in favour of ICo.

Even
it was accepted that the consideration received by the Taxpayer was for
‘transfer’ of the copyright to ICo, such amount would not qualify as
royalty as it did not involve use of or transfer of right to use a
copyright.

shailesh.kwebmaker

Article 5(6) & Article 12 of India-Singapore DTAA; Explanation 2 to section 9(1)(vii) of the Act – Presence of employees is to be tested separately for each type of service for computing Service PE threshold; Application of beneficial provisions of the Act for one source of income and treaty for another source of income is permissible

10.
TS-604-ITAT-2018 (Mum)

Dimension Data Asia Pacific Pte Ltd.
vs. DCIT Date of Order: 12^th October, 2018 A.Y.: 2012-13

Article 5(6) & Article 12 of India-Singapore DTAA; Explanation 2 to
section 9(1)(vii) of the Act – Presence of employees is to be tested separately
for each type of service for computing Service PE threshold; Application of
beneficial provisions of the Act for one source of income and treaty for
another source of income is permissible

Facts

Taxpayer, a private limited company incorporated in
Singapore, was engaged in the business of providing management support services
to its group entities in Asia Pacific region. Taxpayer had a wholly owned
subsidiary in India (ICo). During the years under consideration, Taxpayer sent
its employees to render following services to ICo in India.

·
Management
support services

·
Technical
assistance and guidance to ICo in relation to setting up of internet data
centres (IDCs) in India.

The duration of
stay of the employees in India during the relevant year was as follows:

Type of service rendered in India

No. of solar days spent in India during the year

Management support fees (not being FTS)

2 days

Technical service

171 days

Total days of presence in India

173 days

Taxpayer
received consideration in the form of management fee for management support
services and a separate service fee for providing technical services for
setting up of internet data centres (IDCs) in India.

Taxpayer conceded that service fee qualified as Fee for
Technical Services (FTS) under the Act as well as the DTAA and offered it to
tax in India. However, Taxpayer contended that management support fee qualified
as business income. Since the presence of employees for rendering management
support services in India was less than 30 days, Taxpayer contended that such
presence did not result in creation of a PE in India. Hence, management support
fee was not taxable in India.

The Assessing Officer (AO), however, aggregated the
number of days of presence of Taxpayer’s employees in India and held that the
Taxpayer has a service PE in India. Thus, AO taxed the management fee as well
as service fee as business Income in India.

On appeal, the Dispute Resolution Panel (DRP) upheld AO’s
order. Aggrieved, the Taxpayer appealed before the Tribunal.

Held

·
In cases of multiple sources of income, a taxpayer has an
option to choose the provisions of the Act for one source while applying the
provisions of the DTAA for the other source of income. Reference in this regard
was made to Bangalore ITAT decision in the case of IBM World Trade
Corporation vs. ADIT (2015) 58 Taxmann.com 132 and IBM World Trade Corporation
vs. DDIT (IT) (2012) 20 taxmann.com 728.

·
Taxability
of Management Support Fees:

• There
is no dispute that the management support fee qualifies as business income
under Article 7 of the India-Singapore DTAA. However, such income would be
taxable only if the Taxpayer had a PE in India under Article 5 of the DTAA.

• Since
the employees’ presence in India for rendering management support services was
less than 30 days, such presence of employees did not create a Service PE for
the Taxpayer in India. Hence, management support fee received from ICo is not
taxable in India. Presence of employees in India for rendition of technical
services is not to be reckoned for calculation of service PE duration.

Taxability
of Service Fee:

• Taxpayer’s
employee had the requisite expertise in the field of IDCs and they were sent to
India to assist and provide guidance to ICo in setting up of IDCs. Thus, the
services rendered by the employees of the Taxpayer made available technical
knowledge and skill to ICo. Hence, the fee paid for such services qualified as
FTS under Article 12 of DTAA. Therefore, such service fee was taxable in
India.

• Once
the income qualified as FTS under Article 12 of DTAA, owing to exclusion in Article
5 with respect to services covered under Article 12 of DTAA, the same fell
outside the scope of Article 5 of DTAA dealing with PEs. Hence, evaluation of
whether there was a service PE became academic

shailesh.kwebmaker

1 Article 5(2)(g) of India-Cyprus DTAA – auxiliary and preparatory activity undertaken prior to awarding of the contract cannot be reckoned for computing threshold for existence of PE.

TS-426-ITAT-2018

Bellsea Ltd vs.
ADIT

A.Y: 2008-09, Date
of Order: 6^th July, 2018

Article 5(2)(g) of
India-Cyprus DTAA – auxiliary and preparatory activity undertaken prior to
awarding of the contract cannot be reckoned for computing threshold for
existence of PE.

Facts

The Taxpayer was a
company incorporated in Cyprus mainly engaged in the business of dredging and
pipeline related services for oil and gas installations. During the year under
consideration, Taxpayer was awarded a contract by another foreign entity (FCo)
for placement of rock in seabed for protection of gas pipelines and umbilical¹of subsea structures in oil and gas field developed in
India.

On the basis that
construction work had started on 4^th January 2008 as per the
contractual terms, and was completed on 30^th September 2008 (i.e the
date of issuance of completion certificate as per the contract), the taxpayer
contended that it did not have any PE in India. Accordingly, it did not meet
the 12-month threshold for creation of installation PE under Article 5(2)(g) of
India- Cyprus DTAA.

However, the AO
contended that 12-month threshold should be computed from September 2007, when
one of the employees of the Taxpayer visited India for the purpose of
collecting information, until November 2008 (as the formalities of final
completion certificate had extended upto November 2008, even though the date
mentioned in the completion certificate is 30^th September 2008).
According to the AO, the presence was for a project which lasted for more than
12 months and triggered Installation PE.

_______________________________________________________-

1 A subsea umbilical is a bundle of cables and
conduits that transfer hydraulic, and electric power within the field (long
distances), or from topsides to subsea. They also carry chemicals for subsea injection,
and gas for artificial lift.

The Dispute
Resolution Panel (DRP), confirmed AO’s order and held that Taxpayer’s
activities triggered an installation PE in India. Aggrieved, Taxpayer appealed
before the Tribunal.

Held

On date of
commencement of activities for computation of 12-month threshold

– Article 5(2)(g) ostensibly
refers to activity-based PE. Hence, the duration of 12 months per se is
activity specific qua the site, construction, assembly or installation
project.

– Auxiliary and Preparatory
work like pre-survey engineering, investigation of site, etc., for tendering
purpose without actually entering into the contract and without carrying out
any activity of economic substance or active work qua that project
cannot be construed as carrying out any activity of installation or
construction. Any kind of active work of preparatory or auxiliary nature could
be counted for determining the time period only if such work is undertaken
after the contract has been awarded/ assigned.

– Further, no evidence was
placed on record to suggest that the Taxpayer had installed any project office
or developed a site for carrying out the preparatory work before entering into
the contract with FCo.

– The performance of the
activities in connection with installation project or site, etc., commences
when the actual purpose of the business activity had started (which happened to
be 4^thJanuary, 2008 in the present case) and not before that as the
preparatory work if any, was for tendering purpose and to get the contract.

– Reliance was placed on
decision of National Petroleum Construction Company (386 ITR 648) wherein,
the Delhi HC analysed similar provision appearing in Article 5(2)(h) of
Indo-UAE DTAA and held that any activity which may be related or incidental,
but was not carried out at the site in the source country would clearly not be
construed as a PE. Albeit, preparatory work at the site itself can be counted
for the purpose of determining duration of PE. However, in the present case,
there is no such allegation or material on record that any kind of preparatory
work had started at the installation sites prior to January 2008.

On date of
completion of activities for computation of 12 month threshold

– The activity qua
the project comes to an end when the work gets completed and the responsibility
of the contractor with respect to that activity comes to end. The following
facts suggest that activity of the Taxpayer qua the project as per the
terms of contract had come to an end on or before 30^th September,
2008;

• Last sail out of barge/vessel was on 25^th
September 2008 and Customs authorities also certified the demobilisation by
this date

• All the payments relating to contract work
were received by the Taxpayer much before the closing of September, 2008

• Even though final completion certificate
was issued in November 2008, the completion certificate itself mentioned the
date of completion as 30^th September, 2008.

• Also, there was nothing on record to
suggest that any activity post-completion was carried on or the project was not
completely abandoned before the completion of the period of 12 months.

– Thus, 12-month threshold
period was not exceeded in the present case. Consequently, no PE can be said to
have been established under Article 5(2)(g).

shailesh.kwebmaker

Section 92B and section 271AA of the Act –Penalty cannot be levied for failure to disclose share issue transaction in Form 3CEB filed before the 2012 amendment to the definition of international transaction.

13.
[2018] 93 taxmann.com 87 (Delhi)

ITO vs.
Nihon Parkerizing (India) (P.) Ltd.

ITA No. :
6409/Del/2015

A.Y:
2011-12

Date of
Order: 10^th April, 2018

Section 92B and section 271AA of the Act –Penalty cannot
be levied for failure to disclose share issue transaction in Form 3CEB filed
before the 2012 amendment to the definition of international transaction.

Facts

Taxpayer, an Indian company, had received certain sum as
share capital from its associated enterprise (AE) during FY 2010-11. Taxpayer
furnished the transfer pricing report in Form 3CEB disclosing other
international transactions u/s. 92E. However, Taxpayer did not report the share capital transaction in
Form 3CEB.

AO contended that due to retrospective amendment to
section 92B in the year 2012, share issue transaction qualifies as an
international transaction with retrospective effect. AO imposed penalty for
non-disclosure of the transaction of share capital issue in the Form 3CEB.
Taxpayer argued that the amendment to the definition of international
transaction was made by the Finance Act 2012 with retrospective effect, whereas
the report in Form 3CEB was filed by the Taxpayer much before the enactment of
the amendment. Taxpayer contended that as on the date of filing Form 3CEB,
there was no requirement to report the share issue transaction and hence
penalty cannot be levied.

Aggrieved by the order of AO, taxpayer appealed before
CIT(A). The CIT(A) deleted the penalty holding that that as on the date of
filing of Form 3CEB by the Taxpayer, there was no requirement to report the
share issue transaction and hence, no penalty was leviable. Aggrieved, AO
appealed before the Tribunal.

Held

– Section 92B of the Act was amended
by the Finance Act 2012 with retrospective effect from 01^st April
2002 to cover capital financing, including any type of long-term or short-term
borrowing, lending or guarantee, purchase of sale of marketable securities or
any type of advance, payments or deferred payments or receivable or any other
debt arising during the course of the business as international transaction.

– However, Form 3CEB disclosing
international transactions for the relevant year was filed by the Taxpayer
prior to such amendment and at that time the Taxpayer was not aware that there
would be retrospective amendment wherein the transaction of issue of shares
would be required to be reported in Form 3CEB.

– It is an established law that, for
imposition of penalty, the law in force at the time of filing Form 3CEB would
be applicable.

– It is true that issue of share
capital is an international transaction. However, as on the date of filing of
Form 3CEB in the above year, Taxpayer was not required to disclose the said
transaction. Since the law was later amended, though, with retrospective
effect, the issue had no clarity prior to amendment. Thus, there was a
reasonable cause for not disclosing the share capital issue as an international
transaction in the Form 3CEB by the Taxpayer and hence, penalty is to be
deleted.

shailesh.kwebmaker

2 Section 92B(2) of the Act – TP provisions cannot impute notional income. Existence of a prior agreement with AE of the Taxpayer is a pre-requisite for the transaction to qualify as a deemed international transaction

(2018) 96 taxmann.com 443 (Mum-Trib)
Shilpa Shetty vs. ACIT
A.Y: 2010-11; Dated: 21st August, 2018

Section 92B(2) of the Act – TP provisions
cannot impute notional income. Existence of a prior agreement with AE of the
Taxpayer is a pre-requisite for the transaction to qualify as a deemed
international transaction

Facts

The Taxpayer, an individual resident in India, was engaged in the
profession of acting in films and functioning as the brand ambassador for
various products.

During the year
under consideration, the Taxpayer was one of the parties to Share Purchase
Agreement (SPA) executed between FCo, a company incorporated in Bahamas, and
the shareholders of a Mauritius Company (MCo). FCo was owned by Mr A who was a
relative of the Taxpayer.

As per the SPA, the
shareholders of MCo agreed to transfer a portion of their shareholding in the
MCo to FCo. Taxpayer was neither a buyer
nor a seller of shares of MCo under the SPA but the Taxpayer undertook to provide
brand ambassadorship services to an Indian company (ICo), which was the wholly
owned subsidiary of MCo. The brand ambassadorship services were to be provided
in relation to the promotion of an Indian premiere league (IPL) team owned by
ICo. As per the SPA, such services were
to be provided by the Taxpayer without payment of any consideration by ICo.
However, ICo was not a party to SPA.

AO treated the
Taxpayer and MCo as Associated Enterprises (AEs) and held that the services
rendered by the Taxpayer to ICo by virtue of the SPA involving the shareholders
of MCo constituted an international transaction. The AO computed the ALP of the
brand ambassadorship services and imputed such ALP as additional income of the
Taxpayer.

Aggrieved, the
Taxpayer filed an appeal before the CIT(A) who held that Taxpayer’s
professional activities, constituted an ‘enterprise’ (distinct from Taxpayer
herself) u/s. 92F(iii). Further, since Mr. A controlled both FCo as well the
professional activities of Taxpayer (through the Taxpayer who was a relative),
there existed a AE relationship between the two enterprises u/s. 92A(2)(j).

CIT(A) also held
that the brand ambassadorship services were rendered by the Taxpayer to ICo on
the basis of a prior agreement (i.e the SPA) entered into by the AE of the
Taxpayer (i.e FCo). Hence, such services resulted in a deemed international
transaction u/s. 92B(2).

Aggrieved, Taxpayer
appealed before the Tribunal.

Held

On existence
of control u/s. 92A(2)(j)

– Section 92A(2)(j) deems
the two ‘enterprises’ as AEs if one of the enterprises is controlled by an
individual and the other ‘enterprise’ is also controlled by such individual or
his relatives.

– Although Mr A controlled
FCo, nothing was brought on record to show that Mr A or any of his relatives
controlled the Taxpayer. Hence there is no AE relationship between the Taxpayer
and FCo u/s. 92A(2)(j)² .

On deemed
international transaction

– Section 92B(2) of the Act
cannot be applied to hold that transaction between Taxpayer and ICo was an
‘International transaction’ for the following reasons:

• None of the parties to the SPA qualified as
AE of the Taxpayer.

• As ICo was not a party to the SPA, there
was no ‘prior agreement’ between ICo and the AE of the Taxpayer.

On whether TP
can apply when there is no consideration

– Chapter X pre-supposes
existence of ‘income’ and lays down machinery provisions to compute ALP of such
income, if it arises from an ‘international transaction’.

– Section 92 is not an
independent charging section to bring in a new head of income or to charge tax
on income which is otherwise not chargeable under the Act.

– Accordingly, since no
income had accrued to or received by the Taxpayer u/s. 5, notional income
cannot be brought to tax by applying section 92 of the Act.

________________________________________________________________

2
The Tribunal did not rule on whether the CIT(A) was right in concluding
that the professional activity of the Taxpayer constituted a distinct
‘enterprise’.

shailesh.kwebmaker

22. TS-274-ITAT-2018(Del) Daikin Industries Limited. v. DCIT A.Ys: 2006-07, Dated: 28th May, 2018

Article 5 of
India-Japan DTAA – marketing activities of Indian distributor constitutes
dependent agent PE (DAPE) for the Japanese parent in India; additional profits
were to be attributed to the DAPE by taking into account the functions and risks
that were not considered for TP analysis of the agent (distributor).

Facts

Taxpayer, a Japanese
company was engaged in the business of development, manufacture, assembly and
supply of air conditioning and refrigeration equipment. During the year, Taxpayer
sold air-conditioners in India directly to third party Indian customers (direct
sale) as well as to an Indian distributor, I Co who was the wholly owned
subsidiary of Taxpayer in India.

In addition to acting as
the distributor of Taxpayer’s products in India, I Co entered into a commission
agreement with the Taxpayer to act as a communication channel between the
Taxpayer and its customers in India. As per the agreement, I Co was responsible
for forwarding customer’s request to the Taxpayer as well as forwarding
Taxpayer’s quotations and contractual proposals to the customers in India. In
consideration of the said services, I Co charged a commission of 10% on direct
sales made by the Taxpayer in India.

As the Taxpayer failed to
produce the evidence showing its involvement in the marketing of products sold
by way of direct sales in India, AO held that the activities of identifying
customers, approaching, presentation, demonstration, price catalogue,
negotiation of prices and finalisation of prices etc. were carried on by I Co
on behalf of the Taxpayer in India, in addition to the activities set out in
commission agreement. Consequently, it was held that I Co constituted a DAPE of
the Taxpayer in India under India-Japan DTAA.

The CIT(A) upheld AO’s contention.
Aggrieved, the Taxpayer filed an appeal before the Tribunal.

Held

On DAPE

– The air-conditioning and refrigeration
industry in which the Taxpayer was involved was highly competitive and
tremendous efforts are required for effecting sales in such market. This is
also evident by the fact that I Co had to incur huge selling and distribution
expenses for selling the same products in its capacity as a distributor. It is
hard to comprehend that the Taxpayer managed to make direct contact with customers,
scattered all over India for effecting sales to them directly, without any
marketing efforts.

– The contents of the emails exchanged between
the Taxpayer and I Co demonstrate that the entire deal was negotiated and
finalised by Indian customers with I Co and the role of I Co was not confined
merely to a communication channel as contended by the Taxpayer.

– In absence of any evidence indicating direct
involvement of Taxpayer in marketing activities in relation to direct sales in
India and the emails indicating the involvement of I Co in finalising the deals
with customers in India, the inescapable conclusion is that the entire activity
starting from identification of customers, approaching them, negotiating prices
with them and finalisation of prices was done by I Co in India not only for the
products sold by them as distributor, but also for the direct sales made by the
Taxpayer.

– Although I Co did not have authority to
finalise the contract of direct sales in India, the substantial activities of any
sale transaction like the activities of negotiating and finalising the
contracts were performed by I Co.

– Thus I Co was habitually exercising an
authority to conclude contracts in India on behalf of the Taxpayer. The mere
fact that the Taxpayer was formally signing the contract of sale does not alter
this position in any manner.

– Also, I Co was securing orders in India
‘almost wholly’ for the Taxpayer as all the substantive parts of the key
activities in making sales were carried on by I Co in India.

– Exclusion of independent agent activities is
not applicable as the Taxpayer had not contested the dependent status of I Co.

On Attribution of profits
on determination of ALP

– Since the Taxpayer did not maintain TP
documentation nor did it furnish the TP report with respect to commission
payments to I Co, its contention that the payment of commission is at arm’s
length cannot be accepted.

– SC in the case of Morgan Stanley (292 ITR
416) held that, if the independent agent is remunerated at arm’s length by
taking account all the risk-taking functions of the enterprise, there can be no
further attribution to DAPE. SC further held that if the TP analysis does not
reflect the functions performed and risks assumed by the enterprise, then
additional profits are to be attributed to the PE by taking into account the
functions and risks that are not considered for TP analysis.

– The commission of 10% was paid to I Co only
towards the services rendered as per the commission agreement. However,
evidences in the form of emails correspondences between Taxpayer and I Co as
well as I Co and customer supported the contention of the revenue that the
functions performed by I Co were beyond the services covered by the commission
agreement and included all the activities in relation to negotiation and
finalisation of the price and other contractual terms of the customer
contracts.

– Hence, the determination of arm’s length
commission of 10% did not reflect the functions performed and the risks assumed
by the PE. Therefore, as held by SC in Morgan Stanley (292 ITR 416), additional
profits should be attributed to the DAPE (i.e., I Co) for the additional
functions undertaken by DAPE in India.

shailesh.kwebmaker

21. TS-330-ITAT-2018(Ahd) Skaps Industries India Pvt Ltd. vs. ITO A.Ys: 2013-14 & 2014-15, Dated: 21st June, 2018

Section 90(4),
90(2) of the Act- in the absence of a non-obstante clause u/s. 90(4), it
cannot limit treaty superiority contemplated u/s. 90(2)- mere non-furnishing of
the TRC cannot disentitle a taxpayer from claiming tax treaty benefits.

Facts

The
Taxpayer, an Indian company, made payments to a US entity for services in
relation to installation and commissioning of certain equipment purchased by
the Taxpayer. The Taxpayer did not withhold any taxes as it was not falling
within the ambit of fees for included services (FIS) under the DTAA.

The
AO was of the view that such payments were in the nature of FIS under the DTAA
and, thus, the Taxpayer was liable to appropriately withhold taxes. The CIT(A)
ruled in favour of the AO and also observed that, in the absence of a TRC, the
US entity was not entitled to protection under the DTAA.

Aggrieved,
the Taxpayer filed an appeal before the Tribunal.

Held

– Section 90(2) of the Act provides for an
unqualified treaty override wherein provision of the Act are applicable only to
the extent more beneficial to the Taxpayer. The only exception to the treaty
override principle is in case where the general anti-avoidance provisions
(GAAR) are invoked.

– The restriction on the application of tax
treaty benefits on failure to provide a TRC does not have an overriding effect
over section 90(2) (as opposed to GAAR).

– The requirement to furnish a TRC was
introduced so that the TRC is regarded as sufficient evidence for granting tax
treaty benefit and the AO is denuded of the powers to demand further details in
support of the tax treaty benefits claimed[1].
The TRC provision cannot be construed as a limitation to the superiority of the
tax treaty over the domestic law.

– Thus, mere non-furnishing of a TRC cannot be
a reason to deny tax treaty benefit. However, the Taxpayer should substantiate
its eligibility to claim tax treaty benefits by means other than a TRC.
Substantiating residential status by any other mode is far more onerous
compared to TRC, as the TRC can be easily obtained from the US authorities for
a modest user fee after filing a statutory form.

– A mere declaration by the US entity, without
any material to substantiate the basic facts set out in the declaration, cannot
be accepted as legally sustainable foundation for a finding of fact. Also, same
does not amount to certification by any authority and hence did not prove its
residential status.

– As the Taxpayer was earlier not asked to
submit evidence other than a TRC to prove residential status of the US entity,
the matter was remanded to the AO for fresh adjudication, with direction to
give the Taxpayer a fresh opportunity to furnish evidence not limited to, but
including, the TRC in support of the US entity’s entitlement to the tax treaty
benefits of the DTAA.

[1] Reliance was placed on an Authority
for Advance Rulings order in the case of Serco BPO Pvt. Ltd. [(2015) 379 ITR
256 (P&H)]

shailesh.kwebmaker

20. TS-321-ITAT-2018 (Mum) DCIT v. D.B. International (Asia) Ltd A.Y: 2011-12, Dated: 20th June, 2018

Article 11, 23
of India-Singapore DTAA –relief from capital gains taxation in India cannot be
termed as ‘exemption’ – conditions for trigger of Limitation of Relief clause
not satisfied.

Facts

The Taxpayer, a tax
resident of Singapore, was carrying on its business operations including
trading in securities from Singapore. It did not have any PE in India. During
the year, Taxpayer earned capital gain on sale of shares, debt instruments and
derivatives (collectively referred to as “securities”) in India and claimed it
as non-taxable in India under the DTAA which provides exclusive taxation rights
on such gains to Singapore as resident country.

The AO contended that
since capital gains were not remitted/repatriated to Singapore, capital gain
benefit under the DTAA cannot be allowed. This resulted in non-satisfaction of
Limitation of Relief (LOR) article under the DTAA which restricts exemption in
source country (India) to the extent of repatriation of such income to resident
country (Singapore).

As against this, the
Taxpayer contended that the gains were not taxable in India because under
capital gains article, gains from sale of securities in India are taxable only
in Singapore. Once the entire worldwide income was assessed at Singapore, a
part of it cannot be taxed in India as it will amount to double taxation of the
same income. Thus, LOR provision is of no relevance in this case. In support of
its contention, the Taxpayer relied on Mumbai Tribunal ruling in the case of
Citicorp Investment Bank Singapore Ltd[1].

The Dispute Resolution
Panel (DRP), ruled in the favour of the Taxpayer. Aggrieved by this the AO
appealed before the Tribunal.

Held

u The LOR provision applies if income derived
from a source state is either exempt from tax or taxed at a reduced rate in
that source State. The above condition is not fulfilled in the present case as
capital gains derived by the Taxpayer from sale of Indian securities is taxable
only in the resident state, i.e., Singapore. The provision is clear and
unambiguous and expresses itself as not an exemption provision but it speaks of
taxability of particular income in a particular State by virtue of residence of

the Taxpayer.

u The expression “exempt” with reference to the
capital gain derived by the Taxpayer has been loosely used. Therefore, capital
gain which was not taxable in India due to allocation of exclusive taxation
rights to country of residence cannot be termed as an “exemption”. This is also
supported by Mumbai Tribunal ruling in the case of Citicorp Investment Bank
Singapore Ltd. as referred by the Taxpayer.

u LOR provisions are thus not applicable to the
facts of the case.

[1] 2017–EII–59–ITAT–MUM–INTL]

shailesh.kwebmaker

19. TS-302-AAR-2018 Saudi Arabian Oil Company v. DCIT AAR No 25 of 2016 Dated: 31st May, 2018

Article 5 of
India-Saudi Arabia DTAA – setting up Indian subsidiary for providing business
support services and marketing support services does not create permanent
establishment in India

Facts

The Applicant, a tax
resident of Saudi Arabia, is a state owned Oil Company in the business of oil
exploration, production, refining, chemicals, distribution and marketing.
Applicant is the world’s largest crude oil exporter and is making offshore
crude oil sales to Indian refineries on Free on Board (FOB) basis such that the
title passes outside India and payment is also made outside India.

To expand its India
operations and for having a long term presence in India, Applicant established
a subsidiary company in India (I Co) and entered into a service agreement with
I Co to provide procurement support services. Directors of I Co are also
employees and part of high management team of the Applicant.

During the year under
consideration, an Addendum was proposed to the Service Agreement (Proposed
Addendum) under which I Co proposed to provide business support and marketing
support functions to the Applicant at an arm’s length price (ALP). Broadly, the
services agreed to be provided by I Co under the Proposed Addendum included
procurement, sourcing and Logistic Support, Quality Inspection Support,
Business support/marketing support function, plant audits for identified
manufacturers and suppliers, market research, ascertaining quality of crude
oil, promoting awareness etc.

Based on the nature of
activities proposed to be undertaken by I Co, AAR ruling was sought on the
issue whether I Co would create a PE of the Applicant under the India-Saudi
Arabia Tax Treaty.

Held

AAR relied on the
decisions in Formula One (394 ITR 80) and eFunds (86 taxmann.com 240) to state
that I Co, would not create a PE for the Applicant.

Subsidiary PE:

– I Co, as a subsidiary of Applicant, does not
automatically become PE of Applicant, unless specific tests of PE are
satisfied. I Co has its own board of directors and is/will carry out its own
business in India. As held in case of Vodafone Holdings International BV (2012)
341 ITR 1 (SC) and AB Holdings Mauritius II (AAR/ 1129 of 2011), companies are
separate legal and economic entities for tax purposes and therefore parent and
subsidiary are distinct taxpayers.

– It is unlikely that parent would not at all
be involved in the decision making of its subsidiary whose activities have to
be in consonance with the overall goals of the holding company. Similarly, it
cannot be expected that directors of subsidiary would act with such
independence that the overall objective of holding company gets compromised.

Fixed Place PE:

– I Co is utilising its establishment to carry
out its own business in India, i.e., to provide support services to the
Applicant. Applicant’s business is
carried on in and from Saudi Arabia and is monitored by the Saudi Arabian
Ministry of Petroleum and Mineral resources together with Supreme Council of
Petroleum and Minerals. Hence, the question of any main or core business
activities of Applicant being carried on at I Co’s establishment does not
arise.

– I Co’s establishment is not placed at
disposal of the Applicant. There is no material on record to indicate that the
I Co is or will be manned by employees or personnel of the Applicant.

– Services provided by I Co are support
services for which it is remunerated at ALP and such services do not constitute
main business of the Applicant which is exploration, production, refining, and
distribution of crude oil.

– Accordingly, I Co’s premises does not
constitute a fixed place PE for the Applicant in India. The fact that I Co is
remunerated at ALP does not have a bearing on evaluation of fixed PE.

Service PE

– Applicant is not rendering any services to
any customer in India, either directly or through I Co. It is I Co which is
providing support services, that too to Applicant and not to the customers of
Applicant.

– It is incorrect to say that entire control
and management of I Co is under the Applicant by virtue of its employees who
are also directors of I Co. Also period
of their stay in India is irrelevant since they would be discharging their
duties as directors of I Co and not for the Applicant. Further, the
relationship of such directors with Applicant in past years is also not
relevant.

– Applicant, therefore, does not have any Service
PE in India.

Agency PE

– Service Agreement requires the parties to
perform as an independent contractor and not as an agent. The Proposed Addendum
expressly prohibits I Co from representing itself as agent of Applicant or
negotiating any business terms or conditions on behalf of Applicant.

– Activities like allocations, claims,
communication of customers’ concerns, and maintaining business relationships
does not mean concluding contracts or habitually obtaining orders on behalf of
the foreign enterprise. Even as per the agreements, I Co cannot enter into any
agreement of a binding nature on behalf of the Applicant.

– Furthermore, Agency PE provision of the
treaty, relating to ‘obtaining orders’ covers obtaining orders for sales and
not for procurement/purchase[1] as in this case.

– Thus, I Co does not create any Agency PE for
Applicant.

Preparatory or auxiliary exemption

– PE exemption for preparatory or auxiliary
functions is irrelevant since there is no PE created in the first place.

– Nevertheless, I Co’s Services such as market
research, identifying new customers, etc. would be ‘preparatory’ in nature and
hence eligible for PE exclusion.

[1] It was contended by Applicant that
Agency PE provisions relate to sales contracts/orders. It excludes any activities
in relation to purchase orders

shailesh.kwebmaker

Articles 5, 7 of India-Italy DTAA; Section 9 of IT Act – Where liaison office was involved in strategic business decision making in India including price negotiation and agreement finalisation, liaison office would constitute fixed place PE. Employees of a group entity in India carrying on core sale related activities, results in the emergence of a Dependent Agency PE in India

[2019] 101 taxmann.com 402 (Delhi – Trib.) 25.
ITA No: 6892 (Delhi) of 2017 GE Nuovo Pignone SPA vs. DCIT Date of Order: 1^st January, 2019 A.Y.: 2009-10

Articles 5, 7 of India-Italy DTAA; Section
9 of IT Act – Where liaison office was involved in strategic business decision
making in India including price negotiation and agreement finalisation, liaison
office would constitute fixed place PE. Employees of a group entity in India
carrying on core sale related activities, results in the emergence of a
Dependent Agency PE in India

FACTS

The Taxpayer, an
Italian company and part of an MNE (GE) group was engaged in the business of
supplying key equipment for oil and gas industry across the globe. One of the entities of the Taxpayer’s MNE
group (US Co) had set up a liaison office (LO) in India to act as a
communication channel with the customers in India. Further, the MNE group had
an Indian entity (ICo) which provided marketing support services to the group
companies including the Taxpayer in India. During
the relevant year, Taxpayer earned income from onshore services and as well as
offshore supply of spare parts and equipment to customers in India. However,
only income from onshore services was offered to tax as Fees for technical
services(FTS) in its return of income. Income from offshore supplies was not
offered to tax on the grounds that there was no business connection or PE in
India.

A survey was conducted at the premises of the LO of the group entity.
During the scrutiny proceedings, the AO relied on various documents and
correspondences found during the survey pertaining to the Taxpayer as well as
other entities of the MNE group. AO also made an enquiry about the sales made
by various entities of the Taxpayer group in India, employees/expatriates of
the group working from the LO premises and their roles and responsibilities.

From the material
collected during such survey and post survey enquiry, AO noted that various
expatriates of the group carried on overall business of the group, including
that of Taxpayer in India, Further the documents revealed that the employees of
ICo and expatriates in India had active involvement in conclusion of sale
contracts on behalf of the group entities of the MNE group including Taxpayer
in India

Based on this
evidence, AO held that Taxpayer had business connection in India with a fixed
place PE at the LO premises and Agency PE in the form of ICo. Aggrieved by the
draft assessment order, Taxpayer filed objections before the DRP.

The DRP upheld AO’s
order. Aggrieved, the Taxpayer appealed before the Tribunal.

HELD

Article 5 of India-Italy
DTAA describes a PE as a place which is used by a foreign enterprise for
carrying on business in India with some kind of regularity or permanence.

Basis the following facts,
Tribunal concluded that Taxpayer had a fixed place PE in India at LO’s
premises.

Taxpayer deputed an expatriate employee,
designated as ‘Oil and Gas, India Country Leader’ to India, who worked at the
LO premises along with active assistance of ICo’s employees in India.

The expatriate along with the support of
employees of ICo undertook activities like finalisation of contracts, strategic
decision making and negotiating sale prices with Indian customers from the
premises of LO. This fact was supported by the Tribunal decision² in
case of another member-company of the group. Thus, the role of the LO was not
limited merely to preparatory or auxiliary activities.Thus LO resulted in a
Fixed place PE in India.

Further, the Taxpayer did not make any off
the shelf sales to its customers in India. The sales were made on the basis of
prior contracts finalized in India. These contracts were negotiated and
finalized by the expatriates along with ICo’s employees in India.

Thus, the expatriates/ ICo created an agency
PE in terms of Article 5(4) of India-Italy DTAA for the Taxpayer in India.

________________________________

2. GE Energy Parts Inc vs. Addl DIT [2017] 78
taxmann.com 2 (Delhi-Trib)

shailesh.kwebmaker

Article 12 and Protocol to India-Belgium DTAA; Article 12, India-Portugal DTAA – due to MFN Clause in Protocol to India-Belgium DTAA, scope of FTS was to be restricted to that under India-Portugal DTAA and ‘make available’ condition was to be read into – as IT support services provided by a Belgian company did not ‘make available’ knowledge, experience, etc., the receipts were not in the nature of FTS.

24.
[2019] 101 taxmann.com 94 [Delhi – Trib] ITA No: 123 (Delhi) of 2015 Soregam SA vs. DDIT Date of Order: 30^th November, 2018 A.Ys.: 2011-12

Article 12 and
Protocol to India-Belgium DTAA; Article 12, India-Portugal DTAA – due to MFN
Clause in Protocol to India-Belgium DTAA, scope of FTS was to be restricted to
that under India-Portugal DTAA and ‘make available’ condition was to be read
into – as IT support services provided by a Belgian company did not ‘make
available’ knowledge, experience, etc., the receipts were not in the nature of
FTS.

FACTS

The Taxpayer a tax
resident of Belgium was engaged in the business of providing IT support
services to its group entities. The Taxpayer had provided such services to its
group entity in India and received consideration in respect thereof. The
Taxpayer furnished its return of income declaring NIL income and claimed refund
of tax withheld by the Indian group company.

The AO held that the entire income received by the Taxpayer for
providing IT support services was taxable in India as Fees for Technical
Services (FTS) under the DTAA.

Aggrieved, Taxpayer appealed before the DRP. The DRP held that having
regard to the Most Favoured Nation (MFN) clause in the protocol to
India-Belgium DTAA, the definition of FTS in Article 12 of India-Portugal DTAA
(which was restricted in scope) would apply. The DRP however, held that the
Taxpayer satisfied the ‘make available condition’ and hence, the receipt was
taxable as FTS in India. Aggrieved, the Taxpayer appealed before the Tribunal.

HELD

Article 12(3)(b) of
India-Belgium DTAA defines FTS. It includes payment for services of a
managerial, technical or consultancy nature. Protocol to India-Belgium DTAA
provides that if India enters into a treaty with an OECD country after 1^st
January, 1990 under which, it agrees to a lower rate of tax, or agrees to
restrict the scope of FTS, then, the same rate or scope shall also be
applicable under India-Belgium DTAA.

Subsequent to 01 January
1990, India entered into DTAA with Portugal, which is a member-country of OECD.
Under India-Portugal DTAA, scope of FTS is restricted by incorporating ‘make
available’ condition. Hence, in terms of Protocol to India-Belgium DTAA, this
restricted scope of FTS was to be read into definition of FTS under Article 12
of India-Belgium DTAA

The Taxpayer had provided
IT support services from outside India. No personnel of the Taxpayer had
visited India in connection with these services. The Taxpayer had not trained
any employee of Indian group company while providing these services. In the
order, neither the AO nor the DRP had specified how knowledge, experience, etc.
was made available nor did they mention how employees of India group company
could have utilised the experience gained by them.

Accordingly, IT support
services provided by the Taxpayer did not fall within the ambit of FTS under
Article 12 of India-Belgium DTAA, read with Article 12 of India-Portugal DTAA.

shailesh.kwebmaker

Article 23(3), India-Thailand DTAA – credit of tax that would have been payable on dividend paid by Thai subsidiary in Thailand, but for the exemption granted, could be claimed as credit against tax payable in India on the dividend.

This is the first
and oldest monthly feature of the BCAJ. Even before the BCAJ started, when
there were no means to obtain ITAT judgments – BCAS sent important judgments as
‘bulletins’. In fact, BCAJ has its origins in Tribunal Judgments. The first
BCAJ of January, 1969 contained full text of three judgments.

We are told that the first convenor of
the journal committee, B C Parikh used to collect and select the decisions to
be published for first decade or so. Ashok Dhere, under his guidance compiled
it for nearly five years till he got transferred to a new column Excise Law
Corner. Jagdish D Shah started to contribute from 1983 and it read “condensed
by Jagdish D Shah” indicating that full text was compressed. Jagdish D Shah was
joined over the years by Shailesh Kamdar (for 11 years), Pranav Sayta (for 6
years) amongst others. Jagdish T Punjabi joined in 2008-09; Bhadresh Doshi in
2009-10 till 2018. Devendra Jain and Tejaswini Ghag started to contribute from
2018. Jagdish D Shah remains a contributor for more than thirty years now.

While Part A covered Reported Decisions,
Part B carried unreported decisions that came from various sources. Dhishat
Mehta and Geeta Jani joined in 2007-08 to pen Part C containing International
tax decisions.

The decisions earlier were sourced from
counsels and CAs that required follow up and regular contact. Special bench
decisions were published in full. The compiling of this feature starts with the
process of identifying tribunal decisions from a number of sources. Selection
of cases is done on a number of grounds: relevance to readers, case not
repeating a settled ratio, and the rationale adopted by the bench members.

What keeps the contributors going for so
many years: “Contributing monthly keeps our academic journey going. It keeps
our quest for knowledge alive”; “it is a joy to work as a team and contributing
to the profession” were some of the answers. No wonder that the features
section since inception of the BCAJ starts with the Tribunal News!

23.
ITA Nos: 4347 to 4350/Del/2016 Polyplex Corporation Ltd vs. ACIT A.Ys.: 2010-11 to 2013-14, Date of Order: 24^th January, 2019

Article 23(3), India-Thailand DTAA – credit
of tax that would have been payable on dividend paid by Thai subsidiary in
Thailand, but for the exemption granted, could be claimed as credit against tax
payable in India on the dividend.

FACTS

The Taxpayer was an
Indian company, which had a wholly owned subsidiary in Thailand (“Thai Co”).
During the relevant years, Thai Co declared and paid dividend to the Taxpayer.
In terms of the Investment Promotion Act in Thailand, such dividend was not
laible to tax in Thailand..Taxpayer claimed tax sparing credit¹
against the taxes payable in India on the dividend income.

AO noted that the
dividend was exempt in Thailand in terms of Investment Promotion Act. As
provisions of a tax treaty provide tax benefit in respect of income which was
doubly taxed and not for tax which was not paid at all, it was concluded by AO
that the tax credit claimed could not be granted.

____________________________________

1. Article 23(3) provided that for the
purposes of foreign tax credit in India, “the term “Thai tax payable” shall be deemed
to include any amount which would have been payable as Thai tax for any year
but for an exemption or reduction of tax granted for that year”.

The CIT(A) upheld
the order of the AO.

HELD

The Tribunal observed that
tax sparing credit under Article 23(3) of India-Thailand DTAA could be availed
by the Taxpayer if dividend received by the Taxpayer was, in the first place,
taxable in the hands of the Taxpayer in Thailand, but was not taxed owing to an
exemption under the provisions of Investment Promotion Act or of the Revenue
Code of Thailand.

From perusal of Revenue
Code and Investment Promotion Act, it was noted that while the dividend would
have been otherwise taxable at 10%, it qualified for exemption under Investment
Promotion Act. Hence, tax sparing credit was allowable. However, any such
credit is further subject to limitation of ordinary credit, i.e. it cannot
exceed the amount of tax payable in India.

In the facts of the
case, the tax sparing credit of 10%
claimed by the Taxpayer was less than the tax payable in India on dividend at
30%. Acoordingly, whereas, the Taxpayer
was eligible for claiming such credit..

shailesh.kwebmaker

Section 9 of the Act; Articles 7, 5 and 12 of India-Philippines DTAA – In absence of FTS Article in DTAA, and in absence of PE in India, receipt of Philippines company from Indian company, being in the nature of business profit, were not chargeable to tax in India.

17. [2018] 100 taxmann.com 230 (Bangalore –
Trib.) DCIT vs. IBM India
(P.) Ltd IT (IT)ANos.: 1288,
1291, 1294, 1297, 1300, 1303 & 1306 (Bang.) of 2017 A.Ys.: 2009-10 to
2015-16 Date of Order: 16^th
November, 2011

Section
9 of the Act; Articles 7, 5 and 12 of India-Philippines DTAA – In absence of
FTS Article in DTAA, and in absence of PE in India, receipt of Philippines
company from Indian company, being in the nature of business profit, were not
chargeable to tax in India.

FACTS

The Taxpayer was an Indian
member-company of a global group. The Taxpayer was engaged in the business of
selling computers, software and lease financing of its products. The group had
a policy of deputing employees of one group company to another group company,
as may be required for certain business projects. For this purpose, the two
respective group companies entered into a standard expatriate agreement. During
this period, the employer of the deputed employee paid salary of deputed
employee in the home country. Thus, Philippines Group Company, (“FCo”) of the
Taxpayer had deputed its employee to the Taxpayer in India. The Taxpayer
reimbursed the amount equivalent to the salary to FCo. Further, the Taxpayer
had withheld tax on the salary of the employee and deposited the same with
Government of India. The Taxpayer did not withhold tax from the reimbursed
amount.

According to the tax authority,
FCo continued to be the employer of the deputed employees and also paid their
salaries. The Taxpayer only reimbursed salary to FCo but did not directly pay
salary to deputed employee. Therefore, the reimbursed amount was covered within
the definition of FTS under the Act as well as under India-Philippines DTAA.
Since the Taxpayer had not withheld tax from reimbursed amount, it was held
‘assessee-in-default’.

In appeal before CIT(A) the
Taxpayer also contended that in absence of FTS article in India-Philippines
DTAA, the receipt was ‘business profit’ and since FCo did not have a PE in
India, the receipt could not be chargeable to tax in India. CIT(A) held that
even if reimbursement by the Taxpayer to FCo was regarded as FTS, the payment
would not be chargeable to tax in India in absence of FTS article in
India-Philippines DTAA.

______________________________________________________

2. Apparently,
the disallowance was u/s. 40(a)(i) of the Act though the decision does not
mention the relevant provision

HELD

In
an earlier decision in the case of the Taxpayer, the Tribunal has held that
when India-Philippines DTAA does not provide for taxing of FTS, it is not
chargeable to tax.

There
is no specific clause in India-Philippines DTAA regarding income in the nature
of FTS. Article 23 does not apply to items of income which can be classified
under any other article, whether or not the income is taxable. A payment would
be covered by Article 23(1) [‘Other Income’ Article] if the payment was not
covered within any other Article.

FCo
received payment in the course of its business. FCo did not have any PE in
India. Hence, the receipt, though business profit, cannot be brought to tax
under Article 7. Therefore, it was not chargeable to tax in India.

shailesh.kwebmaker

Section 9 of the Act; Article 12 of India-Japan DTAA – payments received by Japanese company in respect of deputation of high-level technical executives to Indian subsidiary were FTS, particularly because technical knowledge was made available; in absence of reconciliation of receipts with actual payments, the receipts could not be treated as reimbursement of cost.

16. [2018] 99 taxmann.com 183 (Chennai – Trib.) Panasonic
Corporation vs. DCIT ITA No.: 1483
(Chny) of 2017 A.Y. 2013-14 Date of Order: 2^nd
August, 2018

Section
9 of the Act; Article 12 of India-Japan DTAA – payments received by Japanese
company in respect of deputation of high-level technical executives to Indian
subsidiary were FTS, particularly because technical knowledge was made
available; in absence of reconciliation of receipts with actual payments, the
receipts could not be treated as reimbursement of cost.

FACTS

The Taxpayer was a company
incorporated in Japan. (“FCo”). FCo was engaged in the business of electrical
and electronic products and systems. FCo had a subsidiary in India (“ICo”). In
the course of its business, FCo deputed certain high-level technical executives
to ICo for providing highly technical services to ICo. ICo reimbursed the
salaries of the deputed employees to FCo.

According to ICo, since it was a
case of mere reimbursement of expenses, the receipts by FCo could not be construed
as income of FCo. Further, the objective of secondment was to support ICo and
there was no economic benefit to FCo.

According to the AO, ICo was
required to withhold tax from the payment. Since ICo had not withheld the tax,
the AO disallowed² the
deduction while passing draft assessment order. The DRP directed FCo to
reconcile receipts from ICo with actual payments. FCo could not reconcile the
same. DRP observed that routing salary through FCo was with the twin objectives
of having absolute control over seconded employees and not letting the customer
know about the margin retained by FCo over the actual salary. DRP further
observed that services rendered by employees of FCo made technology available
to ICo which was apparent since subsequently there was no requirement for
deputation of employees again.

Relying on decision in Food
World Supermarkets Ltd vs. DDIT [2015] 63 taxmann.com 43, DRP conducted
that irrespective of whether amount was received with mark-up or on
cost-to-cost basis, it had to be considered as FTS. Since FCo could not
reconcile the receipts with actual payments, it could not be treated as
reimbursement of expenses.

HELD

The
AO disallowed claim of FCo on the ground that it received FTS. The AO and DRP
also found that the technical knowledge was made available to ICo. FCo also
could not reconcile the receipts and the actual payments, before DRP as well as
the Tribunal.

The
deputed personal were all holding senior technical/managerial positions with
ICo and reported to the top management of FCo. They were working under
direction, control and supervision of FCo.

The
deputed personal were rendering highly technical services. Further, the
services resulted in technology being made available to ICo, which obviated the
necessity of employees to be deputed again. Accordingly, order of the AO and
DRP was confirmed.

shailesh.kwebmaker

Section 5 of the Act – salary for services rendered outside India but received in India is not taxable in India in absence of TRC if the Taxpayer furnishes evidence in support of accrual of salary outside India.

15. IT A No.:2407/Bang/2018 Maya C. Nair vs.
ITO A.Y.: 2013-14 Date of Order: 31^st
October, 2018

Section 5 of the Act – salary for services rendered
outside India but received in India is not taxable in India in absence of TRC
if the Taxpayer furnishes evidence in support of accrual of salary outside
India.

FACTS

The Taxpayer
was an individual employed in India. During the relevant year, she was deputed
by her employer to USA. During the deputation period, her entire remuneration
was credited by her employer to her bank account in India. As her stay in India
was less than one hundred and eighty-two days, she qualified as non-resident in
terms of section 6(1) of the Act. In her return of income, the Taxpayer
disclosed remuneration for services rendered in India as taxable and claimed
remuneration for the deputation period outside India as exempt. For the period
of her deputation in USA, the Taxpayer had furnished return of income in USA
and had also duly paid taxes in USA.

However, for the following reasons,
the AO concluded that the Taxpayer was not entitled to exemption of income
earned on deputation in USA and accordingly charged tax thereon.

(i) The Taxpayer had not provided confirmation of her employer in India
or in USA to establish that she was working in USA.

(ii) The receipt of salary in India by the Taxpayer suggested that
she had rendered services in India, unless the Taxpayer proved otherwise¹.

(iii) To claim benefit in terms of India-USA DTAA, the Taxpayer was
required to provide Tax Residency Certificate (“TRC”), which she had failed to
provide.

The Taxpayer preferred an appeal
before CIT(A)-12. By her order dated 31-10-2017, and relying on certain
judicial decisions, CIT(A)-12 deleted the addition made by the AO in respect of
the exempt income. Subsequently, by a departmental administrative order, CCIT
transferred the appeal for that particular year to CIT (A)-10. Hence, CIT(A)-10
passed ex-parte order dated 28-02-2018. In his order, CIT(A)-10 upheld
the order of the AO treating income that had accrued in USA as taxable in
India.

__________________________________________

1. It may be
noted that section 5(2) of the Act provides that income received in India by a
non-resident is chargeable to tax in India.

HELD

When
CIT(A)-10 passed the order, order of CIT(A)-12 was in existence. It was solely
the mistake of the department, for which, the Taxpayer should not be made to
suffer hardship and harassment.

CIT(A)-12
could not have invalidated her order as ‘rectification’ u/s. 154 of the Act. Section
154 merely provides for correction of mistake apparent from the records but
does not confer power to recall or invalidate an order.

As
there cannot be two appellate orders of two different CIT(A)s for the same
assessment year, order of CIT(A)-10, being later, was not a valid order under
law and was liable to be quashed as non-maintainable.

It
is not the case of revenue that the order of CIT(A)-12 was perverse or was made
on wrong factual or legal premise. CIT(A)-12 had passed a reasoned order and
had relied on decisions of jurisdictional High Court and the Tribunal.
Therefore, remanding the matter to CIT(A)-10 would, rather than serving a
useful purpose, will cause hardship to the Taxpayer.

In
ITO vs. Bholanath Pal [2012] 23 taxmann.com 177 (Bangalore), it was held
that salary accrues where the services under the employment are rendered. The
facts of the Taxpayer are similar to the facts in the said decision. Absence of
TRC cannot be a ground for denying DTAA benefit. A taxpayer is required to
provide evidence in support of exemption claimed. The Taxpayer had furnished
evidence of her stay outside India and since the salary for services rendered
outside India did not accrue in India, it was not taxable in India.

shailesh.kwebmaker

Article 12 of India-USA DTAA; Explanation 2 to section 9(1)(vi), payment made towards web hosting charges not taxable as royalty under the Act as well as the DTAA

14. TS-623-ITAT-2018 (Pune) EPRSS Prepaid
Recharge Services India P. Ltd. vs. ITO Date of Order: 24^th
October, 2018 A.Y.: 2010-11

Article
12 of India-USA DTAA; Explanation 2 to section 9(1)(vi), payment made towards
web hosting charges not taxable as royalty under the Act as well as the DTAA

Facts

The Taxpayer is a private Indian
company engaged in distribution and sale of recharge pens of various DTH
providers via online network. In order to run its business, the Taxpayer required
access to servers. Instead of purchasing servers and incurring expenditure on
its maintenance, Taxpayer hired server space under a web hosting agreement from
a foreign company (“FCo”).

The Taxpayer did not withhold
taxes while making payment to FCo for such services on the contention that
payment for web hosting services did not qualify as royalty or FTS.

AO, however, held that the
payments were made for the use of servers which amounted to use of commercial
equipment. Hence, they qualified as royalty u/s.9(1)(vi) of the Act. Aggrieved,
the Taxpayer appealed before CIT(A), who upheld the order of AO.

The Taxpayer appealed before the
Tribunal.

HELD

As
per the terms of the agreement, the Taxpayer had made payments for use of
technology driven services of FCo and not for use of any IPR or rights owned by
FCo. The fact that payments made to FCo varied with the use of technology also
supported the fact that the payments were for availing services. Accordingly,
the payments made for web hosting services did not qualify as royalty.

Further
while using the technology services provided by FCo, the Taxpayer did not use
or acquire any right to use any industrial, commercial or scientific equipment.
Hence, the payments made by Taxpayer cannot be said to be covered under clause
(iva) to Explanation 2 of section 9(1)(vi) of the Act. Reliance was placed on
the decision of Madras HC in Skycell Communications Ltd. & Anr
(TS-18-HC-2001).

Thus,
the Taxpayer was not liable to withhold taxes on web hosting charges paid to
FCo.

Without
prejudice, the definition of royalty, which was retrospectively amended to
include use of, or right to use, an equipment cannot be applied in respect of
the tax years which have elapsed before the amendment came into force.

In
any case, since payments were made by the Taxpayer to FCo before the
retrospective amendment came into force, the Taxpayer cannot be held to be in
default for failure to withhold taxes on the basis of retrospective amendment.

Also, retrospective
amendment to the Act cannot amend the DTAA. Thus, amended definition of
‘royalty’ under the Act cannot be read into the DTAA. Since the Taxpayer had no
control over the servers of FCo, payment for such services did not qualify as
royalty under the DTAA as well.

shailesh.kwebmaker

TS-479-AAR-2016 Mahindra-BT Investment Company (Mauritius) Limited, In re Dated: 08.08.2016

Section 6(3) of the Act; Article 13 of India Mauritius DTAA – since Mauritius company had commercial purpose and the nature of decisions taken by the Board of Directors in Mauritius showed that the control and management was not situated wholly in India, it qualified as treaty resident of Mauritius – Consequently capital gain from transfer of shares of Indian company was exempt under Article 13 of the DTAA.

Facts:
The Taxpayer, a Mauritius company, was held by another Mauritius company (Mau Holding Co) and a UK company (UK Co). The Taxpayer’s board of Directors (BoD) comprised five directors, of which three directors were resident in Mauritius, one was a resident of the UK and one was a resident of India. The Taxpayer’s control and management was exercised by its BoD whose meetings were conducted in and chaired from Mauritius. The Taxpayer acquired certain shares (approximately 8.12%) in I Co, an Indian listed company through the stock exchange. I Co was a joint venture between Taxpayer, other promoters (Indian company and a UK company).

Taxpayer entered into an option agreement (Agreement) with a US Company (US Co), I Co and other promoters, as per which US Co was granted options over the Taxpayer’s shares in ICo representing 8.12 % of the total share capital, if US Co provided a certain level of business to I Co, which was set as a milestone.

In the year under consideration, US Co achieved the specified milestone and exercised its option to purchase shares of I Co from the Taxpayer in March 2010.

The Taxpayer approached the AAR to adjudicate on the issue of whether capital gains arising to the Taxpayer on transfer of I Co’s shares were exempt from tax in India under the capital gains article of the DTAA.

Held:
•The purpose of the arrangement was to motivate US Co, to give a certain level of business to I Co, by giving US Co an opportunity to acquire shares of ICo. Such conditions are not unusual or abnormal in the business agreement. Thus, contention that the Taxpayer had no commercial purpose but to transfer shares to US Co, and the real transaction was between I Co and US Co, was rejected by AAR.

•For a company to be treated as being resident in India as per the then applicable S. 6(3) the control or management was required to be wholly situated in India.

•However, in the facts of the case, having regard to the facts of the case, control and management of the Taxpayer was situated wholly in Mauritius.

The minutes of the BoD meetings reflected that decisions related to financial matters, such as budgets, dividend declaration, buy-back of shares, approval of the Agreement etc., were taken by the BoD in Mauritius.

The SC’s rulings, in the cases of Nandlal Gandalal and V.V.R.N.M. Subbayya Chettiar , support that the expression “control and management” means de facto control and management, and not merely the right or power to control and manage. The BoD also included representatives from UK Co. The board meetings and the nature of decisions taken clearly indicate that control and management of the affairs of the Taxpayer, particularly financial affairs, were situated only in Mauritius.

No additional facts were submitted to substantiate that any important affairs of the Taxpayer, for the purpose of the Act, were being controlled or managed from India.

•Thus Taxpayer was a resident of Mauritius, and, accordingly in terms of Article 13(4), the capital gains arising to the Taxpayer was not taxable in India.

shailesh.kwebmaker

[2016] 72 taxmann.com 198 (Delhi – Trib.) New Delhi Television Ltd v ACIT A.Y. 2007-08, Dated: 17.08.2016

S.- 92B of the Act – (i) Managerial services provided prior to incorporation of proposed overseas subsidiary cannot be classified as an international transaction under section 92B despite the fact that the overseas subsidiary made reimbursement for the same post-incorporation. (ii) Fact that in the transfer pricing study submitted, transaction was classified as an international transaction is not determinative.

Facts:

The Taxpayer was engaged in the business of television broadcasting. To expand its business internationally, it proposed to establish a subsidiary in UK (UK Subsidiary). During the relevant assessment year, the Taxpayer performed certain management services in relation to its establishment of the UK subsidiary. Such services were undertaken prior to its incorporation in the capacity of a shareholder. Post incorporation of the UK subsidiary, the Taxpayer received reimbursement for the management services (including salary and other expenses incurred on its managerial personnel) from the UK subsidiary.

In the transfer pricing study submitted by the Taxpayer such reimbursed amount was classified as international transaction. AO made transfer pricing adjustments in respect of the reimbursed amount.

Taxpayer contended that the management services were provided prior to incorporation in order to conceptualise and give effect to an efficient group structure and hence such services cannot be considered as an international transaction.

Held:

•As per the OECD Transfer Pricing Guidelines, shareholder activity means an activity which is performed by a Member of an MNE group (usually the parent company or a regional holding company) solely because of its ownership interest in one or more group members i.e. in its capacity as a shareholder.

•Since the UK subsidiary had not come into existence at the time of rendering of services, the expenditure incurred on such services could be classified as expenditure for shareholder activity. Moreover, the Taxpayer had incurred the expenditure solely because of its ownership interest.

•The pre-incorporation provision of managerial services is a different transaction from the post-incorporation provision of managerial services since expenditure incurred when an AE was not in existence, cannot be classified as an international transaction.

•Merely because the UK subsidiary reimbursed expenditure post-incorporation, it cannot be the ground for triggering transfer pricing provisions.

•This holds good, notwithstanding that the Taxpayer itself had classified it as an international transaction in transfer pricing study.

shailesh.kwebmaker

[2016] 73 taxmann.com 14 (Mumbai – Trib.) Praful Chandaria v ADIT A.Y.: 2002-03, Dated: 26.08.2016

Article 13 of India-Singapore DTAA – (i) while a call option simplicitor is not a capital asset, a perpetual call option coupled with grant of enjoyment of shareholder rights under a Power of Attorney results in transfer of capital asset in form of valuable right, which is distinct from shares; (ii) Capital gain arising on transfer of such asset is not chargeable to tax in India by virtue of Article 13(6) of India-Singapore DTAA.

Facts:
The Taxpayer, a non-resident Indian and a tax resident of Singapore, held majority of shares in ICo. The Taxpayer entered into an agreement, whereby the Taxpayer granted option to MauCo to buy the shares in ICo at a strike price of USD1 within a period of 150 years. Furthermore, the Taxpayer executed an irrevocable Power of Attorney (PoA) in favor of a bank, confirming that he would not revoke the same. Taxpayer also gave an undertaking that he would not transfer the shares in any other manner.

The Taxpayer received certain consideration for grant of call option under the agreement during the relevant year. The Taxpayer did not offer such income to tax in India. The AO contended that the Taxpayer had effectively alienated his shares in ICo by way of an irrevocable PoA. Accordingly, the AO held that the income from grant of call option resulted in income through or from a capital asset in India and hence sought to tax the same as income from other sources under the Act.

Upon appeal, the CIT(A) confirmed the order of the AO . Aggrieved by the order of CIT(A), the Taxpayer preferred an appeal before the Tribunal.

Held:

•Rights arising pursuant to grant of call option may not be treated as a ‘capital asset’ because, without exercising the option, no actual asset is acquired by the option holder. However, in the present case, the period of option in the agreement was fixed for an incredibly large period of 150 years. Also, an irrevocable PoA, in respect of ICo shares, was executed in favor of a bank, confirming that the Taxpayer would not, at any time, revoke the same. This suggests that the call option was granted for perpetuity. Further the rights which were enjoyed by the Taxpayer as a shareholder were exercised by the PoA holders to participate in the affairs of the company.

•Such a bundle of substantive rights would generally not be given under normal call option agreements. Thus taxpayer has in effect alienated a substantive and valuable right as an owner of the shares without alienating the shares itself.

•Such valuable rights/interest in shares qualifies as a “capital asset” and transfer of such results in “capital gain” chargeable to tax in India under the Act. However, as per Article 13 of the India-Singapore DTAA applicable for the relevant year, such gains are taxable only in Singapore.

shailesh.kwebmaker

[2016] 72 taxmann.com 360 (AAR – New Delhi) Banca Sella S.P.A., In re Dated: 17.08.2016

Section 47(vi) of the Act; Articles 14 and 25 of India-Italy DTAA – (i) In absence of consideration flowing to the amalgamating company, no capital gains in India; (ii) S. 47(vi) of the Act, exempting capital gains in the hands of amalgamating company is also applicable on amalgamation of Italian companies by applying the nationality non-discrimination clause of the DTAA; (iii) Capital gains on transfer of Italian company shares is taxable only in Italy under the India- Italy DTAA

Facts:
The Applicant was a banking company incorporated in Italy (“BSS”) and a member of a banking group in Italy. BSS, held 15% shares in an Italian company, SSBS while the balance shares were held by other Group entities.

In 2010, one of the group entities transferred the information technology business to the Indian branch of SSBS, for a fair consideration and on a going concern basis. Subsequently, SSBS merged into BSS. Consequently, SSBS ceased to exist and the Indian branch of SSBS vested in BSS. BSS paid the consideration to other shareholders of SSBS by way of fresh issue of shares, while shares which BSS held in SSBS were extinguished.

The pictorial representation of facts is as follows:

The Applicant sought ruling from AAR on the following questions.

•Upon amalgamation, whether SSBS would be taxable in India, as there is transfer of a capital asset, being the branch in India.

•If the above is answered in the affirmative, whether Article 25(3) of the DTAA on Nationality Non Discrimination Clause (NNDC) can be invoked to claim the exemption on amalgamation under S. 47(vi) of the Act, which is available only if the amalgamated company is an Indian company.

•Whether BSS and other shareholders would be liable to capital gains on extinguishment of its shareholding in SSBS.

•Whether amalgamation attracts transfer pricing (TP) provisions of the Act.

Held:
•In the absence of any consideration flowing to the amalgamating company i.e., SSBS, the computation mechanism would fail and hence income from “transfer” cannot be taxed as capital gains. Reliance in this regard was placed on SC decision in CIT v. B. C. Srinivasa Setty.

•Although, there is a transfer of shares by BSS, in absence of consideration, no capital gains accrued to BSS.

•Article 25(3) of the DTAA on NNDC provides that there should be no discrimination between locals and foreigners in the matter of taxation. The only exception to Article 25(3) is grant of personal allowances, reliefs, reductions etc. The word ”personal” denotes that the allowances are those that are available to individuals only. Thus the exception is not applicable to companies.

S. 47(vi) of the Act provides exemption to a local amalgamating company, on transfer of assets on amalgamation. By virtue of NNDC of DTAA, similar exemption is available to SSBS.

•Transfer of shares by other shareholders of SSBS results in capital gains. However, such capital gain is taxable only in Italy by virtue of Article 14(5) of India-Italy DTAA.

•TP provisions are not applicable in the absence of any charge of tax in India

shailesh.kwebmaker

[2016] 71 taxmann.com 172 (Bangalore – Trib.) Page Industries Ltd. vs. DCIT A.Y.: 2010-11, Date of order: 24th June, 2016

Sections 92A(1), 92A(2)(g) of the Act – Section 92A(2) cannot be read independent of Section 92A(1) for determining whether enterprises are associated.

Facts
The Taxpayer, an Indian company was engaged in the business of manufacture and sale of ready-made garments. The Taxpayer was a licensee of the brandname owned by an USA Company (FCo).

The brand name was used by the Taxpayer for the purpose of exclusive manufacturing and marketing of the garments under the brand name of FCo. For grant of license, the Taxpayer was required to pay royalty at the rate of 5% of its sales to FCo. The Taxpayer owned the entire manufacturing facility, capital investment, employees and there was no participation of FCo in the capital and management of the Taxpayer. Taxpayer argued that the transfer pricing (TP) provisions do not apply as there is no ‘Associated Enterprise’ (AE) relationship between the Taxpayer and FCo. Nevertheless, Taxpayer disclosed the transaction in Form 3CEB.

Assessing officer (AO) referred the matter to Transfer pricing officer (TPO) for determination of arm’s length price (ALP) of the transaction. As per the TPO, the transaction was not at ALP and consequently he proposed an adjustment to the income of the Taxpayer. The Taxpayer filed objection before Dispute resolution panel (DRP), which rejected the objections of the Taxpayer.

Aggrieved, Taxpayer appealed before the Tribunal.

Held
Section 92A(1) defines AE based on the parameters of management, control or capital. Section 92A(2) is a deeming provision and enumerates circumstances in which the enterprise can be deemed to be an AE.

Thus the conditions of both Sections 92A(1) and 92A(2) are to be satisfied in order to constitute an AE relationship.

The contra view that, satisfaction of the conditions of section 92A(2) alone is sufficient for creation of an AE relationship would render section 92A(1) otiose. While interpreting a provision in a taxing statute, the construction should preserve the purpose of the provision. If more than one interpretation is possible, that which preserves its workability and efficacy is to be preferred to the one which would render a part of it otiose or sterile.

Thus even though the conditions of section 92A(2)(g) are satisfied, in absence of any right with FCo to control and manage Taxpayer, Taxpayer and FCo cannot be considered as AEs, and consequently TP provisions will not apply to transactions undertaken between them.

shailesh.kwebmaker

(Unreported) ITA. Nos. 1548 and 1549/Kol/2009 Instrumentarium Corporation Limited, Finland vs. ADIT A.Y.: 2003-04 and 2004-05, Date of order: 15th July, 2016

Section 92 of the Act – Tribunal upholds interest imputed on interest free loan; TP provisions, being anti-abuse provisions can tax notional income.

Facts
The Taxpayer, a company incorporated in Finland, was engaged in the business of manufacturing and selling medical equipment. A wholly owned Indian subsidiary (ICo) of Taxpayer, acted as its marketing arm in India. In 2002, the Taxpayer entered into an agreement to grant interest free loan to ICo which was duly approved by RBI. Transfer pricing Officer (TPO) sought to impute interest on such loan.

For the relevant year, ICo had incurred losses. Had Taxpayer granted loan charging ALP, losses of ICo would have increased while Taxpayer would have suffered source taxation on interest @10 %.

The Taxpayer argued that there is no erosion of tax base in India on giving an interest free loan to its wholly owned Indian subsidiary and hence, transfer pricing provisions cannot be invoked. Further it was contended that for evaluating section 92(3) one must consider the tax implications of a transaction as a whole rather than tax implications in the hands of the Taxpayer alone and hence charging of higher service fees by the Taxpayer to ICo would have resulted in an erosion of tax base in India as it would increase losses of ICo. Additionally, where the Taxpayer has advanced interest free loan, the Assessing Officer (AO) cannot disregard the commercial expediency of the interest free loan and impute interest thereon.

Held
For the following reasons, Tribunal held that TPO was correct in imputing interest on the interest free loan given by the Taxpayer

Section 92(1) requires that any income from international transaction has to be computed at ALP. It is not in dispute that grant of interest free loan by the Taxpayer to its India AE was an international transaction. However, section 92(3) provides that, if on computation of ALP u/s 92(1), either the income of the Taxpayer is decreased or losses are increased, section 92(1) will not be pressed into service.

Moreover, section 92(3) refers to the Taxpayer in respect of whom computation of income is being done under section 92(1). Thus Taxpayer’s contention that while evaluating the impact of section 92(3), overall impact on profits and losses of not only the taxpayer but also the impact on its AEs should be considered, cannot be accepted.

It was further contended by Taxpayer that u/s. 92(3) one needs to not only consider the actual tax impact but also possible tax advantage de hors the time value of money. These contentions of the taxpayer cannot be accepted. The impact has to be seen only in respect of the previous year in which the international transaction was entered into and not for the subsequent years. Besides, mere possibility of a tax shield which may be available to AE as a result of accumulated losses, if any, can only affect the income of the subsequent years, which as stated above is not relevant for section 92(3).

If the transaction structure is to be accepted without ALP adjustment, while India will lose the taxability of interest in the hands of the Taxpayer @10%, it will have nothing to lose in the respect of taxability of the ICo because admittedly ICo was incurring losses.

In the present case, as a result of TP adjustment, there is neither any lowering of profit of AE nor increase in losses of AE, even while income of the Taxpayer is increased. Thus there is no base erosion by the ALP adjustments in the hands of Taxpayer. The base erosion could have, if at all, taken place at best in a situation in which ICo was actually allowed a deduction.

Further, there is no provision enabling corresponding deduction for ALP adjustments in the hands of ICo merely because TP adjustment is made in the hands of Taxpayer

Under the Indian TP provisions, the use of ALP is mandatory for computation of income arising from international transactions between the AEs. The only exception is that these provisions are not to be applied only in the event where section 92(3) is satisfied.

If the intent of legislature was that TP provisions are not to be invoked in the cases where there is lowering of the overall profits of all the AEs connected with the transactions, the words of the statutory provision would have been so provided so. In absence of the same, it is incorrect to say that, TP provisions are not to be invoked when, there is no erosion of Indian tax base.

Commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining ALP of such a loan. Once a transaction is treated as international transaction between AEs, section 92 mandates that income from such transaction be computed as per ALP. Transfer pricing provisions, being anti-abuse provisions with the sanction of the statute, come into play in specific situation of certain transactions with the associated enterprise and the same can tax notional income too.

While notional interest income cannot indeed be brought to tax in general, the arm’s length principle requires that income be computed, in certain situations, on the basis of certain parameters which inherently lead to notional taxation. When the legal provisions are not pari materia, (i.e the provision of normal computation of income and the provision of computation of income in the case of international transactions between the AEs), what is held to be correct in the context of one set of legal provisions has no application in the context of the other set of legal provisions.

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TS-428-ITAT-2016(Mum) DDIT vs. Taj TV Ltd A.Y.: 2003-04 to 2005-06, Date of order: 5th July, 2016

Section 9 of the Act, Article 5, 12 of India Mauritius DTAA – (i) in absence of principalagent relationship and authority to habitually conclude contract in India, Indian advertising agent did not create a Dependent Agency PE in India; (ii) transponder charges and uplinking charges did not constitute royalty under the DTAA , and retrospective amendment to the royalty definition under the Act cannot be read into the DTAA ; (iii) programming charges for acquiring telecasting rights of live events conducted outside India did not represent income accruing or arising in India.

Facts 1
The Taxpayer was incorporated as a company in British Virgin Islands (BVI) in the year 2000. However, it was subsequently registered as a company in Mauritius in July 2002.

The Taxpayer was engaged in the business of telecasting a sports channel across the globe including India. The Taxpayer had entered into following two contracts with its Indian subsidiary (“ICo”), with the prior approval of Reserve Bank of India (RBI).

Advertising Sales agreement for sale of commercial slot or spot to the prospective advertisers and other parties in India for which a commission at a flat rate of 10% was paid to ICo

Distribution agreement for distribution of the channel to cable operators who ultimately distribute to consumers in India. The distribution revenue collected by ICo was to be shared between the Taxpayer and ICo in the ratio of 60:40.

The Taxpayer contended that advertising and distribution revenue earned by it is not taxable in India because income is business income and is not taxable in absence of Permanent Establishment (PE) in India.

However, Assessing Officer (AO) considered that ICo constituted a ‘dependent agent PE’ (DAPE) of the Taxpayer in India. Also, the distribution income was characterised as ‘Royalty’ u/s. 9(1)(vi) of the Act.

For F.Y. 2002, Taxpayer was registered in BVI as a company for part of the year and in Mauritius for the residuary period. Hence, it was suggested that Taxpayer was not eligible to claim treaty benefits for such part of the year during which it was registered in BVI. As a consequence, it was held that distribution income for that part of the year was taxable as royalty income under the Act, while for the balance period where the Taxpayer was registered in Mauritius, as the royalty income was attributable to the DAPE of Taxpayer, it would be taxable in India as per Article 7 of India Mauritius DTAA .

Held 1
Taking note of the terms of the distribution agreement and the actual conduct of the parties, it was held that ICo was not acting as an agent of Taxpayer in India. ICo merely obtained the right of distribution of channel for itself and subsequently entered into contract with other parties (sub-distributors) in its own name. Thus it was held that the transactions between the Taxpayer and ICo were on principal-to-principal basis.

As per Article 5(4) of the India Mauritius DTAA, an agent is considered to be creating a PE of a foreign enterprise in India if he is a dependent agent and habitually exercises any authority to conclude contract or habitually maintains stock of goods or merchandise in India on behalf of such foreign enterprise. Moreover, an agent is treated as dependent only if it is subject to instructions or comprehensive control of the foreign enterprise and no entrepreneurial risk is borne by the agent.

Thus, even if ICo is considered as an agent of the Taxpayer, since ICo did not satisfy any of the above conditions, it did not constitute DAPE of the Taxpayer in India.

The Taxpayer had not granted any license to use any copyright to the distributor or to the cable operators but merely made available the content to the cable operator which was transmitted to the ultimate viewer. In fact, the rights over the content were always held by the Taxpayer and were never made available to distributors or cable operators. Thus, the income from such arrangement would not constitute royalty.

Also, the contention of the AO that the income from distribution agreement be considered as royalty for some part of the year and as business income for the balance year was not acceptable.

Facts 2
Taxpayer made payments to a US Co for providing facility of transponder for telecasting its sports channel. Additionally certain ‘up-linking’ charges were paid to USCo for up-linking the signals of live events from the venue of the events to USCo’s satellite.

Taxpayer did not withhold taxes on such payments. AO contended that the payments made to USCo qualified as royalty under the Act as well as the India-USA DTAA and hence, were subject to withholding tax in India. Accordingly, AO disallowed such expenses for failure to withhold taxes.

Held 2
Article 12 of the India – USA DTAA exhaustively defines the term ‘royalty’ and therefore, the definition and scope of ‘royalty’ should be as provided in the DTAA not the Act. Hence, the definition of royalty as enlarged by Finance Act 2012 with retrospective effect cannot be read into the DTAA . Reliance in this regard was placed on the Delhi HC ruling in DIT vs. New Skies Satellite [2016] 95 CCH 0032 (Del).

Payment for transponder charges and up linking charges were not in the nature of any consideration in the nature of “use” or “right to use” any copyright of a literary or artistic or scientific work, patent, trademark or process etc., as referred to in Article 12 nor is it for the use of or right to use any industrial, commercial or scientific equipment. Hence, they did not qualify as royalty under the DTAA .

Even otherwise, applying the maxim of “lex non cogit ad impossplia”, since the retrospective amendment was not in place when the payment was made by the Taxpayer, the Taxpayer cannot be held liable for failure to withhold taxes.

In absence of PE of the NR in India, the payment made to a NR outside India for availing service of equipment in relation to transponder and up-linking activity outside India cannot be taxed in India.

Facts 3
Taxpayer paid certain programming cost to various NR cricket boards and other sports associations for acquiring live telecast rights in relation to sport events taking place outside India.

AO contended that such payments were in the nature of acquiring copyrights and hence qualified as royalty under the Act. Taxpayer, however, contended that telecasting such live events did not constitute royalty as it did not involve any copyright.

Held 3
Programming cost was paid by Taxpayer to various nonresidents outside India for acquiring rights of sports events taking place outside India.

Further as liability to pay programming cost is assumed by the Taxpayer outside India and is not borne by any PE of NRs in India, such programming cost cannot be deemed to arise in India.

shailesh.kwebmaker

TS-245-ITAT-2016-TP Owens Corning (India) P. Ltd vs. DCIT A.Y.: 2007-08, Dateof order: 22.4.2016

Section115JB of the Act – a self-contained code – No provision under the Act permits A.O. to make adjustment on account of transfer pricing addition to the amount of profit shown by the Taxpayer

Facts
The Taxpayer is a company incorporated in India and engaged in the manufacturing and trading of glass fiber reinforcement products. During the course of assessment proceedings, Transfer pricing officer (TPO) had undertaken certain TP adjustment. A.O. additionally sought to increase the book profits by the amount of the TP adjustment for the purpose of S.115JB

Held
The TP adjustment made by TPO were deleted by the tribunal. On the additional issue of inclusion of TP adjustment in book profits, Tribunal held as follows:

Section 115JB is a self-contained code. Only those adjustments are permissible to the book profit as have been prescribed u/s 115JB.

The adjustment/additions made under the transfer pricing regulations are governed by altogether different sets of provision as contained in Chapter X of the Act.

Since no provision under the law permits the A.O. to make adjustment on account of transfer pricing addition to the amount of profit shown by the Taxpayer in its profit and loss account for the purpose of computing book profit u/s 115JB, the addition is deleted.

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TS-278-ITAT-20162 DDIT vs. Reliance Industries Ltd. Various AYs, Date of order 18.5.2016

Purchase of Computer software does not qualify as use of copyright in literary work under the copyright Act – Such payment falls outside the ambit of royalty under the DTAA .

Facts
The Taxpayer is a public limited company incorporated in India. It had purchased different types of software from residents of different countries viz. Australia, Canada, Singapore, Netherlands, Germany, USA, UK, and France etc. (collectively referred to as FCo). The software purchased by the Taxpayer was operational software for the internal use of its business. Taxpayer contended that payment for purchase of software does not constitute royalty. Further as FCo does not have a PE in India such payment is not taxable in India. The A.O. however, argued that the consideration paid by the Taxpayer, falls in the definition of ‘royalty’ and hence taxable in India.

Aggrieved, Taxpayer appealed before the CIT(A). The CIT(A) upheld the contention of AO. Being aggrieved, the Taxpayer filed appeal before the Tribunal.

Held
Definition of royalty under the DTAA is short and restrictive definition, when compared to the definition under the Act. The Act was amended to include computer software within the ambit of “right, property or information” specified in S. 9(1)(vi). However, the right to use computer software program is not specifically mentioned in DTAA 3.

The contention of A.O. that the term literary work used in the DTAA includes software is incorrect for the following reasons.

• “Computer software has neither been included nor is deemed to be included within the scope or definition of “literary work under section 9(1)(vi) of the Act. Infact, computer software and literary work have been recognized as a separate item in s. 9(1) (vi) of the Act.

• It has been well settled that where a term is not defined under DTAA it should be understood as per the definition under the domestic laws applying the DTAA , unless the context requires otherwise. In the present case both “copyright’ and ‘literary work’ are not defined under the Act. However, they are defined under the Copyright Act. Thus the term ‘copyright’ under the DTAA has to be understood as per the Copyright Act in India.

• Computer software has been recognized as a literary work in India under the Copyright Act, if they are original intellectual creations. However, the issue that arises is whether sale of such computer software amounts to use of copyright in a literary work. Once it is incorporated on a media it becomes ‘goods’ and cannot be said to be a copyright in itself.

• To constitute “royalty under DTAA, it is the consideration for transfer of “use of copyright in the work and not the “use of work itself. Hence, one needs to understand the difference between the term “use of copy right in software and “use of software itself.

• In case of purchase of software embedded in a disk, what the buyer purchases is the copyrighted product and he is entitled to fair use of the product. The restriction or the terms mentioned in the agreement are the conditions of sale restricting misuse and cannot be said to be license to use. Moreover, the purchaser pays the price for the product itself and not for the license to use.

• Copyright Act provides certain exclusive rights to the owner of the work. The fair use of the work for the purpose it has been purchased does not constitute right to use the copy right in work or infringement of copyright.

• Sale of a CD ROM/diskette containing software is not a license but it is a sale of a product which is a copyrighted product and the owner of the copyright by way of agreement puts the conditions and restrictions on the use of the product so that his copyrights in such copyrighted article or the work, may not be infringed.

• As per the Copyright Act, even if the owner of the copyrighted work restricts the use or right to use the work by way of certain terms of the license agreement, it cannot be said to be grant of or infringement of copyright.

Thus consideration paid by the Taxpayer falls outside the scope of the definition of ”royalty” as provided in DTAA and would be taxable as business income of the recipient.

shailesh.kwebmaker

TS-226-ITAT-2016-TP Imerys Asia Pacific Pvt. Ltd. vs. DDIT A.Y.: 2010-11, Date of order: 15.4.2016

Article 11, 12, 24 of the India-Singapore DTAA – Benefits under DTAA available to the Taxpayer upon furnishing a valid TRC – Recipient of royalty income from sub-license of know-how to third party will be considered as beneficial owner of the same – As long as income is remitted to Singapore, even if in a different year, conditions under the limitation of relief (LOR) article will be considered as being satisfied

Facts
The Taxpayer, 100% subsidiary of French Company, was a company incorporated in Singapore and tax resident of Singapore. The Taxpayer was set up to act as headquarter for Asia-Pacific region and to render administrative, marketing and sales services to the group and affiliated companies as well as to trade in paper and performance minerals and other related business activities. The Taxpayer entered into an agreement with its affiliate UK Co on principal-to-principal basis for obtaining use of technical know-how. Subsequently, Taxpayer entered into an agreement with its Indian affiliate (I Co.) for sublicensing technical know-how received from UK Co, and received royalty income from I Co. Moreover, Taxpayer contended that it provided services to I Co through its employees, who travelled to India for rendering such services. Additionally, Taxpayer had granted loan to I Co. for which it received interest income.

Taxpayer furnished a valid tax residency certificate and accordingly offered royalty and interest income received from I Co to tax in India at a lower rate provided under the India-Singapore DTAA . However, the A.O. contended that Taxpayer was not the beneficial owner of the income and hence benefit under the DTAA should not be available. It was also argued that as per the Limitation of relief article in the DTAA , since the royalty and interest income was not received in Singapore, such incomes would not be eligible for the lower rates prescribed in the DTAA . Aggrieved, appeal was filed before the Dispute resolution panel (DRP), which confirmed the order of the A.O.

Aggrieved by the order of DRP, Taxpayer appealed to the Tribunal

Held:
Benefits available under the DTAA should be granted to the Taxpayer who furnishes a valid TRC as propounded by SC in UOI Vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)

Tribunal noted that the Taxpayer entered into an agreement with UK Co under which UK Co granted right to use certain technology and know-how to Taxpayer in consideration of payment of royalty. Further as per the agreement Taxpayer was allowed to sub-license the know-how to other group companies. Accordingly, Taxpayer sub-licensed the same to I Co. Also, the Taxpayer provided certain services to ICo through its employees in relation to use of such know-how.

Since the taxpayer entered into an agreement with UK Co and received the know-how license in its own right, which it sub-licensed to ICo as well as provided further services to ICo, Taxpayer was the beneficial owner of royalty. Reliance in this regard was placed on decision of AAR in Shaan Marine Services Pvt. Ltd. v. DDIT (2014) 165 TTJ 952 (Pune).

Royalty for the relevant year was paid to Taxpayer not in same year, but in a subsequent year. Limitation of relief article does not require that the income be received in the same financial year for it to qualify for the benefits under the DTAA. Where royalty and interest income is remitted to Singapore and subject to tax therein, benefits of the DTAA should be available.

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TS-252-ITAT-20161 Shri Soundarrajan Parthasarathy vs. DCIT A.Y.: 2011 -12 and 2012-13 Date of order: 5.5.2016

Section 17(2) of the Act- Benefits obtained under Stock Appreciation Rights (SAR s plan) received by employees of an Indian company (I Co) from ICo’s parent in USA (US Co) and exercised while the Taxpayers were resident – taxable in India as salary income in the hands of the employees.

Facts
Taxpayers were employees of I Co, a subsidiary of US Co. US Co rolled out a Stock Appreciation Rights plan (SARs plan) under which Taxpayers, as Employees of I Co, became eligible and received options under the SARs plan.

As per the terms of the SARs plan, Taxpayers were not offered any security or sweat equity shares, but, were given a right to receive cash equivalent of the appreciated value of certain specified number of securities of US Co. The rights under the SARs plan, vested in the Taxpayers while they were working outside India and were Nonresident (NRs). Rights were however exercised by the Taxpayers when they were residents of India. I Co withheld tax on benefit received by the Taxpayers under the SARs plan by treating it as salary Income. US Co also withheld taxes payable in the USA on the same benefits. Taxpayers in the return of income filed in India claimed that the SARs benefits were not taxable as salary Income. This claim was rejected by the A.O.

The First Appellate Authority confirmed A.O.’s action of taxing the SARs as Salary Income. Being aggrieved, Taxpayers appealed to the Tribunal.

Held
The Tribunal ruled in favor of the A.O. and upheld salary taxation on the following grounds:

SARs are not capital assets
• The Taxpayers were merely given the right to receive appreciation in value of shares in cash, and not shares itself. Hence, SARs did not represent capital assets. They were revenue receipt.

• The SARs were given to the Taxpayers as compensation for services rendered to I Co. They did not represent transfer of capital asset or termination of any source of income.

• Amount received under SARs was a revenue receipt.

The SAR benefit is taxable as Salary Income despite absence of a direct employer-employee relationship with US Co
• SARs were given to employees who are connected, directly or indirectly, with US Co so as to motivate the employees to perform their best work. But for employment with I Co, the Taxpayers would not have received the benefits. The SARs benefitted I Co directly and US Co indirectly.

• US Co promoted the SARs scheme to promote its business and for commercial expediency. The Taxpayers enriched themselves by accepting the offer.

• The SARs were in addition to salary for services rendered to I Co and, hence, they were taxable as salary, being benefit in lieu of salary for services rendered.

SARs trigger taxation in India if the exercise happens when a taxpayer is resident in India
• The Taxpayers exercised the SARs options when they were residents in India. Merely because the vesting happened when the Taxpayers were NRs and working outside India, does not relieve taxation at the time of exercise.

shailesh.kwebmaker

TS-310-ITAT-2016 Tapas Kr. Bandopadhyay vs. DDIT A.Y.: 2010-11, Date of order: 1.6.2016

Section 5, 15 of the Act – Salary paid by foreign employer from its bank account outside India and directly deposited in Non Resident External (NRE) account in India of employee, being ‘received in India’ is taxable in India since the Taxpayer had not brought facts on record to prove that he had control over salary income in foreign jurisdiction prior to its remittance to his NRE account in India.

Facts
The Taxpayer, an individual was engaged in providing marine engineering services to two foreign companies (FCos). In the relevant year, the Taxpayer was in international waters to render services to FCos for more than 182 days and hence qualified as a NR under the Act. Additionally, he was not a resident of any other country during the relevant year. During the year, FCos directly deposited salary of the Taxpayer in his Non Resident External (NRE) bank account in India.

The A.O. observed that the income was received directly in the taxpayer’s NRE account in India. As the first point of receipt of salary was in India, salary income was taxable in India u/s 5(1)(a) of the Act on receipt basis.

Taxpayer contended that services were rendered to FCo outside India and the payment for which was made in USD. Since the payment was made by FCo in USD, it should be considered as having been made at the time of payment in FCos’ jurisdiction. The amount was merely remitted to his NRE account in India at his behest. As the first receipt was outside India, overseas salary income cannot be taxed in India.

Aggrieved, Taxpayer appealed before CIT(A). The CIT(A) upheld the AO’s contention. Being aggrieved, the Taxpayer filed an appeal before the Tribunal.

Held
It is not the case of the Taxpayer that he received the salary on board of a ship on high seas which subsequently got deposited in his NRE account. On the other hand, money was transferred directly from the FCos’ account outside India to the Taxpayer’s NRE account in India. Thus, the Taxpayer’s contention that salary was received outside India and not in India is not acceptable.

Contention of the Taxpayer that he had control over salary income in international waters and remittance by employers in USD in his NRE account was at the behest of his instruction is not acceptable since this could be so only if the Taxpayer received hot currency and deposited that in his NRE account. However, in absence of any evidence on record to prove that the Taxpayer had any control over money in the form of salary income in foreign jurisdiction.

The receipt in NRE account in India is the first receipt by the Taxpayer and hence salary income is taxable in India.

Also, from the Indian tax perspective, Taxpayer was an NR. He was also not a resident of any other foreign jurisdiction. If the Taxpayer’s contention of nontaxability of income is accepted then income will neither be taxable in India nor in any foreign jurisdiction.

shailesh.kwebmaker

TS-438-ITAT-2016(Ahd) ITO(IT) vs. Susanto Purnamo A.Y.: 2011-12, Date of order: 4th August, 2016

Article 15 and Article 12 of India – USA Double Taxation Avoidance Agreement (DTAA ) – Software development services rendered by an individual qualified as Independent professional services (IPS) as per Article 15. In absence of satisfaction of conditions provided in Article 15, such income was not taxable in India.

Facts
The Taxpayer, an individual resident in USA, carried on his business as a sole proprietor. During the year, Taxpayer had rendered certain software development services to an Indian company (ICo). As part of the software development services, Taxpayer was required to design, build and maintain a complete video streaming website for ICo.

Taxpayer contended that the income from the software development services was in the nature of business income and in absence of a PE or a fixed base in India, income from such services is not taxable in India under Article 7 as well as Article 15 of the DTAA. Further, even if one were to contend that the services were in the nature of technical services, as such services did not make available any technical knowledge or skill, it would not be covered by Fee for Included Services (FIS) Article.

AO rejected Taxpayer’s contention on the ground that services rendered by the Taxpayer were not in the nature of IPS but in the nature of FIS. Further it was contended that the services satisfied the “make available condition” and hence, income from software development services was taxable in India.

On appeal, the First Appellate Authority (FAA) held that software development services are covered by the IPS article. Further due to a specific carve out in FIS article, services covered by IPS article would fall outside the ambit of FIS. Since the Taxpayer did not have a fixed base in India, nor did his presence in India exceed 90 days, the income from such services was not taxable in India. Aggrieved, the AO filed an appeal with the Tribunal.

Held
On a conjoint reading of Article 12 and Article 15 of the India-USA DTAA, it is clear that once an amount is found to be of such a nature as it can be covered by IPS article, the same shall stand excluded from the ambit of FIS article.

The applicability of Article 15 is substantially influenced by the status of the recipient; whether the recipient is an individual or a corporate entity. Thus, although there may be overlapping effect in the scope of services covered by Article 12 and Article 15, as long as the services are rendered by an individual or group of individuals, rendition of such services is covered by Article 15. Reliance in this regard can be placed on decision of Mumbai Tribunal in Linklaters LLP vs. ITO (2011) 9 ITR Tri 271. In the context of India-USA DTAA, this is specifically exemplified by way of a specific carve out in Article 12.

The definition of professional service in Article 15 is only illustrative and not exhaustive. The emphasis is on the nature of services.

Software development service which essentially requires predominant intellectual skill and is dependent on individual characteristics of the person pursuing software development, and is based on specialized and advanced education and expertise qualifies as a professional service under Article 15. Reliance in this regard was placed on Kolkata Tribunal decision in the case of Graphite India Ltd (2002) 86 ITD 384

It was not in dispute that the Taxpayer did not have a fixed base in India, nor did his presence in India exceed 90 days in the relevant year. Thus, although the services are in the nature of IPS, in absence of satisfaction of conditions of Article 15, income from software development services was not taxable in India.

Whether the services satisfied the make available clause under the FIS Article is wholly academic and infructuous considering the above discussion.

shailesh.kwebmaker

[2016] 71 Taxmann.com 351 (Delhi-Trib) ADIT(IT) vs. International Technical Services LLC A.Y.: 2009-10, Date of order: 11th July, 2016

Sections 44BB , 44DA, 115A of the Act – Section 44BB of the Act does not mandate that the services should be provided directly by the party engaged in prospecting etc. of mineral oil; Provision of services of technical personnel for carrying out drilling activities is covered by Section 44BB of the Act.

Facts
The Taxpayer a non-resident (NR) provided services of highly specialized offshore personnel to a third party. The third party (also a non-resident) required these personnel for carrying out drilling operations in relation to its contract with an Indian company.

Taxpayer contended that provision of technical personnel is for carrying out drilling operations and hence would be covered by presumptive taxation provisions of section 44BB. However, the Assessing Officer (AO) argued that the income of the Taxpayer would be determined on net basis as per the provisions of section 44DA.

Aggrieved, the Taxpayer appealed before Dispute Resolution Panel (DRP), who subsequently directed the AO to compute income u/s 44BB.

The AO appealed before the Tribunal

Held
Taxpayer provided key technical personnel for conducting actual drilling operations. The service was an integral part of the drilling operations in connection with prospecting, extraction or production of mineral oil. Hence, it cannot be said that the activities of the Taxpayer were not “in connection with prospecting for or extraction or production of mineral oils”.

Section 44BB requires that the services/facilities provided by the Taxpayer should be “in connection with” prospecting etc. of mineral oil. It however, does not mandate that such services should be provided directly by the party engaged in prospecting etc. of mineral oil. Reliance in this regard was placed on the Mumbai Tribunal ruling in Micoperi S.P.A. Milano vs. DCIT (2002) 82 ITO 369 (Mum).

Section 115A was not applicable in the present case as payment was received from a NR. The decision in the case of CIT vs. Rolls Royce Pvt. Ltd. 170 Taxman 563 (Uttarakhand High Court) did not apply as in that case the services were rendered to an Indian company whereas in the present case services were rendered to a NR.

Thus services rendered by Taxpayer were covered by section 44BB.

shailesh.kwebmaker

[2015] 63 taxmann.com 124 (Bangalore) DCIT vs. Subex Technology Ltd A.Y.:2009-10, Date of order: 1 October, 2015

Section 90 of the Act –In absence of any specific provision in the Act denial of grant of foreign tax credit against MAT liability is invalid

Facts
The Taxpayer was an Indian company. During the relevant assessment year, the income of Taxpayer was subject to Minimum Alternate Tax (“MAT ”) under the provisions of section 115JB of the Act. Since, the Taxpayer had paid taxes in foreign countries, it claimed credit in terms of section 90 of the Act for taxes paid abroad against its MAT liability u/s. 115JB.

During assessment proceedings, the AO disallowed the claim of foreign tax credit on the ground that provisions of section 115JB stood on a different footing than the normal provisions of the Act.

Held
The income on which tax was paid abroad was included in ‘book profit’ computed for the purpose of section 115JB. Once taxable income was determined either under the normal provisions or u/s. 115JB, the computation of tax was to be governed by the normal provisions of the Act1 .

As there was no provision in the Act for restricting the grant of foreign tax credit, such credit should be allowed against MAT liability.

shailesh.kwebmaker

[2016] 70 taxmann.com 1 (Delhi) ZTE Corporation vs. ADIT Date of order: 30 May, 2016

Articles 5, 7, 12 of India-China DTAA; section 9 of the Act, Rule 10 of I T Rules – (i) level of participation of PE in economic life of source country should determine attribution of profit to PE (ii) If supply of software is integrally connected to supply of hardware, receipts from supply of software could not be taxed as royalty.

Facts – 1
The Taxpayer was resident of China. It was engaged in the business of supplying telecom equipment and mobile handsets to Indian customers. It did not furnish return of its income in India on the ground that it did not have PE in India in terms of Article 5 of India-China DTAA .

According to the AO, since the Taxpayer was carrying on business in India through fixed base for long period, it had fixed place PE, installation PE and dependent agency PE in India. Therefore, the AO proceeded to determine the profits from supply of telecom equipment and mobile handsets that were attributable to the PE in India. Moreover, since the Taxpayer had not maintained separate books of account for its Indian operations, the AO invoked Rule 10(ii) of I T Rules and attributed 20% of net global profits arising out of revenues realized from India.

Facts – 2
In terms of consolidated offshore supply contract executed by the Taxpayer, the Taxpayer also supplied software. The Taxpayer contended that such software was integral and essential part of telecom equipment and hence, payment towards such software should not be treated as royalty. However, the AO concluded that the payments made for use of software were royalty in terms of Article 12(3) of India-China DTAA as well as section 9(1) of the Act.

Held – 1
As regards attribution of profits to PE
Since the Taxpayer had not maintained books of account pertaining to PE in India, indirect method of attribution as per rule 10 should be resorted to.

Primarily, taxable income arises to Taxpayer from nexus between source country and activities of PE. Hence, level of participation of PE in economic life of source country is the most important aspect.

The order of the AO and that of CIT(A) gives clear picture of level of operations of the PE. The level of operations carried out by the Taxpayer through its PE in India was considerable enough to conclude that almost entire sales function was carried out in India.

Since in the present case the hardware and software supplied to Indian customers involved supply, installation, commissioning etc.,, 35% of net global profits of the Taxpayer from its transactions with India were to be attributed to PE in India.

Held – 2
As regards integrally connected supply of software

Since supply of software was integrally connected to supply of hardware, receipts from supply of software could not be taxed as royalty.

shailesh.kwebmaker

TS-365-ITAT-2016 (CHNY) Intelsat Global Sales and Marketing Ltd A.Ys.: 2002-03 to 2012-13, Date of order: 1 July, 2016

Article 5 of India-UK DTAA – Since maintenance of satellite signal quality was obligation of the taxpayer, equipment installed in India for signal testing and monitoring would result in rendering of service in India.

Facts
The Taxpayer, a company incorporated in UK, was providing satellite capacity and related services to telecasting/telecom companies in India (“Indian customers”). Indian customers uplinked data/signals to satellite of the Taxpayer. These were processed through the transponder in the satellite and retransmitted to earth stations, which were owned by Indian customers. A group company of the Taxpayer in India had installed testing and monitoring equipment in India to ascertain quality of the signals received in India.

According to the taxpayer, the function of equipment was only to monitor the signals and since the earth stations were owned by the Indian customers, it had not rendered any service or carried on any business in India. Further, as per Article 5 of India-UK DTAA , it did not have a Permanent Establishment (PE) in India. It also contended that tax authority could tax only such portion of income which could be attributable to operations carried out in India. Also, the fact that a UK company controls a group company in India would not, by itself, constitute PE of the UK Company in India. The Taxpayer relied on various decisions to contend that the payments received by it were not royalties and since the services provided were standard services, they were also not Fee for Technical Service (FTS).

Held
If Taxpayer was maintaining a satellite in orbit and Indian customers were uploading data/signals, which were retransmitted to India to earth stations owned by Indian customers, the Taxpayer may not be rendering any service in India.

However, the Taxpayer was also maintaining testing equipment in India because the Taxpayer was under obligation to maintain the quality of the signals.

Even though the equipment was maintained by group company of the Taxpayer, it was for testing the signal transmitted by the Taxpayer. Hence, the Taxpayer should be construed as rendering services in India.

As the Taxpayer claims to have dismantled the equipment, and since it was under obligation to maintain quality of signals, it should be examined how taxpayer tested and maintained quality of signals after dismantling the equipment and also certain other technical aspects. Therefore, the assessment was set aside and matter remanded to AO.

shailesh.kwebmaker

[2016] 71 taxmann.com 120 (Mumbai) Mrs Shalini Seekond vs. ITO A.Y.: 2007-08, Date of order: 7 July, 2016

Article 4, 6 and 24 of India-Sri Lanka DTAA; section 90(3) of the Act – (i) on applying tiebreaker test, Taxpayer was resident in India as habitual abode and center of vital interests was in India (ii) Notification issued under section 90(3) being clarificatory in nature, has retrospective applicability (iii) having regard to Notification under section 90(3), capital gain on sale of immovable property in Sri Lanka is chargeable to tax in India.

Facts
The Taxpayer was a Sri Lankan national married to an Indian national. Post-marriage she was living in India. During the relevant year, she was resident of India in terms of the Act and, based on her fiscal domicile, was also a resident of Sri Lanka in terms of Sri Lankan domestic law. The Taxpayer owned immovable property in Sri Lanka, which she had sold during the year. She invested the sale proceeds in mutual funds and a property in India.

According to the Taxpayer, based on tie-breaker rule in India-Sri Lanka DTAA , she was resident of Sri Lanka. Based on certain decisions of Supreme Court, it was argued that the capital gains on sale of immovable property situated in Sri Lanka were to be taxed only in Sri Lanka.

According to the AO, the Taxpayer was resident in India and hence her global income was taxable in India. Since the Taxpayer had not paid any tax in Sri Lanka, no relief could be granted and capital gain arising in Sri Lanka was fully taxable in India. The AO relied on Notification No 91 of 2008 dated 28-08-2008 clarifying that where a DTAA uses the expression “may be taxed in the other country”, the income should be included in total income chargeable to tax in India and relief should be granted in accordance with the method for elimination or avoidance of double taxation provided in DTAA .

The issue before the Tribunal was whether the gains derived from sale of immovable property was taxable in India.

Held
(i) As regards applying tie-breaker rule for resolving dual residency

It is undisputed that the Taxpayer was a resident in India as per the Act, which was further confirmed by the Taxpayer who declared her status as being “resident in India” in the return of income.

Under the tie-breaker rule of India-Sri Lanka DTAA , the Taxpayer qualified as resident of India since:
• Post-marriage Taxpayer had a permanent home (home of her husband) available to her in India. The availability of a permanent home has nothing to do with ownership of a home in the country of residence, but refers to a place of abode or dwelling in the country of residence and an abode available to her at all times continuously and not occasionally for a short duration.
• The word “habitual abode” requires actual living habitually, consistently and regularly in a country. Mere ownership of an immovable property or living of parents of a married woman in Sri Lanka does not make Sri Lanka her habitual abode, unless it is demonstrated with cogent evidences that the Taxpayer was living both in India and in Sri Lanka permanently, regularly and consistently.
• Post-marriage with an Indian national, the Taxpayer’s economic and personal relations have close proximity to India. She has retained her centre of vital interest in India after her marriage by moving to India to stay with the Indian national permanently.
• The Taxpayer held lifelong, valid multiple visa issued by GoI to enable her to stay in India indefinitely with her husband. This also reflected her intention to stay or settle permanently in India.
• By utilizing the sale proceeds of Sri Lankan property for buying assets in India, the Taxpayer clearly reflected the strategic shift of vital economic interest to India from Sri Lanka.
• Accordingly, the Taxpayer was a treaty resident of India

(ii) As regards connotation of “may be taxed”

Under section 90(3) of the Act, GoI can assign meaning to any undefined term in the Act or DTAA provided the assigned meaning is not inconsistent with their provisions, or unless the context otherwise requires. Accordingly, GoI issued the Notification assigning meaning to the expression “may be taxed”.

Since the meaning assigned is with intent and objective as understood during the negotiations of DTAA , it should be read from the date when India– Sri Lanka DTAA came into force.

Plain language used in the Notification shows that it is merely procedural in nature and no additional liability is sought to be fastened on the Taxpayer. Hence, its retrospective applicability cannot be questioned.

(iii) As regards taxability of capital gains under DTAA

Right to tax capital gains from the sale of the immovable property situated in Sri Lanka is allocated to Sri Lanka under the DTAA . The fact that the tax liability on such gains is nil or zero does not impact the right of taxation allocated in terms of the DTAA .

However, having regard to the Notification, such capital gain should be included in the income of the Taxpayer chargeable to tax in India under the provisions of the Act. Double taxation relief may be granted as per the provisions of the DTAA which in the present case is Nil as no taxes were paid in Sri Lanka.

shailesh.kwebmaker

[2016] 67 taxmann.com 68 (Bangalore) e4e Business Solutions India (P) Ltd vs. DCIT A.Y.: 2009-10, Date of order: 10 November, 2015

Section 92C of the Act – Foreign exchange gain which has direct nexus with international transactions, is to be considered as part of operating profit of Taxpayer.

Facts
The Taxpayer was engaged in the business of end-to-end BPO Services. It had entered into service agreement with its Associated Enterprise (“AE”) based in USA, which was its holding company. For computing its operating profit margin for transfer pricing purpose, the taxpayer had included foreign exchange gains.

However, TPO recomputed the operating profit margin by excluding foreign exchange gain for benchmarking the international transaction. The DRP did not accept the objections of the Taxpayer and confirmed the proposed adjustment.

Held
It was undisputed that the foreign exchange gain pertained to income from service provided to the AE. Therefore, it had direct nexus with international transactions and service provided by the Taxpayer to its AE.

The tax authority had contended that the economic and other factors affected foreign exchange gains and such gain was not dependent on operations of the Taxpayer. However, such factors also affected the business transactions and price determination between the parties. Since foreign exchange gain had arisen only because of international transactions, it had direct nexus with international transactions. Therefore, such gain was part of operating revenue, and consequently part of operating profit of the Taxpayer for the purpose of determining the ALP in respect of the international transaction.

However, while comparing the margins of the comparable, foreign exchange gain should also be included for computing operating profit margin.

shailesh.kwebmaker

ITA NO.4028/Mum/2002 ADIT vs. J Ray Mc Dermott Eastern Hemisphere Ltd A.Y.: 1998-99, Date of Order: 6th May, 2016

Article 5(2)(i), 5(2)(c) of India-Mauritius DTAA – no construction PE in India as duration of each project in India was less than 9 months; Activities of LO being solely of a preparatory or auxiliary character, falls within the exclusion in Article 5(3)(e).

Facts
The Taxpayer, a Mauritius company was a member of a global group of companies, was engaged in transportation, installation and construction of offshore platforms for mineral oil exploration in India. During the relevant year, the Taxpayer carried out only one project the duration of which was only three months.

The AO considered the work executed by the Taxpayer at different locations in terms of different contracts represented one project. Accordingly, the AO aggregated number of days for execution of all the contracts and held that it exceeded period of 9 months. The AO also included the number of days estimated to have been spent for supervisory activities before the actual commencement of construction work. Thus, the AO held that the Taxpayer had a PE in India under Article 5(2)(i) (Construction PE) of India-Mauritius DTAA . Further, relying on the report of a survey carried out u/s. 133A of the Income-tax Act, 1961 (the Act), concluded that the LO premises of group company of the Taxpayer were used exclusively for the Taxpayer’s business and therefore the LO was a Fixed Place PE under Article 5(2)(c). Accordingly, the AO determined the taxable income of the PE and taxed it u/s. 44BB of the Act.

In appeal, CIT(A) held that while the Taxpayer did not have construction PE under Article 5(2)(i), it had Fixed Place PE since the LO was exclusively used for the projects of the Taxpayer in India.

The issues before the Tribunal were:

a) Whether independent activities of the Taxpayer under different contracts were to be aggregated for determining the 9-month threshold period under Article 5(2)(i) of India-Mauritius DTAA ?

b) Whether LO of group company of the Taxpayer constitute PE of the Taxpayer under Article 5(2)(c) of India-Mauritius DTAA ?

Held

As regards Construction PE

(i) In earlier year, the Tribunal after considering the language in Article 5(2)(i) had held that the permanence test for existence of a PE stands substituted by a duration test for building construction, construction or assembly project, or supervisory activity connected therewith. There is also a valid, and more holistic view of the matter, that this duration test does not really substitute permanence test but only limits the application of general principle of permanence test in as much as unless the activities of the specified nature cross the threshold time limit of nine months, even if there exists a PE under the general rule of Article 5(1), it will be outside the ambit of definition of PE by virtue of Article 5(2)(i).Plain reading of Article 5(2) (i) would show that, for the purpose of computing the threshold time limit, what is to be taken into account is activities of a foreign enterprise on a particular site or a particular project, or supervisory activity connected therewith on an independent and standalone basis.

(ii) As there is no specific mention about aggregating the number of days spent on various sites, projects, etc. each of the sites, projects, etc. is to be viewed on standalone basis. Thus the contention that all projects need to be aggregated for computing the threshold of 9 months is not valid.

(iii) In the relevant year Taxpayer carried on only one project and the duration of which did not exceed 9 months. Thus, the Taxpayer did not have a construction PE in India.

As regards LO as PE

(i) There was no material on record that the employees of the LO had reviewed engineering documents or had participated in discussions or approval of the designs. LO merely provided back office support in relation to projects in India. None of the documents showed that the employees of the LO negotiated or concluded contracts for the Taxpayer, or that substantive business was carried out from the LO. In absence of such material, the claim of the Taxpayer that its Project Office was merely a communication channel had to be accepted.

(ii) Since the main business of the Taxpayer was fabrication and installation of platforms, PE trigger can be examined only under Article 5(1)(i) Thus, the issue of determination of its ‘PE’ through any other clause does not arise unless and until any other activity is taken up by the Taxpayer which is having an independent identity or economic substance and yielding separate business profits

(iii) Thus, since the project of the Taxpayer did not have work duration of more than 9 months during the year, an activity of the maintenance of back-up cum support office ‘simpliciter’ will not constitute ‘PE’ in India.

shailesh.kwebmaker

[2016] 69 taxmann.com 106 (Mumbai – Trib.) DDIT vs. Savvis Communication Corporation A.Y. 2009-10, Date of order: 31st March, 2016

Section 9 of the Act, Article 12 of India-USA DTAA – the payment for providing web hosting services (though involving use of scientific equipment) does not qualify as “consideration for the use of or right to use of, scientific equipment”; hence, not taxable either u/s. 9(1) (vi) or Article 12 of India-USA DTAA .

Facts
The Taxpayer, an American company, was engaged in providing information technology solutions, including web hosting services. During the relevant year, the Taxpayer had earned income from provision of managed hosting services to entities in India. The Taxpayer claimed that the income was not taxable in India in terms of Articles 12 and 7 of India-USA DTAA .

According to the AO, web hosting company provides space on a server (whether owned or leased) for use by client. The server is not owned by the client. The hosting contract is for limited period. Hence, the AO concluded that the payment received by the Taxpayer was for granting right to use scientific equipment and therefore, it was royalty in terms of Explanation 2(iva) to section 9(1) (vi) of the Act.

Held

The AO proceeded on the fallacy that when scientific equipment is used by the Taxpayer for rendering service, the receipt should be construed as receipt for use of scientific equipment.

If the Taxpayer receives income by allowing customer to use scientific equipment, it is taxable as royalty. However, use of scientific equipment by the Taxpayer, in the course of giving a service to the customer, is distinct from allowing the customer to use a scientific equipment.

The true test is: whether the consideration is for rendition of service (though involving use of scientific equipment), or whether the consideration is for use of equipment simplicitor by the Taxpayer. If it is former, consideration is not taxable and if it is latter, consideration is taxable as royalty for use of equipment.

If the person making payment does not have independent right to use equipment or have physical access to it, the payment cannot be said to be consideration for use of scientific equipment.

Accordingly, the receipt was not “consideration for the use of or right to use of, scientific equipment” which is a sine qua non for taxability under section 9(1)(vi) read with Explanation 2(iva) thereto.

shailesh.kwebmaker

[2016] 68 taxmann.com 305 (Mumbai – Trib.) DCIT vs. VJM Media (P) Ltd A.Y.: 2007-08, Date of Order: 13th April, 2016

Article 12 of India-Singapore DTAA , Article 13 of India-UK DTAA – payment made to nonresidents for limited, restricted and one time use of photograph, not being for “use of copyright”, was not royalty in terms of DTAA .

Facts
The Taxpayer, an Indian company, was engaged in the business of publishing magazines. During the relevant year, the Taxpayer had made payments to non-residents (one located in Singapore and another located in UK) for procuring images and figures for publication in its magazines. The Taxpayer was downloading the images from the websites of the two non-residents and was required to make payment for each of such downloads. The Taxpayer had the right of one time use of the image in its own magazines.

Since the Taxpayer did not withhold tax from the payments, the AO invoked the provisions of section 40(a)(i) of the Act and disallowed the payment. In appeal, CIT(A) upheld the order of the AO.

Held

In terms of Article 12 of India-Singapore DTAA and Article 13 of India-UK DTAA, only payments made for use of copyright can be characterised as royalty. Further, the copyright should be only of any of the items mentioned therein.

Even if it is presumed that a photograph falls in one or more of the items mentioned, the tax authority is required to establish that the payment was for use of ‘copyright’ and not for ‘copyrighted article’.

In several judgments, it has been held that ‘copyright’ and ‘copyrighted article’ are two different things.

The Taxpayer was permitted only one time use of the photograph in the magazine but not permitted to edit the photograph, make copies for sale or to permit someone else to use the photograph. Thus, the Taxpayer was permitted to use the ‘Article’ and not the ‘copyright’. In absence of “use of copyright”, the payment cannot be regarded as royalty so as to trigger obligation to deduct tax at source.

shailesh.kwebmaker

[2016] 68 taxmann.com 142 (Kolkata – Trib.) Gifford & Partners Ltd. vs. DDIT A.Ys.: 2005-06 and 2007-08, Date of Order: 6th April, 2016

Section 9 of the Act; Article 13, 5 of India-UK DTAA – (i) as per amended section 9 of the Act, the payment made was FTS under section 9(1)(vii); (ii) since the exclusive ownership of the work prepared by Taxpayer was of I Co, technical knowledge, etc. were made available and hence, payment was taxable as FTS ; (iii) place provided to Taxpayer for limited and restrictive purpose could not constitute PE.

Facts
The Taxpayer, a UK company, was engaged in the business of providing consultancy services for execution of projects. An Indian company (“I Co”) engaged the Taxpayer for providing consultancy services for modernisation of its shipyard. The representatives of the Taxpayer visited the shipyard in India to study the existing design, plan and facilities. The collected data was sent to UK and the experts of the Taxpayer at UK prepared the project report containing plans, design, structural design, cost estimate, manner of implementation, etc.

While filing its return of income, the Taxpayer showed the profit from execution of contract as attributable to its PE in India. However, in course of assessment proceedings, the Taxpayer claimed that it did not have PE in India and also that amount received was not FTS as the services provided did not fulfil ‘make available’ condition in Article 13 of the India-UK DTAA. The AO, however, concluded that the Taxpayer had PE in India; the amount received was FTS in terms of Article 13. ;Further as the services were ‘effectively connected’ with the PE in India, the consideration for such services was taxable in India in terms of Article 7 read with article 13(6).

Held

As regards the Act

(i) The services provided by the Taxpayer being in nature of technical or consultancy services, the payment was in the nature of FTS and is deemed to accrue or arise in India in terms of section 9(1)(vii)(b)of the Act.

(ii) Having regard to the retrospective amendment to section 9, since the services were utilized in a business or profession carried on by payer in India, the payment was deemed to accrue or arise in India, irrespective of whether the non-resident had PE in India or whether the non-resident rendered services in India.

As regards India-UK DTAA

(ii) The agreement provided that all plans, drawings, specifications, designs, reports, etc. prepared by the Taxpayer shall become and remain the exclusive property of I Co. therefore technical knowledge, etc. were made available. Accordingly, payment was taxable as FTS even in terms of the treaty.

(iii) Further as the payer is a resident of India, such FTS arises in India and is taxable in India by virtue of Article 13 of the DTAA .

As regards constitution of PE

(i) It was noted that, I Co was contractually required to provide office space to the Taxpayer. However such space was used only for limited purpose of providing services under the contract and its usage was also subject to various restrictions. The Taxpayer did not carry on any other business in India.

(ii) Article 5(1) requires that to constitute a PE, business should be carried on through the fixed place. Carrying on of business would involve carrying on of any activity related to the business of the enterprise.

(iii) Since the Taxpayer could not carry on any other activity, the place provided by I Co for limited and restrictive use could not be said to be PE in India of the Taxpayer. Reliance in this regard was placed on the Special bench decision in the case of Motorola Inc [(2005) 95 ITD 269 (Delhi)] and Tribunal decision in the case of Airline Rotables Ltd [(2011)(44 SOT 368)(Mum)].

shailesh.kwebmaker

9 Section 2(14) of the Act – Sub-license of patented technical know-how does not result in extinguishment of right but sharing of rights, Income from such sub-licensing is taxable as business income.

TS-513-ITAT-2017(Bang)

Bosch Limited
vs. ITO

A.Ys: 2007-08
& 2008-09

Date of Order:
6^th November, 2017

Section 2(14)
of the Act – Sub-license of patented technical know-how does not result in
extinguishment of right but sharing of rights, Income from such sub-licensing
is taxable as business income.

FACTS

Taxpayer, an
Indian company, entered into technical collaboration agreement with its foreign
parent company (FCo). Under the agreement Taxpayer was granted non-exclusive,
non-transferable right to use patents owned by FCo for manufacturing automobile
equipment products for sale.

After obtaining
approval of FCo, Taxpayer granted sub-license of the patents to another company
situated in Iraq (FCo1) for manufacture and assembly of automotive generators
using design and know-how of FCo for lump sum consideration. While granting the
permission, FCo stipulated that Taxpayer will share sub-license feewith FCo.

During the
relevant year, Taxpayer received sub-license fee from FCo1. Taxpayer contended
that the fee was in the nature of capital gains. The Assessing Officer (“AO”)
assessed the fee as business income. Aggrieved by the order of AO, Taxpayer
appealed before CIT(A) who upheld the order of AO.

Aggrieved, the
Taxpayer appealed before the Tribunal.

HELD

– The right
to use patented technical know-how/ technology of FCo granted to Taxpayer was
non-transferable and non-exclusive. Since the right was non-transferable,
Taxpayer had to obtain permission of FCo to sub-license the right to use
patented technology to FCo1. Sub-licensing to FCo1 did not result in
extinguishment of rights of the Taxpayer to use the patented technology, but it
merely resulted in sharing of the use of technology by the Taxpayer with FCo1.

– Transfer
of capital asset involves extinguishment of ownership or right in the property
of the transferor and its vesting in the hands of the transferee. Since
sub-license did not result in extinguishment of any right of the Taxpayer,
income from such sub-license cannot be classified as capital gains in the hands
of the Taxpayer.

shailesh.kwebmaker

5 Section 10A, proviso to Section 92C(4) – Section 92C(4) does not apply to income offered as part of voluntary transfer pricing (TP) adjustment. Voluntary TP adjustment being a notional income will not form part of turnover for computation of deduction u/s. 10A.

1. TS-116-ITAT-2018(PUN)

Approva Systems Pvt. Ltd vs. DCIT

ITA No.1051/PUN/2015

A.Y.: 2011-12

Date of Order: 12^thMarch,
2018

Facts

Taxpayer, an Indian company
was a 100% export oriented unit engaged in the business of providing software
development service to its US affiliate (FCo), as a captive service provider.
Taxpayer was also eligible to claim deduction u/s. 10A ^1.

For the relevant year under
consideration, Taxpayer voluntarily offered additional income to tax in respect
of its services to FCo, basis its transfer pricing (TP) documentation and claimed
a deduction u/s 10A on such additional income.

____________________________________________________________________________________________

1 There was litigation on the
issue of whether the Taxpayer was eligible to claim
deduction u/s 10A or 10B. The Tribunal in this decision held that the Taxpayer
was eligible to claim deduction u/s 10B.

AO contended that proviso
to section 92C(4) will apply to such income and no deduction can be allowed
u/s.10A. Without prejudice, since the Taxpayer failed to bring into India the
export proceeds in relation to the voluntary adjustment, it was not eligible to
claim deduction u/s. 10A in respect of such income.

Taxpayer contended that
such additional income represented the TP adjustment made to the profits of the
business and not the turnover and hence there was no requirement to realise the
same in convertible foreign exchange in India. Further Taxpayer contended that
the additional income was not determined by AO, but by itself on a voluntary
basis and hence proviso to section 92C(4) is not applicable in respect of such
income.

On appeal, the CIT(A) upheld
the order of AO. Aggrieved the Taxpayer appealed before the Tribunal.

Held

– The income which is
computed u/s. 92(1) in respect of an international transaction is a notional
income in the hands of Taxpayer.

– Section 92C(4) of the Act
requires the AO to compute the income of the Taxpayer as per the arm’s length
price (ALP) determined u/s. 92C(3). The proviso, to section 92C(4) further
provides that no deduction will be allowed to a Taxpayer u/s. 10A in respect of
such amount of income which is enhanced by AO having regard to the ALP u/s.
92C(3).

– In the present case, the
additional income was determined by the Taxpayer and not the AO. The Taxpayer
voluntarily offered an additional income to tax. Hence proviso to section 92C
(4) does not apply to such income. Reliance in this regard was placed on Austin
Medical Solutions Pvt. Ltd. vs. ITO (I.T. (TP) A. No.542/Bang/2012) and
IGate Global Solutions Ltd. vs. ACIT (2008) 24 SOT 3.

– As per section 10A
deduction is allowed on the profits derived from export of articles or things
or computer software upto an amount which bears to the profits of the Taxpayer,
the same proportion as the export turnover bears to the total turnover of the
Taxpayer. Once the additional notional income has been so offered to tax, it
forms part of profits of business.

Thus, the additional income notionally
computed u/s. 92(1) would form part of the profits of the Taxpayer for the
purpose of section 10A, however, such notional income does not qualify as
export turnover or total turnover. Hence there is no requirement to realis e
such income in the form of convertible foreign exchange in India. Hence
Taxpayer is eligible to claim deduction on such additional income.

shailesh.kwebmaker

4 S. 2(14), S. (47), S. 45, S. 92B of the Act; Exercise of right to nominate a person to exercise call option results in transfer of a capital asset. Since such exercise was as a result of an understanding or action in concert of various related parties, the transaction qualifies as a deemed international transaction.

TS-37-ITAT-2018 (Ahd-TP)
Vodafone India Services Pvt. Ltd. vs. DCIT
ITA No. 565/Ahd/17
A.Y: 2012-13;
Date of Order: 23rd January, 2018

FACTS
The Taxpayer, an Indian company, was an indirect wholly-owned subsidiary (WOS) of a Netherlands entity (BV Co) and was a part of a global group of companies (V Group). V Group carried on its telecommunication business in India through an operating company, I Co. All the shares of I Co were indirectly controlled by BV Co through a number of subsidiaries, AEs, call options and other financial arrangements. One such entity through which BV Co indirectly held interest in I Co was an Indian company, Omega Telecom Holding (Omega). Omega held around 5% shares in ICo.

Prior to the Taxpayer becoming a part of V Group, it was held by Hutchinson Group (H Group). H Group purchased the stake in I Co through various unrelated third parties owing to the regulatory restrictions on investment in the telecom sector.

SMMS investment Private Limited (SMMS) was one such Indian company through which H Group acquired interest in I Co. SMMS held around 62% shares in Omega (another Indian Company) which translated to an indirect interest of 3% stake in I Co. The acquisition of Omega by SMMS was funded through certain loans and capital (equity and preference share) contributed by third party investors (Investors). Investors, thus, became 100% shareholders of SMMS. The loans taken by SMMS were guaranteed by the ultimate parent entity of H Group.

It was as a result of transfer of certain intermediary companies by H Group to BV Co that Taxpayer became an indirect subsidiary of BV Co.

Taxpayer entered into a Framework agreement in June 2007 (FA 2007) with the investor. In terms of FA 2007, the Taxpayer had a call option to acquire entire equity capital of SMMS at nominal consideration of 4 Cr. (even when the value of SMMS could have been much higher than 1,500 Cr.). The taxpayer also had right to nominate some other person to exercise the available option right.

In November 2011, Termination Agreement and Shareholders Agreement were signed. In terms of TA, Taxpayer terminated the call option and paid a termination fee of INR 21 Crores to the investors. Post the termination of the call and put options, SMMS issued shares to another Indian company, India Hold Co, as agreed under SHA. Issue of shares resulted in India Hold Co holding 75% shares in SMMS. Further, as per the SHA, investors effectively exited from SMMS India on buyback of shares by SMMS and consequently India Hold Co. became 100% shareholder of SMMS.

Taxpayer contended that options that it held vis-à-vis investors in respect of shares of SMMS India were a contractual right and not a property right. Therefore it did not qualify as capital asset. Without prejudice, termination of option does not result in transfer. Further, since the transaction was between two residents, it did not qualify as an international transaction.

AO held that the Taxpayer had two rights by virtue of the call option viz., the right to exercise the option of purchasing the shares of SMMS and the right to assign the call option. On termination of the call option, such rights were extinguished and resulted in transfer of a capital asset by the Taxpayer. Further, AO held that, various agreements entered into by the parties indicate that the terms of the transaction were, in essence, decided by BV Co. Thus, such a transaction would qualify as a deemed international transaction.

Aggrieved, Taxpayer appealed before the Tribunal.

HELD
Whether call option is a capital asset and whether there was a transfer of no cost asset

– The two rights viz. the right to purchase shares of SMMS from the Investors and the right to sell shares of SMMS to the Taxpayer granted under FA 2007 are independent rights, in the sense that if one of the rights is exercised, the other right would become infructuous.

– In essence, the Taxpayer had a right to nominate who could acquire shares of SMMS at the agreed price.

– In the present case, the Taxpayer did not acquire the shares of SMMS, but exercised the right to nominate the person who could acquire the share of SMMS. Such right clearly falls within the expanded definition of capital asset under the ITL.

– Undisputedly, the facts before the SC in the Taxpayer’s case for earlier years did not involve nomination or assignment and, hence, the question of whether a right to nominate can be treated as a capital asset was never considered by the SC. Without prejudice, post the amendment to the ITL expanding the definition of capital asset u/s. 2(14), the SC’s decision stating that pending exercise, an option does not qualify as a capital asset, is no longer applicable.

– The Taxpayer had exercised the right of nomination under the call option. Once the right is exercised, its existence comes to an end. Hence, exercise of right to nominate results in transfer of a capital asset under the ITL.

– All the agreements entered into by the parties are to be read together to understand the actual transaction. The rights were acquired by paying consideration and hence it is not correct to suggest that options were no cost asset.

Whether there is an international transaction and whether the TP provisions apply in the absence of a consideration?

– The Scheme of Arrangement implemented effectively ensured that SMMS shares which could have been acquired and held by taxpayer in India came to be held by AE of the Taxpayer (India Hold Co). Hence the transaction qualifies as an international transaction.

– The Taxpayer had a valuable right to purchase shares of I Co at a nominal consideration of ~INR4crores. Such a right was given up by the Taxpayer for “zero” consideration.

– The TP provisions enable determination of the ALP for an international transaction and, hence, they have a role to play in computation of income. As long as a transaction is capable of producing an income, the TP provisions will apply to compute the income in accordance with ALP.

– The termination if implemented at ALP could have resulted in an income in the form of capital gains and such income has to be computed having regard to the ALP of the transaction. Even in case where there is zero income but application of the ALP results in a consideration being assigned, then the income i.e., capital gains in this case, is to be computed basis such ALP.

– The TP provisions cease to apply only when a transaction is inherently incapable of producing an income and is applicable in cases where income is not reported or if an income is not taken into account in computation of taxable income. Reliance in this regard was placed on a Special Bench decision in the case of Instrumentarium Corporation Ltd. (171 taxmann.com 193).

– The Bombay HC decision in the Taxpayer’s own case for earlier years was concerned with determination of the ALP of shares issued by the Taxpayer, which was admittedly a transaction on capital account. It is a settled proposition that capital receipts cannot be brought to tax in the absence of a specific enabling provision. In other words, the ALP adjustment was proposed in respect of an item of income which could never be brought to tax. Thus, the ratio of that decision is not applicable in the present facts of the case.

shailesh.kwebmaker

3 Article 5 and 7 of India-UAE DTAA – AAR’s decision indicating that a group concern has a PE in India, cannot be a basis for concluding that the Taxpayer has a PE in India. In absence of FTS article in the DTAA, income from provision of technical personnel is taxable as business income, provided that Taxpayer has a PE in India as per the relevant DTAA.

TS- 27-ITAT-2018 (Mum)
Booz & Company (ME) FZ-LLC vs. DDIT
I.T.A. No. 4063/Mum/2015
A.Y: 2011-12;
Date of Order: 19th January, 2018

Facts

Taxpayer, a company incorporated in UAE, was engaged in the business of
providing management and technical consultancy services. During the year, the
Taxpayer provided technical/professional personnel to its Indian associated
enterprise (ICo). The personnel were physically present in India for a period
of 156 days.

The Taxpayer contended that since DTAA does not have any specific
article on fees for technical services (FTS), the consideration received from
ICo is taxable as business income. However, in the absence of a PE in India,
the income received from ICo was not offered to tax by the Taxpayer.

AO observed that in respect of certain group companies including the
parent of the Taxpayer, AAR had given a common ruling that the said companies
had a PE in India. By placing reliance on AAR’s ruling, AO held that ICo
created a PE for the Taxpayer in India.

Aggrieved by the order of AO, Taxpayer appealed before the CIT(A) who
upheld the order of AO. Subsequently, Taxpayer appealed before the Tribunal.

Held

– The
ruling of the AAR in the case of group entities of the Taxpayer cannot be the
basis for determining the existence or otherwise of PE of the Taxpayer in
India, especially when AAR gave a common ruling without making any specific
reference to the provisions of the respective DTAA.

– ICo
did not earmark any specific or dedicated place for the personnel of the
Taxpayer, hence it cannot be said that the premises of ICo was under the
control or disposal of the Taxpayer. Thus ICo premises did not create a fixed
place PE for the Taxpayer in India.

– FCo
provided services to ICo and it is not a case where FCo was receiving any
services from ICo. Thus the question of dependent agent PE in India does not
arise.

– Since
the employees worked in India for an aggregate period of 156 solar days on all
projects taken together, the threshold for triggering Service PE clause is not
met.

– Thus
the income of the Taxpayer from provision of personnel is not taxable in India

shailesh.kwebmaker

22 Article 12 of India-Singapore DTAA; Section 9(1)(vii) of the Act – repeated performance of management support services leads to satisfaction of ‘make available’ condition

ITA
No. 1503/Del/2014 (Delhi)

Ceva Asia Pacific Holdings vs. DDIT

A.Ys: 2010-11, Date of Order: 8^th
January, 2018

Taxpayer, a non-resident company, operated
as a regional headquarter company providing management and support services to
its subsidiaries and related corporations in Asia pacific region. Taxpayer
entered into an administrative support agreement with its Indian affiliate
(ICo) to provide day-to-day administrative and management support services. As
per the agreement, Taxpayer rendered MIS and accounting support service,
information technology support service, marketing and advertising support as
well as treasury functions support services to ICo.

AO examined the nature of administrative
support services rendered to ICo, details of employees visiting India as well
as copies of the emails, bills, and ledger accounts with respect to such
services rendered. Based on these documents, AO noted that the services were
rendered by Taxpayer by working closely with employees of ICo in order to
customise its services as per the needs of ICo as well as to improve the
performance of ICo by employing the best practices and industry experience
possessed by Taxpayer in the functions of management, finance, accounts and IT.
AO held that Taxpayer made available administrative support services to ICo and
therefore, payment for such services qualifies as FTS under Article 12(4) of
the Indian-Singapore DTAA.

Taxpayer, however, contended that the
services did not satisfy the make available condition and hence did not qualify
as FIS as per Article 12 of India-Singapore DTAA. Hence, Taxpayer appealed
before the DRP who upheld AO’s order.

Aggrieved, the Taxpayer appealed before the
Tribunal.

Held

– “Make available? means that the person
receiving the service should become wiser on the subject of services. In other
words, service recipient should be able to perform the services on its own.

– While the documents produced by the Taxpayer
indicate that the nature of services rendered by the Taxpayer were preliminary,
basic, or simple support services; the nature of queries raised by ICo and the
nature of information that was transmitted by the Taxpayer to ICo indicated
that the services rendered by the Taxpayer are of such nature that, if they are
rendered for a long period of time, it would enable ICo to perform the services
on its own.

– One needs to however, examine various
correspondence between the Taxpayer and ICo, conduct of the Taxpayer and ICo as
well as the nature of services involved, to evaluate if services rendered by
the Taxpayer, in fact, satisfied the “make available” condition or not.

– Hence, the matter was remanded back to the
file of AO for deciding whether the services satisfy the “make Available?
criterion or not after taking into account all the relevant information and
documents. _

shailesh.kwebmaker

21 Section 9(1) (vi) of the Act; Article 12 of India-Ireland DTAA – payment towards supply of “off-the-shelf software does not qualify as ‘Royalty’ under the India-Ireland DTAA.

ITA NO.1535/MUM/2014

Intec Billing Ireland vs. ADIT

A.Y: 2010-11, Date of Order: 8^thJanuary,
2018

Taxpayer, a non-resident company, licensed
an ‘off-the-shelf’/’shrink wrapped’ billing software to an Indian company
(ICo). The software provided comprehensive business solution in transaction
management, billing and customer care issues related to telecom industry
players.

Taxpayer contended that the software
licensed to ICo was a standard product which was also licensed to various other
customers. Under the license agreement, ICo only acquired a right to use a copy
of the software for its business purposes. The right to make multiple copies
was also limited only for the internal business operations of ICo. ICo had no
right to resell the software or commercially exploit the software. The
Intellectual Property Rights (IPR) in the software was exclusively owned by the
Taxpayer. Hence, the payment made by ICo was for a “copyrighted article” and
not for use of “copyright”. Consequently, such payment does not qualify as
“royalty” under Article 12 of the India-Ireland DTAA.

AO held that the payment received by
Taxpayer for supply of ‘off-the-shelf’ software to ICo was for grant of ‘copyright’ and accordingly, the receipts
qualified as ‘Royalty’ u/s. 9(1)(vi) of the Act as well as Article 12 of
India-Ireland DTAA.

The Dispute Resolution Panel (DRP) accepted
the fact that the software was a shrink wrapped/ off-the-shelf software.
However, in light of the decisions in CIT vs. Samsung Electronics Co. Ltd.
(2012) 345 ITR 494 and DDIT vs. Reliance Infocom Ltd (2014) 159 TTJ 589,
DRP held that the payment made by ICo was for the use of or right to use
copyright and hence, the payment qualified as royalty within the meaning of
Article 12 of the DTAA.

Aggrieved, the Taxpayer appealed before the
Tribunal.

Held

– The terms
of the agreement clearly indicated that the IPR in the software was owned by
the Taxpayer and ICo was merely granted right to use a ‘copyrighted article’.

– Taxpayer merely granted right to use the
software to ICo for its own use in India, without any right to use the
copyright therein. Thus, the payment made by ICo did not qualify as royalty as
per Article 12 of the India Ireland DTAA.

– In various decisions¹, it has been held that grant of license of
shrink wrapped software does not amount to transfer of copyright and hence the
payment for such license does not qualify as royalty.

– The license agreement under consideration
and the software supplied by the Taxpayer to ICo was subject matter of
consideration before the co-ordinate bench of Tribunal wherein it was held that
sale of software to end-customer does not involve transfer of copyright and
hence payment for such license does not qualify as royalty.

– Though the decision of the co-ordinate bench
was in the context of India-USA DTAA, the definition of Royalty under the
applicable Indo-Ireland Tax DTAA being pari materia to Indo-US Tax DTAA,
payment for supply of software will not be taxable as royalty in the hands of
Taxpayer even under India-Ireland DTAA.

_________________________________________________________________

1 Illustratively, Halliburton Export Inc.
(ITA No. 3631 of 2016), Solid Works Corporation [2012] 51 SOT 34 (Mumbai)
Dassault Systems vs. DDIT (79 taxmann.com 205)

shailesh.kwebmaker

20 Section 9(1)(vii) of the Act; Article 12(4)(b) of India-US DTAA – Payment for MIS services does not make available any technical knowledge or skill and hence does not qualify as FIS under the DTAA; Reimbursement of payment made by a non-resident on behalf of a resident was not taxable as FTS in hands of non-resident.

TS-569-ITAT-2017(Kol)

The Timken Company vs. ITO

A.Ys: 2002-03 to 2007-08,

Date of Order: 29^th November,
2017

Facts 1

Taxpayer, a foreign company was engaged in
the business of manufacturing and sale of bearings. Taxpayer entered into an
agreement with its Indian subsidiary company (ICo), for rendering of management
information services (MIS) outside India. For instance, as part of the MIS
services, Taxpayer rendered product, process and tool design services, capital,
planning and inventory management services, quality assurance services, damage
and failure analysis, tax services and legal services etc. As per the
agreement, compensation payable by ICo to the Taxpayer would cover only
reimbursement towards the cost incurred by the Taxpayer without any profit
element or mark-up.

Taxpayer contended that the services
rendered by the Taxpayer to ICo did not make available any technical knowledge,
experience or skill and hence, the payments made by ICo for such services did
not constitute fees for included services (FIS) within the meaning of Article
12(4) of the Indo-US DTAA. It was further contended that income from such
services represents business profits, which, in absence of a PE, were not
taxable in India. Further, in absence of
a profit element, such business receipts were not taxable in India.

The AO held that payments made by ICo were
taxable in India as per Article 12 of Indo-USA DTAA. Aggrieved by the order of
A.O. Taxpayer appealed before CIT(A) who upheld the order of A.O.

Aggrieved, the Taxpayer appealed before the
Tribunal.

Held 1

– For a payment to qualify as FIS under
Article 12, following two conditions should be satisfied:

• Firstly, the payment
should be in consideration for rendering of technical or consultancy services.

• Secondly, the payment
should be in consideration of services which make available technical
knowledge, experience, skill, etc. to the person utilising the services.

– Services rendered by the Taxpayer to ICo
were purely advisory services and no technical knowledge or skill was made
available by the Taxpayer to ICo.

– The Tribunal referred to the example in the
MOU between India and USA, which supported the view that payment for advisory
services does not qualify as FIS under Article 12.

– Further, in absence of a PE in India, the
income form rendering services to ICo was not taxable in India.

Facts 2

During the relevant year, Taxpayer also
received payments from ICo as reimbursements towards payments made by the
Taxpayer to third parties for certain services rendered by third parties to
ICo.

Taxpayer contended that for a payment to
qualify as FIS, it should be made for rendering technical or consultancy
services. Since Taxpayer did not render any service to ICo, payments received
from ICo as cost reimbursement will not qualify as FIS. Further, the amount received from ICo was
purely in the nature of reimbursement of expenses incurred by Taxpayer on
behalf of ICo. Thus, such payments were not taxable in India.

However, AO contended that payment made by ICo
qualified as FIS under Article 12 of India-USA DTAA. On appeal, CIT(A) held
that the payments were in the nature of reimbursement and AO was not justified
in treating such payments as FIS. Aggrieved, AO appealed before the Tribunal.

Held 2

– The services were rendered by third parties
to ICo and Taxpayer merely paid on behalf of ICo. It is such amount which was
reimbursed by ICo to the Taxpayer.

– Taxpayer was not the ultimate beneficiary of
the payment made by ICo nor did it render any service to ICo. It was hence
incorrect for AO to treat such reimbursements as fee for technical services
(FTS).

– Assuming such payments are for services, in
absence of any evidence to show that such services made available technical
knowledge or skill, the payments could not be treated as FIS under the DTAA.

shailesh.kwebmaker

19 Article 13 of India-Germany DTAA; Section 9(1)(i) of the Act –Transfer of shares of foreign company which do not derive substantial value from the shares of ICo is not taxable in India, no withholding obligation in the absence of any tax liability in India.

GEA Refrigeration Technologies GmbH

AAR No. 1232 of 2012

Date of Order: 28^th November,
2017

The Taxpayer, a foreign company, acquired
100% shares of another foreign company (FCo1) from foreign shareholders
(Sellers). FCo1 was a family owned company having investments in many countries
including a wholly owned subsidiary in India (ICo). Pursuant to acquisition of
shares in FCo1 by the Taxpayer, there was an indirect change in ownership of
ICo.

From the valuation of the assets of FCo1
undertaken by an Independent valuer, it was found that ICo contributed in the
range of 5.23% to 5.57% to the value of total assets of FCo1.

Taxpayer as a buyer sought an advance ruling
to determine the taxability of transaction in the hands of the Sellers in terms
of indirect transfer provisions u/s. 9(1)(i) of the Act and India-Germany DTAA
and its consequential withholding
obligation.

The facts are pictorially reproduced as
follows:

Held:

– Under the Indirect transfer provisions of
the Act, gains arising from a transfer of a share or interest in a foreign
company/ entity that derives, directly or indirectly, its value substantially
from assets located in India is taxable in India. For this purpose, share/
interest is deemed to derive its value substantially from assets located in
India if the value of Indian assets: (a) exceeds INR 10Cr; and (b) the value
represents at least 50% of the value of all assets owned by the foreign
company/ entity.

– Where value contribution of ICo to the value
of total assets of FCo1 is minuscule as against the substantial value
requirement of at least 50% provided in the Act, then shares in FCo1 cannot be
said to derive substantial value from shares in ICo to trigger indirect
transfer provisions in India. Hence, income arising on account of transfer of
such shares in FCo1 cannot be taxed in India.

– As per India-Germany DTAA, gains derived
from transfer of shares of a company which is a resident of Germany may be
taxed in Germany. Further the capital gain article contains a residuary clause,
in terms of which the gains which other than the gains from transfer of assets
specified in the other clauses of capital gain article is taxable only in the
resident state.

– Since the income from transfer is not
taxable under the Act itself, the provisions of the DTAA becomes academic.

– Without prejudice, since the Taxpayer as
well as the Sellers were tax residents of Germany, transfer and payment for the
transaction was completed in Germany, capital gains arising from the transfer
of such shares by the shareholders of FCo1 would be taxable only in Germany as
per India-Germany DTAA.

– Even if one were to argue that transfer of
100% shares results in transfer of controlling interest, transfer of such
rights would be taxable only in the resident state i.e Germany in this case.
Since the transfer is not taxable in India, there will be no obligation on the
Taxpayer to withhold taxes.

shailesh.kwebmaker

18 Article 5 and 12 of India-Belgium DTAA; Explanation 2 to section 9(1)(vii) of the Act; Place provided in the stadium for storing lighting equipment under lock and continued presence required having regard to the nature of services rendered by the Taxpayer results in satisfaction of the disposal test.

TS-626-AAR-2017

Production Resource Group

Date of Order: 8^th November, 2017

Taxpayer, a non-resident company was engaged
in the business of providing technical equipment as well as services including
lighting, sound, video and LED technologies for various events. Taxpayer entered into a Service Agreement
with the Organizing Committee of the Commonwealth Games, India (OCCG), to
furnish lighting and searchlight services during the opening and closing
ceremonies of the Commonwealth Games India, 2010 on a turnkey basis.

As part of the arrangement, Taxpayer was
also required to undertake installation, maintenance, dismantling and removal
of the lighting equipment. Taxpayer was required to be available on call or in
person to service, rectify or repair any equipment supplied under the agreement.
Additionally, it was also required to undertake all related activities, such as
obtaining authorizations, permits and
licenses; engaging personnel with the requisite skills, ensuring their
availability; procure and/ or supply all necessary equipment; subcontracting;
and shipping and loading, insurance etc.

For carrying on the above activities,
Taxpayer was provided with an office space by OCCG. Taxpayer was also provided
an on-site space for storing its tools and equipment inside the Stadium where
the Games were held, under a lock. While
the agreement was entered into for a period of around 114 days, Taxpayer’s
employees and equipment are present in India only for a period of 66 days for
preparatory activities such as installation and dismantling of equipment.

Taxpayer sought an advance ruling on issue
of taxability of its income from OCCG under the DTAA.

Held

On the issue of Fixed place PE:

It was held that Taxpayer had a fixed PE in
India for the following reasons:

– The provision of lockable space for storing
the tools and equipment inside the Stadium implies that Taxpayer had access to
and control over such space to the exclusion of other service providers engaged
by OCCG including OCCG itself.

– Provision of empty workspace to the taxpayer
implies that such workspace is placed at the disposal and under access, control
of Taxpayer. Also, in the facts, the business had to be carried out on site.
For evaluating fixed place PE, it is immaterial if the place of business is
located in the business facilities of another enterprise.

– Given the expensive equipment, time lines,
precision and the highly technical nature of the work involved, it is
inconceivable that the space provided to taxpayer along with the required
security would not be at taxpayer’s disposal, with exclusive right to access
and control. Thus, the space is used not merely for storage alone, but having
regard to the nature of business of the Taxpayer, the usage is for carrying out the business itself.

– For a fixed PE to emerge, the fixed place
need not be enduring or permanent in the sense that it should be in its control
forever. The context in which a business is undertaken, is relevant. In the
present case, the duration for which the fixed place was at disposal of
Taxpayer was sufficient for the Taxpayer to carry on its business. Further,
there was a continuous effort by the taxpayer till the games were over. Hence,
permanence test was also satisfied. Reliance, in this regard, was placed on the
SC decision in the case of Formula One World Championship Ltd.
(TS-161-SC-2017).

– Additional factors of arrangement which
support that disposal test is satisfied are:

• Subcontracting of some
activities by the Taxpayer was indicative of the fact that the Taxpayer had an
address, an office, from which it could call for and award subcontracts.

• Without any premises under
its control, hiring and housing key technical and other personnel, who would
need regular and ongoing instructions during the entire period would be
difficult.

• Taxpayer entered into
various contracts for the purpose of its business in a contracting state, and
employed technical and other manpower for use at its site. The site was thus,
an extension of the foreign entity on Indian soil. Reference in this regard was
place on decision in the case of Vishakhapatnam Port Trust (1983) 144 ITR 146.

• Taxpayer Undertook
comprehensive insurance of its equipment. No insurance company would insure any
equipment, structures etc. against any risk of fire, damage or theft,
unless the place where the equipments are stored was safe, in exclusive custody
and at the disposal of the person who applies for the insurance. Goods are not
ordinarily insured when lying at a third person’s premises. This also suggests
that the place where the tools and equipment were stored was at the disposal of
the Taxpayer.

• It was mandatory for the
Taxpayer to acquire all authorisations, permits and licenses. This indicates
that Taxpayer had a definite place at its disposal, as it could otherwise not
be made liable for any default in the absence of the same.

• The act of carrying out
fabrication, maintenance and repair of equipments, and operating the same at
the opening and closing ceremonies would not have been possible if the premises
were not under Taxpayer’s control.

On the issue of Royalty

– There is a vital distinction between a
consideration received for assigning the rights for the use of the final
product on the one hand (i.e. equipment in this case) and the consideration for
assigning rights to use the IP i.e. the knowhow, technical experience, skill,
processes and methodology etc.

– It is usual for parties to assign exclusive
rights to the client to use the equipment, but to keep intact the element of
uniqueness and novelty in experiencing the lighting display. But how this
experience was created remains a trade secret with the creator of the same.

– In the present case, Taxpayer had merely
granted a right to use the equipment and not the right to use any IP in the
equipment, hence payment made by OCCG to the Taxpayer does not amount to
Royalty.

On the issue of FTS

– Services rendered by taxpayer were not
standard in nature since they were one of a kind and were customised for use by
a particular customer. Provision of services of lighting, search lights, LED
technology along with technical personnel to operate the same did not involve
mere pressing of a button and receiving the service but were complex activities
and could not be availed without the assistance of highly trained technical
personnel.

– Having regard to the MFN clause, the make
available condition in the FIS article of India Portugal DTAA will need to be
read into India-Belgium DTAA.

– Since the services rendered by the Taxpayer
to OCCG does not make available
technical knowledge or skill, payment for such services does not qualify as FTS
under the India-Belgium DTAA.

shailesh.kwebmaker

Article 5 of India-Denmark DTAA – Where master and crew on a vessel charter hired by a Denmark company to an Indian company were not employees of the Taxpayer but procured from a group company, and were under control and direction of the Indian company, the Taxpayer could not be said to have ‘Service PE’ in India in terms of article 5; where decisions relating to business were taken in Denmark, no PE in India in terms of article 5(2)(a) was constituted on account of ‘Place of management’.

8.
[2017] 86 taxmann.com 77 (Delhi – Trib.)

Maersk A/s vs. ACIT

A.Ys.: 1998-99 to 2003-04

Date of Order: 08^thJune,
2017

FACTS

The Taxpayer was a company
incorporated in Denmark. It qualified for benefits under India-Denmark DTAA. It
was in the business of providing charter hire services for ‘Anchor Handling Tug
cum Supply Ship’ (“the vessel”). The Taxpayer owned the vessel and had procured
the master and the crew from its group company. During the relevant assessment
year, the Taxpayer entered into agreement with an Indian company (“ICo”) for
charter hire of the vessel for exploration and exploitation of oil and natural
gas in Indian off-shore area. In its return of income, the Taxpayer disclosed
‘nil’ taxable income on the ground that no part of the receipts from ICo were
taxable in India since it did not have any Permanent Establishment (“PE”) in
India in terms of Article 5 of India- Denmark DTAA.

During the course of the
assessment proceedings, the Taxpayer submitted that:

– it did not have any fixed place in the form
of ‘place of management’, branch, office, factory, workshop, etc.;

– it did not have any installation or structure
used for the exploration and exploitation of the natural resources since the
vessel could not be said to be an installation or structure;

– in terms of any of the clauses (a) to (j) of
paragraph 2 of Article 5 of India- Denmark DTAA, it did not have any PE in
India.

Hence, no income could be
taxed in India in terms of Article 7.

According to the Assessing
Officer (“AO”), the commentary on ‘UN model’ mentions that a ‘place of
management’ may also exist where no premises is available or required for
carrying on business and it is sufficient if the enterprise has certain amount
of space at its disposal and it uses such space to carry out its business
wholly or partly through it, which the Taxpayer had done from the vessel. He
further referred to commentary by Phillip Baker, which mentions that where
enterprise lets out or leases facilities, equipment, and tangible properties
and also supplies the personnel to operate the equipment with wider
responsibilities, then the activities of such enterprise constitute a PE.
Accordingly, he held that the vessel of the Taxpayer, being a ‘place of
management’, constituted a PE under Article 5(2)(a) of Indo-Denmark DTAA and
therefore, receipts of the Taxpayer from ICo were taxable in India.

HELD

– Perusal of the agreement showed that the
arrangement was for hire of vessel for exploitation and exploration of oil and
natural gas by ICo. Not only the vessel but also the master and the crew were
under the direction and control of ICo. In another decision in case of the
Taxpayer, the High Court had accepted that the master and the crew were not the
employees of the Taxpayer, but were procured from a group company.

– When the personnel manning the vessel were
not the employees of the Taxpayer; and nor were they within the direction and
control of the Taxpayer, it cannot be said that these personnel constituted a
PE in terms of either ‘Service PE’ or that the Taxpayer was rendering its
activities through its employees in India for a period of 183 days or more.

– The revenue had contended that the vessel was
a “place of management” in terms of Article 5(2)(a) of India- Denmark
DTAA. However, it cannot be disputed that the management of the Taxpayer is in
Denmark where the decisions relating to the business are taken. The concept of
control and management of the business alludes to a concept of a place where
controlling and directive power (i.e., the head and brains) of the enterprise
is situated and where the decisions are taken. The AO and the CIT(A) have
misinterpreted the UN commentary. In his commentary, Arvid A. Skaar has
emphasised that the place must have power to make significant decisions.

– To conclude, the following three aspects need
to be considered. Firstly, the hiring of the vessel by ICo does not make
the vessel a place of management for the Taxpayer in India; secondly, as
accepted by the High Court in the Taxpayer’s own case, the crew and the master
of the vessel were not the employees of the Taxpayer; and lastly, in any
case master and crew did not have power to make significant decisions for the
Taxpayer because they were under control and direction of ICo.

– The vessel of the Taxpayer cannot be reckoned as installation or structure used for exploration and exploitation of natural resources as such activity was being done by ICo. ICo had merely hired the vessel from the Taxpayer. Therefore, even under this clause it could not be held that the vessel of the Taxpayer constituted a PE in India.

– Thus, no PE of the Taxpayer in India was
constituted. Hence, payments received from ICo could not be taxed in India in
terms of Article 7 of DTAA.

shailesh.kwebmaker

Article 5 and 22 of India-Saudi Arabia DTAA – Only solar days of services rendered in India should be considered to examine constitution of service PE; question of virtual PE does not arise in the absence of services rendered virtually.

7.
TS-451-ITAT-2017(Bang)

Electrical Material Center Co. Ltd. vs.
DDIT

A.Y.: 2010-11 Date of Order: 28^thSeptember, 2017

FACTS

– The Taxpayer was a company resident of Saudi
Arabia. It received income from an Indian company for rendering certain
services through four engineers who were sent to India. All the engineers in
aggregate spent more than 360 individual man days in India. However, their
collective stay in India was 90 days. The Indian company paid the Taxpayer for
services provided by the engineers in India.

– While filing the return of income in India,
relying on the Madras High Court ruling in the case of Bangkok Glass
Industry Co. Ltd. vs. ACIT¹, the Taxpayer claimed that income
from services to the Indian company were in the nature of FTS, and since
India-Saudi Arabia DTAA did not have any specific Article dealing with FTS,
such income was not taxable in India. The Taxpayer further relied on the
decision of the Mumbai Tribunal in the case of Clifford Chance² and
contended that only solar days should be considered for the purpose of
determining the existence of a service PE. Accordingly, as the presence of
engineers in India was less than 182 solar days, no service PE was created.

– According to the Assessing Officer (“AO”),
the income of the Taxpayer was taxable in India as “royalty” under the Act as
well as the DTAA; and a PE is created if the aggregate man days of stay of the
engineers in India (i.e., 360 individual man days) exceed the threshold period
in the DTAA. He relied on the decision of the Bangalore Tribunal in ABB FZ –
LLC vs. DCIT³ to contend that the physical presence of the
employee was not essential since services could be rendered through various
virtual modes. The DRP confirmed the order of the AO.

________________________________________________

1 [2015
(4) TMI 503]

2 76
TTJ 0725

3 IT (TP) A No. 1103/bang/2013

HELD

Service PE

– In Clifford Chance (supra), the Mumbai
Tribunal has held that only solar days are to be considered, and not man days.
As the presence of the Taxpayer in India, through its engineers, was only 90
solar days (i.e., less than 182 days), there was no service PE.

– The decision of the Bangalore Tribunal (supra)
on virtual PE was distinguishable on facts because, in the present case,
payment was made only for the services rendered through the engineers in India
and no service was rendered through virtual modes like e-mail, internet, video
conferencing, etc.

Taxability
of income under other provisions of DTAA

– In the absence of the FTS Article, income
should be considered as “other income” under Article 22 of India-Saudi Arabia
DTAA, which will be taxable only in the country of residence of the Taxpayer,
i.e., Saudi Arabia.

shailesh.kwebmaker

Section 9 of I T Act, Article 12 of India-USA DTAA – Payment received by an American company for grant of non-exclusive, non-transferable software license to Indian customer for a specific time period was not liable to tax in India as royalty since copyright was retained by the taxpayer.

6.
[2017] 86 taxmann.com 62 (Delhi – Trib.)

Black Duck Software Inc vs. DCIT

A.Y.: 2012-13 Date of Order: 11^thSeptember, 2017

FACTS

The Taxpayer was an
American company. It provided software products and services at enterprise
scale. During the year under consideration, the Taxpayer entered into a ‘Master
License and Subscription Agreement’ with two entities in India for sale of
software. According to the Taxpayer, it received the payment for copyrighted
product and not for use of copyright. The Taxpayer further submitted that it
did not have any Permanent Establishment (“PE”) in India. Therefore, receipts
from sale of software were not taxable as business income in terms of Article 7
of India-USA DTAA.

The Assessing Officer
(“AO”) concluded that receipts of the Taxpayer from licensing of software were
taxable as royalty u/s. 9(1)(vi) of the Act. He further held that even in terms
of Article 12(3) of India-USA DTAA, the payment received was in the nature of
royalty.

HELD

– The Taxpayer had contended that since it did
not have any PE in India, receipts from sale of software will not be taxed as
business income in terms of article 7 of India-USA DTAA. However, the Revenue
had not rebutted this.

– From perusal of the terms of ‘Master License
and Subscription Agreement’, it was apparent that:

• the
Taxpayer had granted a non-exclusive, non-transferable, non-perpetual license
for the specified subscription period;

• the
customer did not have right to retain or use the programme after termination of
applicable subscription period;

• the
customer was not permitted any access or use of the programme for any user
other than the user licenses paid by the customer;

• while
the customer was permitted to make reasonable number of copies of the programme
for inactive back up, disaster recovery, failover or archival purposes, it was
not permitted to rent, lease, assign, transfer, sub-license, display or
otherwise distribute or make the programme available to any third party;

• the
customer was prohibited to modify, disassemble, decompile or otherwise reverse
engineer the programme or to permit any third party to do so.

– Thus, the Taxpayer had retained all the
rights in the software which comprised copyright and the customer did not have
any right to exploit the copyright in the software.

– The payment received by the Taxpayer was for
copyrighted software product and not for grant of right to use any copyright in
the software.

– Definition of ‘copyright’ in section 14 is an
exhaustive definition and refers to bundle of rights. In respect of computer
programming, copyright mainly consists of rights as given in clause (b). If any
of the said rights are not given, there is no copyright in the computer
programme or software. None of the rights granted under ‘Master License and
Subscription Agreement’ are in the nature of the aforementioned rights,

– Since the software was to be run at an
enterprise level, in the Supplement Agreement, there was a stipulation of unlimited
number of users, but all the users were to be only from within the
organisation. Further, since the software was to be used only on one server in
India, the contention of the revenue that access was granted to all servers was
not correct.

–   Accordingly, the payment received by the
Taxpayer was not in the nature of ‘royalty’ under Article 12(3) of India-USA
DTAA. Therefore, question of taxability did not arise. Indeed, if the receipts
cannot be taxed under India – USA
DTAA    as royalty, they cannot be taxed u/s. 9(1)(vi).

shailesh.kwebmaker

19 Articles 5, 12 and 22 of India-UAE DTAA – The threshold of nine months for a service PE is to be calculated based on actual period for which services are rendered including the period during which services are rendered virtually and is not to be limited only to period during which the employees are physically present in India.

TS-256-ITAT-2017(BANG)

ABB FZ – LLC vs. DCIT

A.Ys: 2010-11 and 2011-12

Date of Order: 21^stJune 2017

Facts

The Taxpayer, a company
incorporated in the UAE, was engaged in the business of providing regional
services for the benefit of its group entities in India, the Middle East and
Africa. During F.Y. 2009-10 and 2010-11, Taxpayer entered into a regional
headquarter service agreement with its group entity in India (ICo) to provide
managerial and consultancy services comprising Occupational Health and Safety
(OHS) service, Security Service, Project Risk Management Service and Market
Development Service. These services were rendered by the Taxpayer’s employees
either by visiting India or remotely from outside India through email, phone
calls, video conferencing, etc. During the year, the employees of
Taxpayer were present in India for a period of 25 days.

The Taxpayer claimed income was
not taxable in India on the ground that:

– in the absence of FTS Article in India-UAE
DTAA, such income would fall under Article 22 – ‘Other Income’;

– in terms of Article 22 of the India-UAE DTAA,
such income would be taxable in India only if the UAE company had a PE in
India;

– the UAE company did not have any PE in India
(including a service PE) since the stay of its employees was only for 25 days
in aggregate during the given year which did not cross the 9-month threshold
under Article 5 – ‘Permanent Establishment’; and

– accordingly, income from such services
agreement was not taxable in India.

Assessing Officer (AO)
contended that the income was taxable in India as “royalty” under the Act as
well as the India-UAE DTAA. Aggrieved by the draft order of AO, Taxpayer
appealed before the DRP, which subsequently upheld order of AO. Aggrieved, the
Taxpayer filed an appeal before the Tribunal.

Held

– In absence of a valid tax residency certificate
for the relevant financial year, it was held that Taxpayer was not eligible to
claim the benefit of India-UAE treaty. Tribunal, however proceeded to decide on
the merits of non-taxability of payments made by ICo to the Taxpayer as
follows:

– The Taxpayer merely provided access to
industrial, commercial or scientific experience acquired by it to ICo. Such
information was not available in public domain and could not be acquired by ICo
on its own effort.

– Performing specialised services for a party
is different from transferring of specialised knowledge or skill. The Taxpayer
provided information pertaining to industrial, commercial or scientific
experience and also permitted ICo to use such confidential information. Hence,
the consideration received by Taxpayer from ICo qualifies as ”royalty” under
the Act as well as the DTAA.

– The requirement under the DTAA for creation
of service PE is that services including consultancy services should be
rendered by an enterprise through its personnel or other employees for a period
exceeding nine months within any 12 month period. It does not require that the
employees should also be present within India for a period exceeding
nine months.

– Undisputedly, the Taxpayer was providing
“consultancy services” in India “through its employees. Further considering
that the services could easily be provided by the Taxpayer, remotely through
virtual modes like email, internet, video conferencing etc. without
physical presence of employees, the threshold of 9-month was to be treated as
being satisfied on the facts of the case. Thus, the Taxpayer constituted a
service PE in India under the DTAA.

PS: Having decided on the
fact that the payment qualified as royalty and Taxpayer triggered Service PE in
India, the Tribunal did not further rule on the issue whether such payments
would be taxable as royalty income or

business income.

shailesh.kwebmaker

Article 13(4) of India-UK DTAA –Payments made for consultancy services cannot be termed as technical services merely because consultancy services has technical inputs-Merely because the recipient of a technical consultancy services learns something with each consultancy, it cannot be considered as satisfying the make available condition.

12.
[2018] 93 taxmann.com 20 (Ahd)

DCIT vs.
BioTech Vision Care (P) Ltd.

ITA No. :
1388, 2766 & 3154 (AHD.) OF 2014

A.Y.s:
2009-10 to 2011-12

Date of
Order: 18^thApril, 2018

Article 13(4) of India-UK DTAA –Payments made for
consultancy services cannot be termed as technical services merely because
consultancy services has technical inputs-Merely because the recipient of a
technical consultancy services learns something with each consultancy, it
cannot be considered as satisfying the make available condition.

Facts

Taxpayer, an Indian entity, made payments to a UK based
company (FCo) for consultancy services in specified areas2. The Taxpayer contended that payment made
to UK Co for such services qualified as business income and in absence of a PE
of the Taxpayer in India, such income was not taxable in India. Thus, Taxpayer
made payments to FCo, without withholding taxes at source.

AO contended that the payments made to FCo were in the
nature of ‘FTS’ under Article 13 of the India-UK DTAA. Thus, the AO disallowed
the payments made to FCo u/s. 40(a)(i) for failure to withhold taxes on such
payments. Aggrieved, the Taxpayer appealed before CIT(A).

CIT(A) deleted the disallowance by holding that the
services rendered by FCo did not make available any technical knowledge, skill
or knowhow and hence it did not qualify as FTS under article 13 of India-UK
DTAA.

Aggrieved, the AO appealed before the Tribunal.

Held

– As per the terms of service
agreement between the Taxpayer and FCo, FCo was obliged to provide technical
advices on phone/fax/ email as and when required. It also required FCo to
provide for consultancy services to the Taxpayer in the specified areas.

– The make available condition in
the FTS article can be considered to be satisfied only when there is a transfer
of technology in the sense that recipient of service is enabled to provide the
same service on his own, without recourse to the original service provider.
Reliance in this regard was placed on the decision in the case of CESC Ltd.
vs. DCIT [(2003) 87 ITD TM 653 (Kol)].

– Merely because the consultancy
services provided by FCo had technical inputs, such services do not become
technical services. Further, simply because the recipient of a technical
consultancy services learns something with each consultancy, there is no
transfer of technology in a manner that the recipient of service is enabled to
provide the same service without recourse to the service provider.

– Thus, consultancy services
rendered by FCo does not satisfy the make available condition and hence it does
not qualify as FTS under the India-UK DTAA.

[1] Exact scope of services availed is not
clear from the ruling.

shailesh.kwebmaker

Article 12 of India-USA DTAA; Section 9(1)(vii), 40(a)(i) of the Act – Rendering of service through deployment of personnel having requisite experience and skill which could not have been performed by service recipient on its own without recourse to the service provider, did not qualify as FIS under the India-USA DTAA.

11. (2018) 92 taxmann.com 407

ACIT vs.
Petronet LNG Ltd.

ITA No. :
865/Del/2011

A.Y.:
2006-07

Date of Order:
6^th April, 2018

Article 12 of India-USA DTAA; Section 9(1)(vii), 40(a)(i)
of the Act – Rendering of service through deployment of personnel having
requisite experience and skill which could not have been performed by service
recipient on its own without recourse to the service provider, did not qualify
as FIS under the India-USA DTAA.

Facts

Taxpayer, an Indian company availed certain consultancy
services from a U.S. company (FCo). As part of the service agreement, FCo, was
required to evaluate different types of LNG vaporizers, recommend a suitable
form of vaporiser and study the benefits of various schemes for generating
power through utilisation of LNG study.

Taxpayer contended that the payments made to FCo were
covered by Article 23 (other income) of the DTAA and hence was taxable only in
the residence state i.e. US. AO however contended that the payment made by
Taxpayer was in the nature of fee for technical services (FTS) as defined u/s.
9(1)(vii) of the Act and accordingly, disallowed the payments made by the
Taxpayer for failure to withhold taxes on the same.

Aggrieved, the Taxpayer appealed before the CIT(A). The
CIT(A) deleted the disallowance. Aggrieved the AO appealed before the Tribunal.

Held

– Article 12(4) of the India-US
treaty provides for a restrictive meaning of ‘fee for included services (FIS) vis-a-vis
the meaning of FTS under the Act. Under the DTAA, FIS is defined to include
only those technical/consultancy services which are ancillary and subsidiary to
the application/enjoyment of right, property or information or which ‘make
available’ technical knowledge, skill, knowhow, process etc.

– As explained in the Memorandum of
Understanding entered into, between India and USA, technology is considered to
be ‘made available’ only when the person acquiring the service is able to apply
such technology on his own.

– Services provided by FCo involved
use of technical knowledge or skill. Although mere rendering of services
involving technical knowledge, skill etc. could qualify as FTS under the
Act, it would not qualify as FIS under Article 12(4) of the DTAA.

– The scope of services rendered by
FCo involved deployment of personnel having the requisite experience and skill
to perform the services. Having regard to the nature of services, it was not
possible for the Taxpayer to carry out such services in future on its own
without recourse to the service provider. Hence, services rendered by FCo did
not qualify as FIS under Article 12(4) of the India-US DTAA. The services were
not taxable in India and accordingly no disallowance is warranted for alleged
default of withholding tax.

[1] It is not clear why
taxpayer resorted to other income article rather than rely on the proposition
that non –FIS overseas services rendered by US Company does not trigger tax in
absence of PE.

shailesh.kwebmaker

Article 7(1) of India-USA DTAA; Section 9(1)(i), 40(a)(i), 195 of the Act –Support services obtained from an associate entity in USA under a service agreement- Services were rendered within India as well as from outside India – payments for services rendered from outside India not subject to withholding as there was no involvement of PE in India while rendering such services.

10. TS-190-ITAT-2018(Mum)

DCIT vs. Transamerica Direct Marketing
Consultants Pvt. Ltd.

ITA No. : 1978/MUM/2015

A.Y. : 2010-11

Date of Order: 19^th
March, 2018

Article
7(1) of India-USA DTAA; Section 9(1)(i), 40(a)(i), 195 of the Act –Support
services obtained from an associate
entity in USA under a service agreement- Services were rendered within India as
well as from outside India – payments for services rendered from outside India
not subject to withholding as there was no involvement of PE in India while
rendering such services.

Taxpayer,
a resident company, is engaged in the business of direct marketing activities
as well as providing management, scientific, technical and advisory consultancy
services in India. It obtained bundle of support services such as information
support system, marketing and new business development, new product
development, actuarial services, accounting support services, internal audit
etc. from its associated entity in U.S.A (FCo). The services were rendered
by FCo both from outside India as well as within India.

While
making payments for services, Taxpayer withheld taxes only on the amount
pertaining to services rendered within India on the basis that FCo had a
service PE w.r.t such activities and thus profits were taxable in India under
Article 7(1) of the India-US DTAA. However, no withholding was made on payments
made for services received from outside India on the basis that such services
could not be attributed to the Service PE of FCo in India and the payments were
also not in the nature of Fees for Included Services (FIS) as defined under the
treaty. Accordingly, such amounts were not claimed to be taxable in India.

The
AO disallowed the payments attributable to services rendered from outside India
on the basis that such services were also taxable in India since the recipient
(being beneficiary) of the services is located in India.

Aggrieved,
the Taxpayer appealed before CIT(A).

The
CIT(A) placed reliance on the decisions in cases of Ishikawajima-Harima
Heavy Industries Ltd. vs. DIT (228 ITR 408 (SC)), WNS North America Inc.(ITA
No. 8621/Mum/2010) and Morgan Stanley & Co. (292 ITR 416) to conclude
that payments made for services, not in the nature of FIS, rendered by the FCo
from outside India were not taxable in India and hence no disallowance is
needed for alleged failure to withhold tax. Aggrieved, AO appealed before the
Tribunal.

Held

– As per beneficiary test laid down by AO,
if the service recipient is in India, the payments for such services are
taxable in India. However, such test is relevant for the purpose of evaluating
the taxability of ‘fees for technical services’ in the hands of non-resident
recipient u/s. 9(1)(vii) of the Act. Whereas, in this case, the amount paid to
FCo under the service agreement is in the nature of ‘business profits’ which is
taxable under Article 7 of DTAA.

– Reliance placed by CIT(A) on the case of WNS
North America Inc.(ITA No. 8621/Mum/2010), later approved by Bombay HC, was
correct where on similar facts, Mumbai ITAT had held that the amount received
for services rendered outside India cannot be said to accrue or arise in India
or deem to accrue or arise in India. Even the existence of a service PE in
India would not impact the taxability of offsite services if there is no
involvement of the PE in rendering of such services.

– Services rendered by the employees of FCo
deputed to India are attributable to the service PE in India. However, services
rendered by the employees from outside India, are not attributable to the PE in
India and thus, not liable to be taxed in India.

shailesh.kwebmaker

18 Chapter X, Sections 4 and 5 of the Act –– Chapter X provides manner of computation of income from international transaction – Income so computed to be considered for calculating total income u/s. 5 of the Act.

TS-346-ITAT-2017(Bang)-TP

Insilca Semiconductors India Pvt. Ltd vs. ITO

A.Y.: 2007-08, Date of Order: 15^th March, 2017

Facts

Taxpayer was an Indian company.
During the course of assessment proceedings, TPO made certain transfer pricing
adjustments in relation to income from software development services. Taxpayer
contended that the charging provisions u/ss. 4 and 5 do not refer to Chapter X
dealing with transfer pricing provisions. Hence, any addition made under
Chapter X cannot be subjected to tax under the Act.

However, AO rejected the contentions of the Taxpayer.
Aggrieved by the order of AO, Taxpayer appealed before the CIT(A) who upheld
the order of AO. Subsequently, Taxpayer appealed before the Tribunal.

Held

– Section
4 of the Act levies tax on Total Income. Further, section 5 of the Act
provides that total income includes all income received or deemed to be
received in India or accrues or arises or is deemed to accrue or arise in India
or income accrues or arises to him outside India.

– Income under consideration is taxable in
India as the same is falling within the scope of sections 4 and 5 of the Act. Moreover, income is to be
computed after deducting various expenses incurred for earning taxable revenue.

– Chapter X provides the manner of computation
of income from international transaction. No dispute can be raised about
applicability of Chapter X in computing the total income, unless the
international transaction in respect of which addition is made is exempt from
tax.

– Section 5 provides that total income is to be
computed subject to the provisions of this Act. Hence the total income u/s. 5
is inclusive of various incomes. Chapter X is part of the Act. Therefore, the
same has to be applied wherever applicable. Accordingly, the contention that
income computed under Chapter X is not taxable under the Act is not tenable.

shailesh.kwebmaker

Sections 271BA, 273B of the Act – Non-filing of Form 3CEB on the basis that no AE relationship is created on combined reading of section 92A(2) and section 92A(1) is a reasonable cause – penalty not leviable u/s. 271BA

1. TS-631-ITAT-2017(Mum)

Palm Grove beach vs. DCIT

A.Y.: 2011-12, Date of Order: 9^th August, 2017

Facts

Taxpayer, an Indian company entered into a transaction with a
Non Resident (NR). Taxpayer contended that the definition of AE in terms of
section 92A(2) is to be read with section 92A(1) of the Act and consequently,
NR does not qualify as Associated Enterprise (AE) of the Taxpayer.
Consequently, Taxpayer did not file Form 3CEB as it had no other international
transaction.

AO rejected contentions of the Taxpayer and levied penalty
u/s. 271BA of the Act on ICo for failure to file Form 3CEB. Aggrieved, Taxpayer
appealed before CIT(A), who upheld the order of AO.

Aggrieved, the Taxpayer appealed before the Tribunal

Held

– The Taxpayer did not file Form 3CEB in
respect of its transaction with the NR on the grounds that NR did not
constitute its AE u/s. 92A. Taxpayer was under a bonafide belief that the
provisions of section 92A(2) of the Act cannot be read in isolation but in
combination with section 92A(1) of the Act. Since the conditions specified in
both the sections were not satisfied in respect of Taxpayer’s transaction with
the NR, he took a view that NR does not qualify as its AE.

– The view that section 92A(2) of the Act
cannot be read independent section 92A(1) of the Act is one of the possible
interpretations of section 92A of the Act. Thus the Taxpayer was prevented by
sufficient cause from furnishing the TP audit report in Form 3CEB.

– Section
273B of the Act specifies that penalty u/s. 271BA of the Act will not be levied
in case there is a reasonable cause for failure to furnish Form 3CEB. Hence,
penalty u/s. 271BA of the Act is to be set aside.

shailesh.kwebmaker

Sections 92A, 92B of the Act – Transaction with foreign branch of Indian company is not an ‘international transaction’. Threshold of 90% purchase for determining associated enterprise (AE) relationship u/s. 92A(2)(h) is to be computed qua each supplier for AE determination.

1. TS-689-ITAT-2017(Mum)

Elder Exim Pvt. Ltd. vs. DCIT

A.Ys: 2008-09 to 2010-11,

Date of Order: 16^th August, 2017

Facts

Taxpayer is an Indian company engaged in the business of
manufacturing of spliced decorative veneer in flitch form. During the
assessment year (AY) under consideration, Taxpayer had entered into transaction
of purchase/import of raw-materials with two entities. One of the entities was
a foreign Company FCo and the other was the US branch of another Indian
company, ICo.

AO treated the transactions with the two entities as
‘international transactions’ within the meaning of section 92B of the Act. It
was contended by the AO that both FCo and ICo are Associated Enterprises (AEs)
for the following reasons: (1) 90% of purchases of Taxpayer were from FCo and
the US branch of ICo (2) Taxpayer and FCo had common shareholders/director who
influenced the prices at which the goods were purchased by the Taxpayer.

Taxpayer contended that (a) since there were no common
shareholders/directors of FCo and taxpayer, FCo was not an AE of the Taxpayer.
Thus the transaction with such entity would not qualify as an international
transaction; (b) Moreover, the transaction with US branch of ICo was a
transaction with an Indian entity and hence, did not qualify to be an
international transaction.

AO rejected the claims of the Taxpayer and made adjustment to
the purchase price paid by the Taxpayer by re-determining the arm’s length
price.

Aggrieved by the action of AO, Taxpayer appealed before
CIT(A) who affirmed the order of AO. Subsequently, Taxpayer appealed before the
Tribunal

Held

– International transaction is defined under
the Act as a transaction between two AEs, where either or both of them are
non-residents (NRs).

– The fact
that ICo is an Indian resident is not disputed. Since Taxpayer and ICo are
residents, the transaction between Taxpayer and ICo’s US branch cannot be
characterised as ‘international transaction’ under the Act.

– There was no evidence brought on record to
show that Taxpayer and FCo had common shareholders/directors. Further, the
director/shareholders of Taxpayer negotiated the prices of the purchases on
behalf of Taxpayer and not on behalf of FCo.

– Two enterprises are treated as AEs, u/s.
92A(2)(h), if 90% or more of purchases of one enterprise is from the other
enterprise. Thus, the Act requires computation of 90% threshold qua each
enterprise or party. It does not permit aggregation of purchases from different
parties for the purpose of testing the 90% threshold.

– Since purchase of raw materials
from FCo was about 38% of total purchases of taxpayer, FCo cannot be treated as
an AE of the Taxpayer u/s. 92A(2)(h). In absence of any AE relationship between
Taxpayer and FCo, transactions between them do not qualify as international
transaction.

shailesh.kwebmaker

Article 5 and 7 of India-Netherlands DTAA – Independent agent acting in its ordinary course of business and procuring ad time to be broadcasted on TV channels without an authority to legally bind the Taxpayer does not constitute DAPE of the taxpayer. Also, no further attribution to DAPE if agent is remunerated at ALP.

1. TS-340-ITAT-2017(Mum)

International Global Networks BV vs. ADIT

A.Ys: 1998-99 to 2004-05,

Date of Order: 26^th July, 2017

Facts

Taxpayer, a Netherlands company, was a wholly owned
subsidiary of FCo, a Hong Kong Company. FCo was ultimately held by another
company Foreign Company (FCo1). Taxpayer had an exclusive right for sale of
advertising time (ad time) in India on the channel owned by FCo Group. Taxpayer
engaged ICo, an Indian entity of the group, to procure business from Indian
advertisers in return for a commission of 15% of the gross advertisement
receipts from India.

AO held that the Taxpayer was merely a conduit and the
advertisement income belonged to FCo. The AO however assessed the whole of ad
time fees the income in the hands of the Taxpayer on protective basis.

Aggrieved by the order of AO, taxpayer appealed before CIT(A)
who concluded that the Taxpayer had a Permanent Establishment in India in the
form of ICo being its dependent agent.

Taxpayer argued that (a) ICo did not have power to conclude
contracts on behalf of the Taxpayer; (b) ICo carried on the activities for
Taxpayer in the ordinary course of ICo’s business;(c) ICo was engaged in
various business activities like undertaking agency activities,
producing/procuring and supplying program and acting as a licensee in India in
respect of other parties. Accordingly, ICo was economically independent of the
Taxpayer; (d) Consequently, ICo did not qualify as a dependent agent PE (DAPE)
of the Taxpayer in India; (e) In any case, since the remuneration paid to ICo
was at arm’s length, it did not warrant any further attribution, to Permanent
Establishment (PE).

Aggrieved, Taxpayer appealed before the Tribunal.

Held

– The Tribunal noted that agreement between
Taxpayer and ICo, indicated as follows:

• ICo had to solicit the advertisement at the
rates fixed by the Taxpayer.

• ICo could not enter into agreement with any
client independently. Even after the agreement, Taxpayer was the final
authority to decide the fate of the advertisement.

• ICo was to receive fixed percentage of
invoiced amount as commission.

• ICo was free to carry out any other business
and as observed earlier did carry out other business.

• ICo had no right to bind the Taxpayer into
any legal obligation.

– The Tribunal ruled that ICo did not create a
DAPE for the Taxpayer in India for the following reasons:

• ICo was not economically dependent on the
Taxpayer, as it was engaged in various business activities like undertaking
agency activities, producing/procuring and supplying program and acting as a
licensee in India in respect of other parties.

• ICo was an independent agent acting in its
ordinary course of business and its activities were not wholly or exclusively
devoted to the Taxpayer.

• Activities of ICo are no different from
other agents of foreign telecasting companies operating in India.

– Also, commission of 15% paid to ICo was as
per the standard norms prevalent in the industry and it was also accepted to be
at ALP by the tax authorities in the TP
assessment of the Taxpayer. Thus, the transaction between the parties were at
ALP. Even otherwise, since the payment was at ALP, there was no need of further
attribution in the hands of Taxpayer. Reliance was placed on Bombay HC ruling
in the case of Set Satellite (Singapore) Pte. Ltd. vs. DDIT(IT) [307 ITR
205] and CIT vs. BBC Worldwide Ltd. [35 DTR 257]

shailesh.kwebmaker

Section 9(1)(vi) of the Act – Payment for access to database containing publicly available information without any right to commercially exploit the information does not qualify as royalty.

1.
TS-288-ITAT-2017(Del)

McKinsey Knowledge Centre India P. Ltd. vs. ITO

A.Y: 2008-09, Date of Order: 11^thMay, 2017

Section 9(1)(vi) of the Act – Payment for access to database
containing publicly available information without any right to commercially
exploit the information does not qualify as royalty.

Facts

Taxpayer, an Indian company, was engaged in the business of
rendering customised back-office operations and acting as a support center. For
the purpose of its business, Taxpayer was required to access the database owned
and maintained by FCo. The database contained general information on share
price, market commodity, currency exchange rates etc.

Taxpayer filed an application u/s. 195(2) of the Act for
obtaining a nil withholding certificate on amount payable to a Singapore Co
(FCo) for access to the database.

AO held that the transaction was in the nature of royalty and
thus, subject to withholding at the rate of 10% under India-Singapore DTAA.
Aggrieved by the order of AO, Taxpayer appealed before CIT(A).

Taxpayer contended that the payment was made only for access
of the database which contained publicly available information. Taxpayer did
not obtain any license for use of the copyright in the literary work or to
commercially exploit the information and hence payment did not qualify as
royalty.

However, CIT(A) held that
access to database provided a right to the Taxpayer to use information relating
to technical, industrial and commercial knowledge, experience and skill and
hence qualified as royalty under the Act.

Aggrieved, Taxpayer appealed before the Tribunal.

Held

– FCo provided Taxpayer a right to access a
database which consisted of general data relating to equity, share price,
market, exchange rates and commodity prices, which are available otherwise in
the public domain. The information was neither secret nor undivulged nor did it
pertain to FCo’s own experience.

– Though the information was the copyright of
FCo, Taxpayer had a limited right to access the database for its own use in
accordance with the agreement and not for the purpose of commercial
exploitation. Taxpayer obtained a non-exclusive, non-transferable right to use
the information.

– The transaction does not involve transfer of
all or any rights in respect of copyright in the literary work. Payment made by
the Taxpayer is for the use of “copyrighted material” and not for the “use
of the copyright”. Thus, the amount payable by ICo does not qualify as royalty
under the Act.

shailesh.kwebmaker

10 Explanation 1(a) to section 9(1)(i) of the Act – consortium comprising non-resident foreign company and ICo is not an AOP since there was clear demarcation in the work and cost between the consortium members; contract was clearly divisible since there was no business connection in India, offshore supplies were not taxable in India.

TS-497-ITAT-2017(Mum)

Vitkovice
Machinery A.S. vs. ITO

A.Y: 2011-12

Date of Order:
27^th October, 2017

Explanation
1(a) to section 9(1)(i) of the Act – consortium comprising non-resident foreign
company and ICo is not an AOP since there was clear demarcation in the work and
cost between the consortium members; contract was clearly divisible since there
was no business connection in India, offshore supplies were not taxable in
India.

FACTS

The Taxpayer, a
non-resident company, was engaged in the business of steel production and
supply of heavy machinery. Taxpayer formed a consortium with an Indian company
(ICo) to bid for a contract for supply and installation of certain equipment in
India. The contract was awarded to the consortium of Taxpayer and ICo. There
was a clear demarcation of work and cost between the Taxpayer and ICo and each
one was fully responsible and liable for its respective scope of work. While
the Taxpayer was responsible for design, engineering, supply, commissioning,
guarantees, supervision services of all the main and critical equipment, ICo
was responsible for supply of all indigenous equipment and auxiliaries, civil
and erection work and providing assistance during commissioning and performance
tests at the site.

During the
relevant year, Taxpayer received income from offshore supply of goods made to
the Indian entity.

The AO held
that the consortium between the Taxpayer and ICo was taxable as an Association
of persons (AOP). Further, though the contract between consortium and the
Indian entity was a composite contract, to avoid taxability in India it was
artificially divided into offshore and onshore supply and services components.

Hence, the AO
held that the income from offshore supply was also taxable in India.

On appeal,
relying on SC ruling in Ishikawajima Harima Heavy Industries (2007) 288 ITR 408
and Delhi HC ruling in Linde AG [TS-226-HC-2014(DEL)], Dispute Resolution Panel
(DRP) held that income from offshore supply was not taxable in India for
following reasons.

– Merely
because a project was a turnkey project would not necessarily imply that the
entire contract had to be considered as an integrated one for taxation
purposes.

– As per
Explanation 1 to section 9(1)(i) only income attributable to operations in
India is taxable in India.

– Where
equipment and machinery is manufactured and procured outside India, such income
cannot be taxed in India in absence of a business connection in India.

– Mere
signing of a contract in India would not constitute a business connection in
India.

Aggrieved, AO appealed before the
Tribunal.

HELD

– The purpose
of the consortium was to procure the contract jointly. However, there was a
clear demarcation of work and cost between the Taxpayer and ICo. Each of them
was fully responsible and liable for their respective scope of work. While the
Taxpayer was responsible for design, engineering, supply, commissioning,
guarantees, supervision services of all the main and critical equipment, ICo
was responsible for supply of all indigenous equipment and auxiliaries, civil
and erection work and providing assistance during commissioning and performance
tests at the site.

– The
contract between the consortium and the Indian entity specifically provided for
a break up of consideration payable to each party as well as for each activity
to be carried on by the parties. Segregation of the contract revenue was agreed
upon at the stage of awarding the contract and not after awarding the contract.
Thus, the contract was clearly divisible. The consideration was also paid
separately to the Taxpayer and ICo against separate invoices raised by them in
relation to their respective work.

– Both ICo
and Taxpayer incurred expenditure only in relation to their specified area of
work. Taxpayer and ICo incurred profit or loss depending on performance of
their share of work under the contract. There was no joint liability between
the Taxpayer and ICo. Also, liquidated damages, if any, under the contract was
deductible from the contract price of defaulting party alone.

– Having
regard to the above, it was clear that the contract was divisible.

– Taxpayer
was responsible for offshore supply of equipment and material. The equipment
and material were manufactured, procured and supplied outside India. Thus,
income from offshore supply was not taxable in India in absence of a business
connection in India. Reliance in this regard was placed on SC decision in the
case of Ishikawajima Heavy Industries Limited (2007) 288 ITR 408.

shailesh.kwebmaker

Article 12 of India-US DTAA – secondment of employee to Indian subsidiary – employee rendering specialised and expert services in the field of technology of setting up of a business centre does qualify as FIS under India-US DTAA.

1. TS-294-ITAT-2017(Bang)
Emulex Design &
Manufacturing
Corporation vs. DCIT
A.Y.: 2010-11, Date of
Order: 23^rd June, 2017

Facts

Taxpayer, a US company
(FCo) had a subsidiary, ICo in India. FCo entered into an agreement with ICo as
per which, FCo seconded one of its employee to ICo for rendering specialised,
skill based expert service to ICo. The services were in the field for technology
of setting up of an independent business centre. In the relevant financial
year, ICo reimbursed expenses incurred by FCo viz. the salary of the seconded
employee without any mark-up.

While filing the return of
income in India, FCo contended that the amount received from ICo was purely in
the nature of reimbursement and hence not taxable in India. Moreover, the
nature of services rendered by the seconded employee was managerial in nature
and hence was excluded from the purview of ‘Fees for included service’ (FIS) as
defined under Article 12 of India-US DTAA.

However, AO argued that the payment was in the nature of FIS.
Aggrieved, FCo raised objection before the Dispute Resolution Panel (DRP), who
also upheld the order of AO.

Aggrieved by the order of AO, FCo appealed before the
Tribunal.

Held

– The secondment agreement between FCo and ICo
indicated that ICo intended to obtain the temporary services of FCo’s employee
who possessed specialised skills and capabilities. The seconded employee was
required to provide their expert service in the field of technology for setting
up of an independent design centre.

– Thus, secondment was for the purpose of
rendering specialised and expertise services and not for providing general
managerial or administrative service.

– Having regard to the business profile of ICo¹,
the services rendered by the employee qualifies as technical services.

– Though the payment by ICo is without any
mark-up, such receipt is still chargeable to tax as FIS under the India-US DTAA².

shailesh.kwebmaker

9 Section 9 of the Act; Article 12 of India-Singapore DTAA – Amounts paid to a Singapore company for providing global support services were not FTS in terms of Article 12(4)(b) of India-Singapore DTAA since no technical knowledge, experience, skill, know-how, or process was made available which enabled Taxpayer to apply technology on its own.

[2018] 92 taxmann.com 5 (Mumbai – Trib.)

Exxon Mobil Company India (P.) Ltd. vs. ACIT

I.T.A. NO. 6708 (MUM.) OF 2011

A.Y.: 2007-08

Date of Order: 21^stFebruary 2018

Facts

The Taxpayer was an Indian member-company of a global group. The
Taxpayer had an affiliate company in Singapore (“Sing Co”), which was providing
global support services to the group member-companies. During the relevant
year, the Taxpayer had made two kinds of payments to Sing Co. One, payment for
Global Information Services and two, global support service fee. Global support
service included management consulting, functional advice, administrative,
technical, professional and other support services.

The Taxpayer treated the first kind of payment as royalty and withheld
tax accordingly. The Taxpayer did not withheld tax from global support service
fee on the footing that Sing Co did not have a PE in India and since the
services were rendered outside India, the payment cannot be considered as
income deemed to accrue or arising in India u/s. 9(1)(i) of the Act.

The Taxpayer submitted that the payment made to Sing Co could not be
considered fees for technical services (“FTS”) and brought within the ambit of
section 9(1)(vii) of the Act. Further, under India-Singapore DTAA only payment
for services which result in transfer of technology could be considered FTS.

The AO observed that the payment made by the Taxpayer was in the nature
of FTS as defined in Explanation 2 to section 9(1)(vii) of the Act since Sing
Co had rendered services which were highly technical in nature and involved
drawing and research. Further, since Sing Co had earned such fees because of
its business connection in India, it was liable to be taxed in India. Hence,
the Taxpayer was required to withhold the tax.

The DRP confirmed the disallowance made by the AO.

Held

– The limited question was whether the payment
made was FTS in terms of Article 12 of India-Singapore DTAA.

– The AO treated the payment made as FTS on the
footing that Sing Co had ‘made available’ managerial and technical services to
the Taxpayer.

– The expression “make available”
also appears in Article 12(4)(b) of India-USA DTAA. It means that the recipient
of such service is enabled to apply or make use of the technical knowledge,
knowhow, etc., by himself and without recourse to the service provider.
Thus, “make available” envisages some sort of durability or
permanency of the result of the rendering of services.

– In CIT vs. De Beers India Mineral (P.)
Ltd. [2012] 346 ITR 467 (Kar.), Karnataka High Court has observed that
“make available” would mean that recipient of the service is in a
position to derive an enduring benefit out of utilisation of the knowledge or
knowhow on his own in future and enabled to apply it without the aid of the
service provider. The payment can be considered as FTS only if the twin test of
rendering service and making technical knowledge available at the same time is
satisfied.

– The agreement between the Taxpayer and Sing
Co had clearly mentioned provision of management consulting, functional advice,
administrative, technical, professional and other support services. There was
nothing in the agreement to conclude that by providing such services, Sing Co
had ‘made available’ any technical knowledge experience, skill, knowhow, or
process which enabled the Taxpayer to apply the technology contained therein on
its own in future without the aid of Sing Co.

– Accordingly, applying the aforesaid twin
tests laid down by Karnataka High Court to the facts of the present case, it cannot be said that the payment made by the Taxpayer was FTSs defined in Article 12(4)(b) of India-Singapore DTAA.

shailesh.kwebmaker

8 Sections – 9(1)(vi)(b), 40(a)(i), 195 of the Act – Royalty paid by an American company tax resident in India to a non-resident company for IPRs which were used for manufacturing products in India was taxable in India even if products were entirely sold outside India.

Dorf Ketal Chemicals LLC vs. DCIT

ITA NO. 4819/Mum/2013

A.Ys.: 2009-10

Date of Order: 22^nd March 2018

Facts

The Taxpayer was a LLC incorporated in, and tax resident of USA. It was
engaged in the business of trading of specialty chemicals. The Taxpayer was
100% subsidiary of an Indian company (“Hold Co”). The Taxpayer was also treated
as a tax resident of India since its control and management was situated in
India and was filing returns of its income in India as a resident company.
Thus, it was assessed to tax both in USA and India.

The Taxpayer had acquired certain patents and copyrights from an
American company for which it paid royalty computed as a fixed percentage of
sales in USA. The Taxpayer had certain customers in USA. The Taxpayer got the
products manufactured from Hold Co which were sold only in USA, and not in
India. According to the Taxpayer since the royalty was paid to an American
company (“USA Co”) for business carried out in USA, it was not required to
withhold tax from the royalty.

Hold Co had full and unconditional access to technical know-how and
information regarding manufacturing procedure and technology, which was used
for the purpose of manufacture in India. Hence, the AO held that in terms of
section 9(1)(vi) of the Act, the payment of royalty by the Taxpayer to USA Co
constitutes chargeable income, on which, tax was required to be withheld u/s
195 of the Act. Since the Taxpayer had not withheld tax, the AO invoked section
40(a)(i) and disallowed the royalty.

On appeal, the CIT(A) confirmed the order of the AO.

Held:

– The relationship between the Taxpayer and the
holding company was not merely that of a contract manufacturer. The IPRs were
utilised for manufacturing in India. Export to USA was in conjunction with this
activity and was not isolated. Hence, the CIT(A) was correct that Taxpayer
merely carried out marketing of the products which are exported by it.
Therefore, there was a business connection with India. Further, Hold Co was a
guarantor under the agreement between the Taxpayer and USA Co.

– Services were rendered in India as well as
utilised in India. Accordingly, the payment did not fall under the exception in
section 9(1)(vi)(b) of the Act. Hence, the CIT(A) was correct in disallowing
royalty paid in terms of section 40(a)(i) of the Act.

– The decision of the Supreme Court in
Ishikawajima-Harima Heavy Industries Ltd.¹ and that of Madras High
Court in the case of Aktiengesellschaft Kuhnle Kopp and Kausch² were distinguishable on the facts of this
case.

___________________________________________________

1 DIT
v. Ishikawajima-Harima Heavy Industries Ltd. [2007] 158 Taxman 259 (SC)

2 CIT v. Aktiengesellschaft Kuhnle Kopp
and Kausch [2003] 262 ITR 513 (Mad)

shailesh.kwebmaker

7 Section 9(1)(vi) of the Act – Domain being similar to trademark, the receipts for domain registration services were in the nature of royalty within the meaning of section 9(1) (vi) of the Act, read with Explanation 2(iii) thereto

Godaddy.com LLC vs. ACIT

ITA No 1878/Del/2017

A.Y: 2013-14

Date of Order: 3^rd April 2018

Facts

The Taxpayer was a LLC in USA. However, it was not a tax resident of
USA. It was engaged in the businesses of an accredited domain name registrar
and providing web hosting services. During the relevant year, the Taxpayer had
two streams of income. First, receipts from web hosting services/on demand
sale. Second, receipts from domain registration services.

The Taxpayer had contended that: domain registration services were
provided from outside India; the business operations were undertaken from
outside India; none of its employees had visited India for this purpose; the
Taxpayer did not have any fixed business presence in India in the form of any
branch/liaison office; and the Taxpayer merely facilitated in getting domain
registered in the name of the customer who paid the consideration for availing
such services. Accordingly, the receipts in respect of domain name registration
were not in the nature of royalty as defined in Explanation 2 to section
9(1)(vi) of the Act. In support of its contention, the Taxpayer relied on the
decisions of Delhi High Court in Asia Satellite Telecommunications Co. Ltd
vs. DIT [2011] 197 Taxman 263 (Delhi) and of AAR in Dell International
Services (India) Private Limited [2008] 218 CTR 209 (AAR).

On appeal, DRP upheld the finding of the AO.

Held

– The limited question was whether the domain
registration fee received by the Taxpayer was in the nature of royalty.

– While the facts in Asia Satellite
Telecommunications Co. Ltd. were totally different, in Satyam Infoway Ltd.
vs. Siffynet Solutions Pvt. Ltd. [2004] Supp (2) SCR 465 (SC), the Supreme
Court held that the domain name is a valuable commercial right, which has all
the characteristics of a trademark. Accordingly, the Supreme Court held that
the domain name was subject to legal norms applicable to trademark. In Rediff
Communications Ltd vs. Cyberbooth AIR 2000 Bombay 27, Bombay High Court
held that domain name being more than an address, was entitled to protection as
trademark.

– It follows from the aforementioned decisions
that domain registration services are similar to services in connection with
the use of an intangible property similar to trademark. Therefore, the receipts
of the Taxpayer for domain registration services were in the nature of royalty
within the meaning of section 9(1) (vi) of the Act, read with Explanation
2(iii) thereto.

Note: In terms of Explanation 2(iii) to
section 9(1)(vi) of the Act, “royalty means consideration
for the use of any patent, invention, model, design, secret formula or
process or trade mark or similar property”.
The decision does not make it clear how mere domain registration services
result in “use of … … trademark or similar property.

shailesh.kwebmaker

6 Ss. Section 9 of the Act; Article 16 of India-USA DTAA; Article 15 of India-Germany DTAA – Employees deputed to Germany and USA for rendering services abroad being non-residents, salary would accrue to them in respective foreign countries during period of deputation and would not be liable to tax in India

[2018] 91 taxmann.com 473 (AAR – New Delhi)

Hewlett Packard India Software Operation
(P.) Ltd., In re

A.A.R. NO. 1217 OF 2011

Date of Order: 29^th January 2018

Section 9 of the Act; Article 25 India-USA
DTAA; Article 23 of India-Germany DTAA – On return to India when employees
become residents, the payment to be made being in nature of salaries, section
192(2) would apply subject to credit for taxes deducted during their deputation
outside India

Facts

The Applicant was incorporated in India and was engaged in the business
of software development and IT Enabled Services. The Applicant had sent one
each of its employees on deputation to USA and Germany, respectively.

During the deputation period, though the employees would render services
in the respective country of deputation, they would continue to be on the
payrolls of Applicant. They would regularly receive salaries in India from the
Applicant and certain allowances in the respective country of deputation to
meet local living expenses.

While on deputation, the employees would be non-residents in India
during one financial year. In the year of their return after completion of assignment,
they would be Resident and Ordinarily Resident (ROR).

The Applicant sought ruling on the following questions.

– Whether salary paid by the Applicant to the
employees was liable to be taxed in India having regard to provisions of the
Act and the DTAA?

– Whether the Applicant can take credit for
taxes paid abroad in terms of Article 25 of India-USA DTAA and Article 23 of India-Germany
DTAA while discharging its tax withholding obligations u/s. 192?

Held – 1

– The employees would render services in
USA/Germany and would be non-residents for tax purposes during one financial
year.

– As per section 4 of the Act, tax is chargeable
in accordance with, and subject to, the provisions of the Act in respect of the
total income of the previous year of every person. Section 5(2) deals with
income of non-residents. Section 5(2) is ‘Subject to the provisions of this
Act’, which brings Chapter IV (computation of total income) into play. In
Chapter IV, section 15 deals with the head ‘Salaries’. Thus, chargeability to
tax under the head ‘Salaries’ arises under section 5(2), read with section 15.
Merely because section 5(2) is the charging section, income that the employees
would receive in India should not be taxed in India.

– The income accrues where the services are
rendered. Though the employees are covered in section 15(a), being
non-residents, and since they would be rendering services in USA/Germany, the
salary would accrue to them in USA/Germany. Merely because the
employer-employee relationship would exist in India, and they would be paid in
India, they could not be taxed in India. Hence, the income would not be
chargeable to tax in India. This view is supported by the Explanation to
section 9(1)(ii) of the Act.

– An employer is required to deduct tax from
salary payable to an employee but only if the employee is liable to pay tax on
salary. In case of the employees, since the salary would accrue to them outside
India, the Applicant would not be required to withhold tax u/s. 192 of the Act
at the time of payment.

Held – 2

– The employees would be covered by the tax
credit provisions of Articles 25 of the India-USA DTAA and Article 23 of
India-Germany DTAA, respectively. Hence, they would be entitled to foreign tax
credit. When they become residents, and since the nature of payments made to
them would be salaries, section 192 applies. Therefore, if payments were to be
received by the employees from more than one source during a particular year,
the present employer could give credit for foreign taxes to be deducted during
their deputation outside India.

shailesh.kwebmaker

17 Section 9 of the Act; Articles 12, 23 of India-UK DTAA – Guarantee fee received by UK company from its Indian subsidiaries is not in the nature of ‘Interest’, business income or FTS; such income qualifies as ‘Other Income’.

[2017] 88 taxmann.com 127 (Delhi – Trib.)

Johnson Matthey Plc v. DCIT

A.Y.: 2011-12, Dated: 06^thDecember,
2017

Facts

The Taxpayer was a company incorporated in,
and resident of, the UK. ICo 1 and ICo 2 were two Indian subsidiary companies
of the Taxpayer. The Taxpayer, inter alia, provided guarantees for
credit facilities provided by foreign banks to ICo1 and ICo 2. The Taxpayer
offered the guarantee fees received from ICo 1 and ICo 2 as ‘Interest’ taxable
at the rate of 15%, under Article 12 of India-UK DTAA.

The AO concluded that the guarantee fee was
‘Other Income’ under Article 23 of India-UK DTAA and accordingly, was subject
to tax at the rate of 40%.

The Taxpayer contended that the guarantee
fee was in the nature of business income and such fee was not taxable in India,
in absence of a PE. The Taxpayer further contended that it offered the fee to
tax as ‘Interest’ out of abundant caution.

Held

– The term “interest” in Article
12(5) of DTAA and section 2(28A) of the Act is to be understood in the context
of the other words and phrases used in the definition. The term “interest”, in
its widest connotation, will indicate the payments made by the receiver of some
amount, pursuant to a loan transaction. Even the expressions “claims of
any kind” or “service fee or other charge” as appearing in the
DTAA or in the Act, are to be understood in relation to the transaction or
contract of loan.

– A payment can be treated as interest only in
the context and privity of loan contract. though no creditor-debtor
relationship may exist. Payments made to strangers cannot be treated as
interest, even where such payments are incidental to a loan.

– The Taxpayer was a stranger to the privity
of loan transactions as the contract of loan was different from the contract of
guarantee.

– Accordingly,
scope of the expressions “debt claims of any kind” or “the
service fee or other charge in respect of moneys borrowed or debt
incurred” cannot be extended to payment of guarantee commission as the
Taxpayer was a stranger to the privity of contract of loan.

– The Taxpayer was manufacturing
technologically advanced chemicals and was not in the business of providing
corporate/bank guarantee to earn guarantee commission. It had provided
guarantee only to secure finance for its subsidiaries and not to earn fee.
Hence, the fee cannot be considered ‘business profit’ under Article 7 of
India-UK DTAA.

– Such fee was neither for rendering any
technical or consultancy service nor for making available any knowledge,
experience, skill know-how or process, nor was it for any development or
transfer of a technical plan or a technical design. Further, it was also not
covered within Explanation to section 9(1)(vii) of the Act. Hence, it could not
not be considered Fee for technical service (FTS).

– Accordingly, guarantee fee was taxable as
‘Other Income’ in terms of Article 23(3) of India-UK DTAA. _

shailesh.kwebmaker

16 Section 9 of the Act; Article 5 of India-USA DTAA – Income of US company could not be taxed in India since non-exclusive advertising and sales agent for canvassing channel airtime sales did not constitute PE of US company in India

[2017] 87 taxmann.com 345 (Mumbai – Trib.)

SPE Networks India Inc. vs. DCIT

A.Ys: 2005-06 to 2010-11,

Date of Order: 08^th November,
2017

Facts

The Taxpayer was a company incorporated in,
and a resident of, USA. It was engaged in the business of operating, marketing
and distribution of the television channels and related activities. For
marketing two of its channels the Taxpayer had appointed its group company in
India (“ICo”) as a non-exclusive advertising and sales agent for canvassing
airtime for its channel. The Taxpayer was to receive substantial portion of the
share of revenue collected by ICo from distribution of channels. The Taxpayer
claimed that since it did not have PE in India, in terms of Article 7 of
India-USA DTAA, its income was not taxable in India.

For the following reasons, AO contended that
ICo was a dependent agent of the Taxpayer and hence, the Taxpayer had a
business connection and Dependent Agency PE in India.

(i) The Taxpayer carried on
the telecasting business in India by extensively utilising the services of ICo
for sale of advertisements and distribution of channels.

(ii) Activities of both the
Taxpayer and ICo were interlaced, interconnected, inter dependent and interlinked.

(iii) The agreement was a
revenue sharing arrangement which depended upon the gross advertisement airtime
revenue and not purchase and sale of advertisement airtime.

(iv) ICo had an authority to
conclude contracts on behalf of the Taxpayer in India .

Accordingly, AO held that
15% of the net revenue received by the Taxpayer from ICo was taxable in India.

Held

? Taxpayer had entered into two agreements
with ICo, which gave rise to two revenue streams for the Taxpayer i.e
advertisement revenue and distribution revenue. Advertisement revenue was
generated from advertisement broadcasted on the channel and distribution
revenue was generated by distributing the viewership rights to the customers
through cable operators.

? Perusal of the agreements clearly showed
that: (a) the Taxpayer was carrying on its operations from USA and not from
India; (b) both sale of advertisement and distribution of channels were not
carried out in India; (c) the Taxpayer did not have any office premises or a
fixed place of business in India at its disposal; and (d) none of its employees
were based in India through whom it could render the services in India. Thus,
there was neither fixed base PE nor service PE in India.

? Though CIT(A) endorsed the view of the AO
that the Taxpayer had Agency PE, nothing was brought on record to prove that
the agreements between the Taxpayer and ICo were not on Principal-to-Principal
basis. Tribunal noted that: (i) ICo had no authority to conclude contract on
behalf of the Taxpayer; (ii) while selling the airtime and distributing
channels, ICo was acting in its own right and not on behalf of the Taxpayer:
(iii) ICo was not dependent on the Taxpayer economically or legally; and (iv)
ICo also carried out significant marketing activities for other channels.
Hence, it was an independent entity carrying on its own business.

? ICo
purchased airtime from the Taxpayer and sold in its own right and the Taxpayer
had no control over it. The revenue earned by ICo was not on behalf of the
Taxpayer. ICo made payment to the Taxpayer for the purchases. ICo was not
subject to any control of the Taxpayer for conducting business in India. Its
activities were not devoted wholly or almost wholly for the Taxpayer.
Similarly, revenue of the Taxpayer was not entirely dependent on the earning of
ICo. Thus, it cannot be treated as a dependent agent, of the Taxpayer.

? The AO had not alleged that the transactions
between the Taxpayer and ICo were not at arm’s length. The TPOs had held that
no TP adjustments were required to be made to the income of the Taxpayer on
account of advertisement revenue or distribution revenue.

? Accordingly, the Taxpayer did not have any
business connection or agency PE or fixed base PE in India and ICo was not an
agent of the Taxpayer. Hence, the AO had wrongly invoked Rule 10.

shailesh.kwebmaker

15 Articles 4, 8, 29 of India-UAE DTAA – Since India-Germany DTAA also provided benefits similar to India-UAE DTAA, it could not be said that incorporation of the company in UAE was for availing DTAA benefits merely because it was owned by German shareholders.

[2017] 88 taxmann.com 102 (Rajkot – Trib.)

ITO vs. Martrade Gulf Logistics FZCO-UAE

A.Y. 2008-09, Date of Order: 28^th
November, 2017

Facts

The Taxpayer was a company incorporated in
UAE engaged in the business of shipping. It had filed return u/s. 172(4) of the
Act. The Taxpayer was held by German shareholders. The Taxpayer claimed that
the income earned out of the operations of ships in international waters was
not taxable in India by virtue of India-UAE DTAA.

The AO noted that: (i) the meeting of its
shareholders was held outside UAE; (ii) its directors were not residents of
UAE; (iii) its shareholders were not residents of UAE; (iv) the Taxpayer was
not liable to tax in UAE; and (v) the Taxpayer only had its registered office
in UAE with some senior employees. Hence, the AO concluded that effective
control and management of the Taxpayer was not situated in UAE and denied
India-UAE DTAA benefit. Further, the AO contended that the Taxpayer was merely
registered in UAE for doing the business of the German entities. Thus, owing to
Article 29 of India-UAE DTAA, benefit of Article 8 cannot be granted to the
Taxpayer.

However, the Taxpayer contended that despite
the fact that its shareholders and directors are non-UAE residents, it was managed
and controlled wholly from UAE, and the business was also carried on from UAE.
Hence, it was eligible for India-UAE DTAA benefits.

On appeal, the CIT(A) observed that the
place of effective management of the Taxpayer was UAE. Further, UAE had also issued
Residency Certificate, Incorporation Certificate, Trading License and other
documents. Hence, the CIT(A) concluded that the Taxpayer was a resident of UAE
and consequently, eligible for treaty benefit.

The CIT(A) further referred to explanation
u/s. 115VC of the Act which defines the place of effective management in case
of a ship operating company and stated that since all the board meetings were
regularly conducted in UAE, the control and management was situated in UAE.
Accordingly, he held that the AO had wrongly determined the residential status
of the Taxpayer by considering the nationality of the directors. Therefore,
having regard to Article 8, read with Article 4, of India-UAE DTAA, profits
from operations of ship in international waters was not taxable in India.

Held

? On account of its incorporation in UAE, the
Taxpayer was liable to tax in UAE. Therefore, it was “resident of Contracting
State” under Article 4(1) of the India-UAE DTAA.

? Tribunal further relied on its earlier
decision in ITO vs. MUR shipping DMC Co. (ITA No. 405/RJT/2013) and
observed that:

• All that is necessary for
the purpose of being treated as resident of a Contracting States under
India-UAE DTAA is that the person should be liable to tax in that Contracting
State by reason of domicile, residence, place of management, place of
incorporation. Reliance in this regard was placed on the decision of ADIT
vs. Green Emirate Shipping and Travels, (2006) 100 ITD 203 (Mum).

• Being ‘liable to tax’ in
the Contracting State does not necessarily imply that the person should
actually be liable to tax in that Contracting State by virtue of an existing
legal provision but would also cover the cases where that other Contracting
State has the right to tax such persons, irrespective of whether or not such a
right is exercised by the Contracting State.

• Since the Taxpayer was not
a resident of India, the question of applying the POEM test under the
tie-breaker rule in Article 4(4), which the AO had emphasised, was irrelevant.

• For invoking Article 29,
it should be established that if the Taxpayer was not to be incorporated in
UAE, it would not have been entitled for such benefits. However, India-Germany
DTAA also provided such benefit. Hence, even if the Taxpayer was incorporated
in UAE but its entire share capital was held by German entities shall not
affect the taxability of shipping income. This is for the reason that similar benefit with regard to taxability of
shipping profits is available even under India-Germany treaty. Therefore, the
requisite condition for invoking Article 29 was not fulfilled.

shailesh.kwebmaker

14 Articles 8, 24 of India-Singapore DTAA – Distinction between ‘liable to tax’ and ‘subject to tax’; expression ‘exempt from tax’ implies, treaty benefit of non-taxation in source state depends on taxability in residence state; remanded to CIT(A) for proper deliberation on whether treaty benefits can be granted in source state, where such benefit results in double non-taxation.

TS-556-ITAT-2017(Rjt)

BP Singapore Pte Ltd. vs. ITO

A.Y.: 2015-16,

Date of Order: 28^th November,
2017

Facts

A Singapore Company (“the Taxpayer”) was
engaged in the business of operation of ships in international waters. The
Taxpayer had claimed exemption under Article 8 of the DTAA in respect of the
freight income.

The Assessing Officer (“AO”) contended that
Article 24 of the India-Singapore treaty grants benefits of an exemption or
lower rate of taxation under the treaty only where income was taxed in
Singapore and since there was no evidence indicating that the freight income
was taxed in Singapore, AO applied Article 24 and denied the treaty benefits to
the Taxpayer.

The Taxpayer contended that as per Article
8, India has no right to tax shipping income. Hence, the income cannot be said
to be “exempt from tax in India”. Therefore, Article 24 was not applicable to
the facts of the case. Further, since the income was taxable in Singapore on
accrual basis¹ , even for this reason, Article 24 could not be
applied.

_________________________________________________________

1 Though
the Taxpayer had claimed that the income was taxed in Singapore on accrual
basis, during the proceedings before Tribunal, it mentioned that because of
applicability of an incentive provision, such freight income was not taxed in
Singapore.

Held

? The income was liable to tax in Singapore as
the fiscal domicile of the Taxpayer was in Singapore. However, it was not
actually taxed because of the incentive provision. In other words, though it
was “liable to tax”, the income was not “subjected to tax”

? On the issue of whether income was “exempt
from tax in India”, Tribunal held as follows:

• Article 3(2) requires
contextual interpretation of the undefined terms. Even where there is a
domestic law meaning to the undefined term, the contextual meaning will have
precedence.

• The expression ‘exempt
from tax’ in Article 24, essentially implies that the treaty benefit of
non-taxation of an income, or its being taxed at a lower rate in a contracting
state (in this case, India), depends on the status of taxability in other
contracting state (in this case, Singapore).

• Irrespective of whether
the treaty grants taxing rights exclusively to resident state (like the
language used in Article 8) or exempts the income in the source state the
impact on source state taxation remains the same, especially if seen in the context
of the provisions of the treaty where a benefit being granted is dependent
on the taxation in resident state.

? Thus, technically, Article 24 was applicable
to the facts of the case.

? However, noting that granting of treaty
benefits in the facts of the case, would lead to double non-taxation of income,
the matter was remanded back to CIT(A) for adjudication de novo on the issue of
whether, having regard to the underlying objective of the treaty to avoid
double non-taxation, treaty benefits in the source state (i.e India) can be
granted in respect of an income which is exempt from tax in resident state.

? The Tribunal noted that this issue would
impact a large number of Singapore companies and may be difficult to adjudicate
without proper deliberation, backed by the submissions of the parties. Hence,
the Tribunal remanded the matter to the CIT(A) to consider the issue and
directed both the parties to provide detailed arguments before CIT(A).

shailesh.kwebmaker

2 Article 12 of India-USA DTAA; Section 9(1)(vi), 40(a)(i), 195 of the Act – payments made to the parent company on a cost to cost basis for availing lease line services from third party service provider does not qualify as royalty; it qualifies as a reimbursement, not subject to tax in India.

TS-70-ITAT-2018
T-3 Energy Services India Pvt. Ltd. v. JCIT
ITA No.826/PUN/2015
A.Y- 2010-11;
Date of Order: 2nd February, 2018

Facts

Taxpayer, an Indian company, was an affiliate of FCo. FCo had entered
into an agreement with a third party service provider for providing
bandwidth/lease line services for the global business of the FCo’ group
including the Taxpayer. FCo raised back to back invoices on Taxpayer in respect
of Taxpayer’s share of lease line charges.

The Taxpayer contended that payment made to FCo was not in the nature of
royalty but in the nature of reimbursement and hence there was no obligation to
withhold taxes on such payments.

AO contended that the amount remitted to the third party was not a
reimbursement of expenses but was in the nature of payment made to the service
provider for lease line services through its associated enterprise (AE).
Further, it contended that such lease line charges constituted royalty under
the Act as well as the DTAA basis the amended definition of royalty under the
Act and hence would be subject to withholding u/s. 195 of the Act.

Aggrieved by the order of AO, Taxpayer appealed before CIT(A). CIT(A)
observed that in case payments were directly made to third party service
provider, it would have been taxable in the hands of the service provider and
would attract withholding obligations for the Taxpayer. Merely because the
payment is routed through FCo on back to back basis, it cannot be treated as
reimbursement of expenses. Payment made by Taxpayer is taxable in India and
will be subject to withholding.

Aggrieved, the Taxpayer appealed before the Tribunal

Held

– The
agreement with the service provider was a commercial transaction, in terms of
which FCo contracted the service provider to provide lease line services for
global business of FCo group and was not limited to the Taxpayer alone.

– The understanding
was between FCo and the service provider. Though the Taxpayer benefited from
the negotiated price under the agreement, it was not a party to the agreement.

– The
privity of the agreement was between FCo and service provider, whereby FCo obtained
the services from the service provider and passed it to its affiliates
including the Taxpayer on cost to cost basis. Thus there was no income element
involved in payments made by Taxpayer to FCo.

– Without
prejudice, the contention of AO that it is not case of reimbursement but a case
of payment to third party through its AE and hence qualifies as royalty, cannot
be accepted. This is because the term ‘royalty’ is defined under the DTAA and
it does not cover payments made towards lease line charges.

– Further,
the amended definition of royalty u/s 9(1)(vi) of the Act cannot be read into
the DTAA. Reliance in this regard was placed on Delhi HC decision in the case
of New Skies Satellite BV.

shailesh.kwebmaker

1 Article 5(4), 7 & 8 of India-Mauritius DTAA –When place of effective management is not situated in one of the contracting states but in a third country, Article 8 of DTAA (shipping income) does not apply where an agent has more than one principal, he cannot be treated as an exclusive agent for the purposes of Dependent Agent PE (DAPE)

TS-73-ITAT-2018(Mum)
ADIT (IT) vs. Baylines (Mauritius)
I.T.A. No. 1181/Mum/2002
A.Ys: 1998-99 to 2012-13,
Date of Order: 20th February, 2018

Facts

Taxpayer, a company incorporated in Mauritius carried on the shipping
business in India. Taxpayer held a TRC indicating that it was a resident of
Mauritius for the relevant financial year. Taxpayer had an agent in India (ICo)
who concluded the contracts on behalf of the Taxpayer in India.

Taxpayer filed its return of income in India and claimed that the income
from shipping business was exempt from tax by relying on Article 8 of the India
Mauritius DTAA dealing with taxation of shipping income.

Article 8 of the India-Mauritius DTAA provides that income from shipping
business is taxable in the contracting State in which the POEM of the Taxpayer
is located. AO noted that the place of effective management (POEM) of the
Taxpayer was situated in UAE, a third country. Consequently AO held that
Article 8 of the DTAA was not applicable to the Taxpayer. Further AO held that
ICo created a dependent agent PE (DAPE) for the Taxpayer in India and
accordingly taxed the income from shipping business as per Article 7 of the
DTAA.

Aggrieved by the order of AO, Taxpayer appealed before CIT(A).

CIT(A) upheld AO’s contention that Article 8 of the DTAA was not
applicable to the Taxpayer. CIT(A) however, held that ICo did not create a DAPE
of the Taxpayer in India. Accordingly, in the absence of PE, shipping income
was held to be exempt from tax in India under the DTAA.

Aggrieved, both the Taxpayer and AO appealed before the Tribunal.

Held 1

– On
the basis of following observations, it was held that merely holding of two board
meetings in Mauritius is not sufficient to support that the POEM was in
Mauritius.

– Only two Mauritian directors
attended the first board meeting in person, while the remaining two UAE
directors of the Taxpayer attended these meeting via phone. The only business
transacted in that meeting was the appointment of the auditors.

– The business transacted in the
second board meeting was with regard to approval of accounts. It is surprising
how the annual accounts a company could be approved on telephone. This
indicates that the directors of Mauritius were on the Company’s Board only to
satisfy the conditions of the regulatory requirements of Mauritius Government.

– The
fact that ICo was appointed as an agent on a letter head showing its UAE
address and a letter addressed by Taxpayer to AO also originated from UAE
indicated that the major policy decisions were taken in UAE.

– In
case where the POEM is not in one of the contracting States, Article 8 becomes
inapplicable. Reliance in this regard was placed on the commentary by Professor
Klaus Vogel

– Thus
whether or not shipping income is taxable in India will have to be evaluated
basis Article 7 of the DTAA.

Held 2

– For
the following reasons it was held that ICo qualified as an agent of independent
status and hence did not create a DAPE for the Taxpayer in India:

• ICo carried on the activities
of the Taxpayer in the ordinary course of its business.

• Article 5(5) of DTAA between
India and Mauritius requires that when the activities of the agent are devoted
exclusively or almost exclusively on behalf of the foreign enterprise, the
agent will not be considered to be an agent of an independent status.

• The dictionary meanings of the
term ‘exclusively’ clearly suggests that the agent should earn 100% or something
near to 100% from the principal to qualify as its dependant agent. Reliance in
this regard was also placed on the decision of Mumbai ITAT in case of Shardul
Securities Ltd. vs. JCIT (115 lTD 345).

• In the facts of the case, ICo
worked on behalf of other principals as well, apart from the Taxpayer and
earned a substantial part of its income from them. Thus ICo’s activities were
not devoted exclusively or almost exclusively on behalf of the Taxpayer.

• Reliance was placed on the
decision of Mumbai ITAT in the case of DDIT(IT) vs. B4U International
Holdings Ltd. (137 lTD 346) which was upheld by Mumbai High Court in
support of the proposition that for the determination of independence for the
purpose of DAPE, one should look at the activities of the agent and whether or
not the agent works exclusively for one principal.

– The
fact that the principal has only one agent in India who undertakes all the
activities for the principal is not relevant in determination of independence
or otherwise of the agent.

– Thus,
in absence of a PE in India, the income from shipping business is not taxable
in India.

shailesh.kwebmaker

13 Article 6 and 7 of India-Kenya DTAA; Indian bank earned rental income from house property in Kenya. Rental income not taxable in India as per Article 6 of DTAA. Notification or circular can neither override the provisions of tax treaty nor alter the nature of income

TS-515-ITAT-2017(Mum)

Bank of India vs. ITO

A.Y: 2009-10

Date of Order: 8^th November, 2017

Article 6 and
7 of India-Kenya DTAA; Indian bank earned rental income from house property in
Kenya. Rental income not taxable in India as per Article 6 of DTAA.
Notification or circular can neither override the provisions of tax treaty nor
alter the nature of income

FACTS

The Taxpayer,
an Indian public sector bank, had a branch in Kenya. During the relevant year
the Taxpayer earned business income from its branch in Kenya. Further, the
Taxpayer also earned rental income from a house property located in Kenya.
Taxpayer claimed that the business income and rental income earned by the Kenya
branch was not taxable in India as per Article 6 and Article 7 of India-Kenya
DTAA.

Relying on the
CBDT Notification No.91 of 2008, AO contended that the business income and
rental income is taxable in India¹. Aggrieved by the contention of
the AO, the Taxpayer appealed before CIT(A) who upheld the order of the AO.

Aggrieved, the
Taxpayer appealed before the Tribunal.

HELD

– Relying on
its own order for earlier years in the case of the same Taxpayer, the Tribunal
held that business income from foreign branches was not taxable in India as per
Article 7 of India-Kenya DTAA. The earlier decision of the Tribunal relied on
SC ruling in the case of Kulandagan Chettiar (267 ITR 654) for arriving at such
conclusion.

– AO had
treated the business income and rental income as one source of income. However,
the DTAA contains two different Articles i.e., Article 7 which governs business
income and Article 6 which governs income from immovable property.

– Any
notification or circular cannot alter the nature of income that has been
specifically included in DTAA. Even amendment in a section of the Act would not
affect the provisions of tax treaties, unless same are not ratified by both the
countries.

– Rental
income received by the Taxpayer is covered by Article 6 of India-Kenya DTAA. As
per Article 6, such rental income is not taxable in India.

P.S: The
meaning of “may be taxed” provided by Notification No. 91 of 2008 was not
applicable to the facts of the case. _

_____________________________________________________

1 Notification No. 91 of 2008 provides that
where an DTAA is entered into by the Central Government of India with the
Government of any country outside India for granting relief of tax or as the
case may be, which provides that any income of a resident of India “may be
taxed” in the other country, such income shall be included in his total
income chargeable to tax in India in accordance with the provisions of the Act
a’nd relief shall be granted in accordance with the method for elimination or
avoidance of double taxation provided in such DTAA.

shailesh.kwebmaker

12 Section 5(2), 6(1) of the Act – Salary income earned by a non-resident for services rendered in foreign country while on deputation is not taxable in India

[2017] 87 taxmann.com 98 (Delhi)

Pramod Kumar
Sapra vs. ITO

A.Y: 2011-12
Date of Order: 30^th October, 2017

Section 5(2),
6(1) of the Act – Salary income earned by a non-resident for services rendered
in foreign country while on deputation is not taxable in India

FACTS

The Taxpayer,
an individual was employed by ICo. Taxpayer was deputed to Iraq for the purpose
of employment by ICo. During the year under consideration, total number of days
of his stay outside India was 203 days. Further, his stay in India for the four
FYs preceding the relevant FY was less than 365 days.

The Taxpayer
filed his return of income in India in the capacity of a non-resident (NR). In
his return, Taxpayer claimed that the salary earned outside India for the
period during which he was on deputation in Iraq is not taxable in India.

The return of
income filed by the Taxpayer was accepted by the AO. However, Principal
Commissioner of Income tax (PCIT) set aside the assessment order. PCIT
contended that the salary earned by the Taxpayer for the period of deputation
was received in his bank account in India. Taxes were also deducted on such
income in India. Thus, such income was taxable on receipt basis in India u/s. 5
of the Act. As A.O. had proceeded with the assessment without considering this
fact and without making any enquiry, the assessment made by AO was erroneous
and prejudicial to the interest of the revenue. Thus, the order of AO was
needed to be set aside u/s. 263 of the Act.

Aggrieved by
the order of PCIT, Taxpayer appealed before the Tribunal

HELD

– Since
Taxpayer was present in India for less than 182 days and his total stay in
India during the preceding four FYs was less than 365 days, he was NR for the
relevant FY.

– The fact
that salary income has been received in India, i.e., it has been credited in
the bank account of the taxpayer in India and also that TDS has been deducted
by the employer, cannot be determinative of the taxability under the Act. What
is relevant is, whether the income can be said to be received or deemed to be
received in India u/s. 5 of the Act.

– Section
5(2) merely provides that if the income of NR has been received or has accrued
in India or is deemed to be received or accrued in India, the same shall be
treated as total income of that person. Section 5 does not envisage that income
received by NR for services rendered outside India can be reckoned as part of
total income.

– Taxpayer
received salary during his employment outside India for carrying on his
activities outside India. Such income cannot be treated as income received or
deemed to be received by the Taxpayer in India. Hence salary received by the
Taxpayer for services rendered in Iraq was not taxable in India.

shailesh.kwebmaker

26 Sections 9, 44BB, 44DA and 115A of the Act – Prospecting for or extraction or production of mineral oil is not technical services – therefore, payments for rendering of services for extraction or production of mineral oil as sub-contractor would not be FTS – since payment was received by non-resident Taxpayer from another non-resident for services in connection with prospecting for extraction or production of mineral oil, such payments would be covered by section 44BB.

[2018] 89 taxmann.com 416 (Mumbai – Trib.)
Production Testing Services Inc vs. DCIT
A.Y.: 2011-12, Date of Order: 27th October, 2017

Facts

ONGC had awarded a contract for providing
certain services to a company incorporated in Scotland and having a project
office in Mumbai (“F Co”). F Co, in turn, sub-contracted the work to the
Taxpayer, which was a non-resident. The Taxpayer received certain payments from
F Co. The Taxpayer offered the receipts to tax u/s.44BB of the Act.

The AO held that since F Co was providing
services to ONGC, the Taxpayer who was sub-contracted the said work by F Co was
indirectly performing the services for ONGC. The AO further held that services were
technical services provided by the Taxpayer for prospecting extraction or
production of mineral Oil. The AO also noted that as per the TDS certificates,
tax was withheld u/s. 194J (which, inter alia, applies in case of FTS).
Accordingly, the AO treated the receipts as ‘fees for technical services’
(“FTS”) u/s. 115A of the Act.

DRP upheld the findings of the AO.

Held

– Perusal
of the contract showed that the contractor was solely responsible for the
performance of the contract. The contract further stated that if the contractor
engaged any sub-contractor for performing the contract, then the sub-contractor
shall be under the complete control of the contractor and that there shall not
be any contractual relationship between such sub-contractor and ONGC.

– Thus,
the Taxpayer, who was engaged as a sub-contractor, had nothing to do with ONGC.
Therefore, the AO and DRP were wrong in holding that the amount received by the
Taxpayer for rendering services were indirectly received from ONGC. Hence, the
payments were received by the Taxpayer from FCo.

– In Oil & Natural Gas Corpn. Ltd. vs. CIT
[2015] 376 ITR 306/233 Taxman 495/59 taxmann.com 1, the Supreme Court has
held that prospecting for extraction or production of mineral oil is not to be
treated as technical services for the purpose of Explanation 2 of 9(1)(vii),
and such activity would be covered by section 44BB.

– Section
115A(b) presupposes existence of FTS, therefore, the payments received for
rendering of services for extraction or production of mineral oil by the
Taxpayer would not fall within the ambit of FTS. Since the pre-condition for
invoking of section 115A is missing, the same would not be attracted.

– The
contention of the Taxpayer that it had received the payments for rendering the
services from F Co, which was a foreign company, had merit. Since the receipts
of the Taxpayer were from F Co, and not from Government or an Indian concern,
the provisions of section 115A and section 44DA were excluded.

– Section
44BB has special and specific provisions for computing profits and gains of a
non-resident in connection with the business of providing services or
facilities in connection with or supplying plant and machinery on hire used or
to be used in the prospecting for or extraction or production of mineral oils.
Hence, the services provided by the Taxpayer in connection with extraction or
production of mineral oil were covered by section 44BB. _

shailesh.kwebmaker

25 Section 9 of the Act and Article 12 of India-USA DTAA – payments to USA subsidiary towards provision of inputs for new product development including market survey expenses in USA, being FIS under Article 12(4), were taxable in India; remittances to an employee towards expenses of overseas representative offices were not taxable in India.

[2018] 89
taxmann.com 445 (Chennai – Trib.)

Tractors &
Farm Equipment Ltd. vs. ACIT

A.Y. 2006-07,
Date of Order: 27^th September, 2017

Facts

The Taxpayer
was engaged in manufacture and sale of tractors and farm equipment. It had
established a subsidiary In USA (“US Co”) for sale of tractors in USA. The
Taxpayer had entered into agreement with US Co to provide assistance for
promoting sale of tractors through advertisement, to provide market inputs to
enable increased sale of its tractors and maintain stock. The Taxpayer was
reimbursing promotional activity expenses to US Co on the basis of supporting
documents. The Taxpayer had also set up overseas representative offices in
London, Vienna and Belgrade for sale of tractors and had remitted funds towards
reimbursement of expenses to overseas representative office. The remittances
were made to the account of an employee of the Taxpayer. The employee had
periodically submitted detailed accounts with supporting documents in respect
of expenses incurred.

The Taxpayer contended that none of the
payments made to US Co were fee for technical/consultancy services. Further,
they being reimbursements, there was no element of profit. Hence, the
remittances were not taxable in India.

The AO
held that as the Taxpayer did not withhold tax while making payments to US Co
and overseas representative offices, such payments were to be disallowed u/s.
40(a)(i) of the Act.

With respect to payment to overseas
representative office, the Taxpayer contended that the payment was merely a
reimbursement towards periodic maintenance expenses incurred by the
representative office and hence, was not taxable in India.

The
CIT(A) confirmed the order of the AO in respect of payments made to US Co but
deleted disallowance in respect of payments made to overseas representative
offices.

Held

– The
Taxpayer had paid US Co for expenses for two kinds of services. One, sales
promotion and two, market development.

– As
per Distribution Agreement between the Taxpayer and US Co, the payments were
made “to provide inputs for new Product Development – Improvements in the
present range of products” to US Co “towards the market survey expenses to be
incurred in USA”. Thus, these payments were towards services rendered by US Co
to provide inputs for new product development including market survey in USA.
Such services were covered within the definition of ‘Fees for included
services’ in Article 12(4) of DTAA.

– The
debit note issued by US Co showed that reimbursement was for expenses incurred
towards detailed review of specifications of compact tractors, obtaining
feedback of dealers/end users, consulting experts/professional engineers
regarding current use and future requirements and evolving broad specifications
for a new range of compact utility models. The debit note also supports the
fact that the services fell within the definition of ‘Fees for included
services’ in Article 12(4) of DTAA.

– As
regards remittance towards expenses of overseas representative offices, the AO
had neither doubted the genuineness of the expenditure nor had he brought any
material on record for supporting disallowance. Merely because the employee
acted as an authorized signatory in another entity, does not mean that the
payment was not towards reimbursement of expenses of overseas offices of the
Taxpayer.

shailesh.kwebmaker

24 Sections 5(2), 9, 15, 90(2), 192(2) of the Act; Article 16 of India-USA DTAA – if employee is non-resident and no part of services under employment are performed in India, salary is not subject to withholding in India; employer can consider foreign tax credit at the stage of withholding tax.

AR No 1299 of 2012
Texas Instruments (India) Pvt. Ltd., In re
A.Ys.: 2011-12 and 2012-13, Date of Order: 29th January, 2018

Facts

The applicant, was an Indian entity which
had sent an employee on an assignment to the USA for two years. During that
period the employee was on payroll with its group entity in the USA (US Co).
While he was in USA, though the employee had not rendered any service in India,
for fulfilling his personal obligations, he received part of the salary in
India from the applicant.

In respect of financial year 2011-12 the
employee would have been a non-resident (“NR”)
in India and for financial year 2012-13 he would have been a resident in
India.

The employee would be resident in the USA
for the calendar years 2010, 2011 and 2012 as per the US domestic laws.
Accordingly, his global income, including salary paid in India, would be taxable
in USA.

The applicant sought ruling of AAR on the
following questions.

Question 1: Whether the Applicant is obliged
to withhold taxes on the salary paid in India to the employee in financial year
2011-12, when the employee qualified as an NR in India;

Question 2: Whether the Indian employer can
consider claim of foreign tax credit (“FTC”) at withholding stage in respect of
the taxes paid in the USA by the employee in financial year 2012-13 when he
would be a resident in India.

The applicant contended as follows before
the AAR.

As regards question 1

– In
terms of section 5(2) of the Act, the scope of total income of a non-resident
comprises income received in India, including salary received by the employee
in India. However, it is to be computed in terms of section 2(45) of the Act, after providing
reliefs, such as, treaty reliefs. Hence, first the taxability of salary needs
to be determined and then the availability of treaty benefit for computing the
taxable total income.

– Since
no services were rendered in India, salary for employment exercised in the USA
would not accrue in India. This is supported by the provisions of section 15
read with explanation to section 9(1)(ii) of the Act, decision in DIT vs.
Sri Prahlad Vijendra Rao (ITA No 838/ 2009) and decision in CIT vs.
Avtar Singh Wadhwan [2001] 247 ITR 260 (Bom) and commentary by Professor
Klaus Vogel on Article 15 of the OECD Model Convention

– U/s.
90 of the Act, the employee is entitled to adopt either the provisions of the
Act or India-USA DTAA, whichever is more beneficial. As per Article 16 of DTAA,
the salary received by a USA resident in respect of employment is taxable only
in USA since the employment is not exercised in India. Hence, though the salary
was to be paid in India, , it would not be taxable in India.

– U/s.
192 of the Act, an employer is required to withhold taxes only if salary is
chargeable to tax in India. Also, as per section 192 read with section 2(10) of
the Act, taxes are required to be withheld considering the average rate of tax,
which is determined by dividing income-tax on total income by the total income.
In the instant case, as the total income with respect to salary paid in India
would not be chargeable to tax in India, the average rate of tax will work out
to Nil.

As regards question 2

– The
employee would be a resident in India for financial year 2012-13. Hence, in
terms of Article 25 of India-USA DTAA he will be entitled to claim FTC on taxes
paid in USA.

– Section
192(2) of the Act provides that an employee working under more than one
employer during any financial year can furnish details of salary and TDS to one
of the employers, and such employer is obliged to consider the same while
arriving at the quantum of total taxes to be withheld.

– Since
withholding tax provisions apply only to the extent of actual tax liability,
the treaty relief should be available to the employee at the tax withholding
stage without having to wait to seek this relief only at the time of filing
return of income.

– Hence,
relying on decisions in British Gas India Private Limited (AAR/725/2006)
and Coromandel Fertilizers Ltd [1991] 187 ITR 673 (AP), the Indian
employer would be required to consider FTC while arriving at the taxes to be
withheld at source in India.

The tax authority contended as follows before the AAR.

As regards question 1

– U/s.
5(2) of the Act, any income (which includes salary) received in India is liable
to tax in India. Hence, it will be subject to withholding tax. Salary due from
an employer in India is chargeable to tax in India and its payment will trigger
withholding tax obligations in India.

– An
Indian employment contract is an evidence of employer-employee relationship in
India. If the employer is an Indian entity, the employment is considered to be
exercised in India. Place where services are actually rendered or where the
employee is physically present is not relevant.

As regards question 2

– Grant
of claim of FTC involves interpretation of the articles of DTAA and examination
of satisfaction of other conditions, such as, actual payment of taxes in USA,
attribution of tax to income, etc. Only tax authority would have such
expertise. An employer would neither have the opportunity nor such expertise to
carry out such exercise at the time of withholding tax at source. From
financial year 2012-13, there is an additional requirement for obtaining a Tax
Residency Certificate (“TRC”) in order to avail Treaty benefits.

– Further,
section 192 of the Act does not provide for allowing FTC at the withholding
stage. Hence, the Indian employer cannot give benefit of FTC at the time of
withholding tax.

Held

As regards question 1

– U/s.
4 of the Act, income tax is to be charged in accordance with, and subject to,
provisions of the Act, on the total income of a taxpayer. The total income
chargeable to tax for a non-resident is subject to other provisions of the Act.

– The
judicial decisions cited by the Indian employer, and decision in Utanka Roy
vs. DIT (International Taxation) (2017) 390 ITR 109 (Cal), have held that,
the actual place of rendering services is the key test in determining place of
accrual of salary to a non-resident, and that salary received in respect of
services rendered outside India has to be considered as being earned outside India.
Since the employee was rendering services in the USA during FY 2011-12, the
salary accrued to him in USA and not in India.

– Whether
the employer was an Indian entity or not was immaterial and the only material
point for consideration is the place where the services were rendered. This is
also supported by the Commentary by Klaus Vogel on Article 15 and Explanation
to section 9(1)(ii) of the Act.

– Further,
even as per the provisions of Article 16 of DTAA, any income from services
rendered in USA would be chargeable to tax in USA. Thus, applying section 90 of
the Act, the beneficial provisions of the DTAA would prevail.

– Accordingly,
as the employment was exercised in the USA, the salary did not accrue in India.
Therefore, the Indian employer is not required to withhold taxes on the portion
of salary paid in India to its NR employee.

As regards question 2

– Under
Article 25 of India-USA DTAA, the employee is entitled to benefit of claim of
FTC.

– U/s.
192(2) of the Act, in respect of payments received by an employee from more
than one employer, the employee could furnish details of salary paid and tax
deducted to one of the employers, who would then be required to consider the
same at the time of withholding tax.

– Although,
the machinery provisions of the Act do not provide for claim of FTC at
withholding stage, the judicial decisions cited by the applicant had held that
FTC can be considered by the Indian employer at the withholding stage. Thus,
the Indian employer could consider the same while computing withholding tax.

– However,
while the Indian employer can consider FTC at the time of withholding tax, it
is also obligated to exercise due diligence in satisfying itself about the
details of period of residence, TRC, details of income earned and taxes
deducted, the period of income, etc., before doing so.

– If
the tax authority believes that the Indian employer has failed in carrying out
such due diligence, it may take appropriate action under the Act.

shailesh.kwebmaker

23 Articles 5, 7 of Indo-Swiss DTAA – Referral fee received by Dubai branch of a Swiss company from its India branch for referring an Indian resident client was ‘commission’ – since such fee was not attributable to PE in India of the Taxpayer, it was not taxable in India.

[2018] 90 taxmann.com 181 (Mumbai – Trib.)
DCIT vs. Credit Suisse AG
A.Y.: 2011-12, Date od Order: 9th February, 2018

ACTS
The Taxpayer was an entity incorporated in, and tax-resident of, Switzerland. The Taxpayer was a member of a global banking group providing various financial services globally. With permission of RBI, the Taxpayer had established a branch in India (“India Branch”). The Taxpayer also had a branch in Dubai. (“Dubai Branch”).

Dubai Branch had referred an Indian resident client to India Branch. India Branch handled the assignment and in accordance with global policy of the group, paid half of the fee to Dubai Branch as referral fee. The Taxpayer contended that referral fee received by Dubai Branch was ‘business income’. Since Dubai Branch did not have a PE in India, in terms of Article 5 of Indo-Swiss DTAA fee was not liable to tax in India. According to the AO, since the referral fee was payable in connection with a transaction between India Branch and referred client, it was in the nature of ‘fee for technical services’ and not ‘business income’. Hence, in terms of section 5(2)(b), read with section 9(1)(i) of the Act, referral fee was taxable in India since it was deemed to accrue or arise in India.

According to the DRP, Dubai Branch referred the client and it had no PE in India. Such income could not be attributed to activity of India Branch1.

HELD
– Mere fact that the fee was payable by India Branch to Dubai Branch, after execution of the work was no ground to determine the nature of the payment.

– In concluding that the ‘referral fee’ is in the nature of ‘commission’ to be taxed as ‘business income’ and not as ‘fees for technical services’ the DRP has referred and relied upon the decisions in Cushman & Wakefield (S) Pte. Ltd., 305 ITR 208(AAR) and CLSA Ltd., vs. ITO (International Taxation), 56 SOT 254(Mum) by the DRP. The tax authority has not brought any contrary decision.

– The tax authority has not countered the contention of the Taxpayer that Dubai Branch had no PE in India and also that PE in India of the Taxpayer, i.e., India Branch, had no role to play in the performance of the referral activity in question.
– Since the referral activity was undertaken outside India, and since PE of the Taxpayer had no role to play in the referral activity, the referral fee earned by Dubai Branch could not be considered to be attributable to PE in India of the Taxpayer. Therefore, the DRP was right in applying Article 7 of Indo-Swiss DTAA and holding the referral fee as non-taxable in India.

1 Though the decision has not made any mention, it may be noted that Article 7(1) of Indo-Swiss DTAA contains only limited force of attraction.

shailesh.kwebmaker

Sections 9, 44BB of the Act; Article 5(5) of India-Singapore DTAA – Where drilling rig was brought into India for fabrication and upgradation to make it ready for drilling activities, the number of days for which such fabrication and upgradation was being carried out was to be included to determine whether aggregate days exceeded the threshold.

23. [2017] 83
taxmann.com 174 (Mumbai – Trib.)

DCIT vs. Deep Drilling (1) Pte. Ltd.

A.Y.: 2011-12, Date of Order: 19^thApril, 2017

Facts

The Taxpayer was a non-resident company, incorporated in
Singapore. It was engaged in the business of providing jack-up drilling unit
and platform well operations services.

The Government of India had awarded an exploration contract
to an Indian company (“I Co”) for exploration in offshore areas of India.
During the year under consideration, the Taxpayer entered into an agreement
with an I Co for providing jack-up drilling unit and platform well operations
for exploration and earned income from the said agreement.

Under the agreement with
I Co, the Taxpayer was required to provide rig as per stipulated
specifications. The Taxpayer brought rig into India for necessary fabrication,
upgradation and positioning to meet requirements of I Co. Actual drilling
operations commenced after such modifications and were undertaken for 119 days.
The Taxpayer did not offer any income to tax in India on the ground that number
of days for which drilling operations were carried on in India were less than
the threshold period of 183 days for constitution of exploration PE in India
under India-Singapore DTAA and in absence of a PE in India, income from its
activities was not taxable in India.

However, the AO observed that the drilling rig was brought
into India in April 2010. Since the rig was in India for more than 183 days, it
constituted exploration PE of the Taxpayer under India-Singapore DTAA.
Therefore, income of the Taxpayer was taxable u/s. 44BB of the Act.

Aggrieved by the order of AO, Taxpayer appealed before
CIT(A). The CIT (A) decided the issue in favour of
The Taxpayer.

Held

– Under article 5(5) of India-Singapore DTAA,
an enterprise shall be deemed to have an exploration PE in a contracting state,
if it provides services or facilities in that state for a period of more than
183 days in connection with exploration, exploitation or extraction of minerals
oils in that state.

– The Taxpayer brought the drilling rig into
India on 26^thApril 2010. For rendering the services to I Co, the
rig was required to undergo necessary fabrication, upgradation and positioning
as per the requirements of I Co before commencing the drilling activity.

– The operation on the rig to upgrade it, to
prepare it, and to enable it to perform the drilling activity cannot be
considered in isolation from the actual drilling activity for determining
whether the Taxpayer was having a PE in connection with exploration,
exploitation or extraction of mineral oil in India.

– Thus, the Taxpayer had an
exploration PE in India from the day it commenced fabrication, etc. in
India to perform the drilling activity. Since the number of days for which the
rig was deployed (including those for fabrication, etc.) was more than
183 days, the Taxpayer had an exploration PE in India.

shailesh.kwebmaker

Section 92C, the Act – No royalty could be said to have accrued to the Taxpayer since there was no agreement between AEs and the Taxpayer to charge royalty during the year and since the Taxpayer had not provided any technical or other support to the AEs.

21. [2017] 83
taxmann.com 305 (Delhi – Trib.)

Dabur India Ltd. vs. ACIT

A.Y.: 2006-07, Date of Order: 12^th April, 2017

Facts

The Taxpayer was engaged in manufacturing and trading of
health care, personal care, cosmetics and veterinary products. It entered into
the following arrangement with two of its subsidiaries based in UAE (“UAE Co”)
and Nepal
(“Nepal Co”).

– UAE Co:

UAE Co had entered into an agreement with
the Taxpayer prior to becoming subsidiary of the Taxpayer for the use of the
technical know-how and R&D support of the Taxpayer in manufacturing
Ayurvedic products in UAE. The Taxpayer had permitted UAE Co to use its brand
name. In return, UAE Co had paid royalty @3% of FOB sale. Further, UAE Co also
manufactured other products without the technical know-how and R&D support
of the Taxpayer. In respect of such products UAE Co was allowed to use the
trademark of the Taxpayer for which a royalty of 1% of FOB sales was paid by
UAE Co to the Taxpayer.

Subsequently, UAE Co found that Ayurvedic
products of the Taxpayer were not selling in UAE. Hence, it began to
manufacture and market FMCG products with its own technology and hence, paid
royalty @1% to the Taxpayer.

– Nepal Co:

The Taxpayer had entered into agreement
with Nepal Co for payment of royalty @ 7.5% of FOB sale price and as per the
terms of the agreement, the Taxpayer was required to bear the cost of marketing
expenses. However, Nepal Co had to incur substantial expenditure to penetrate
the market and hence, the agreement was amended and the royalty was reduced to
3%. However, in the relevant assessment year, Nepal Co did not pay any royalty.
Further, the Taxpayer had contended that 80% of production of Nepal Co was
purchased by the Taxpayer. Hence, even if the Taxpayer charged royalty, it
would have increased the cost and the Taxpayer would have paid higher price.

The TPO noted low/non-receipt of royalty
from AEs during the current year. Hence, he asked the Taxpayer to furnish the
reasons for the same.

The Taxpayer submitted that there was no
agreement for payment of royalty during the year under consideration. Hence,
right to receive the royalty was absent. Further, UAE Co had also refused the
payment of royalty on the ground that it had incurred huge expenditure on
promotion of bands of the Taxpayer.

The TPO observed that in the absence of
evidence of termination of agreement between the Taxpayer and its AE, as well
as in absence of corroborative evidence like non-use of brand name or non-use
of technical know-how by the AE, the Taxpayer had permitted UAE Co and Nepal Co
use of its intellectual property without any royalty payment and hence, he made
an adjustment in the hands of the Taxpayer considering royalty @ 4% of sales in
case of UAE Co and @ 7.5% of sales in case of Nepal Co.

Aggrieved by the order of AO, Taxpayer made
appeal before CIT(A). CIT (A) held that international transaction of permitting
use of brand name by AEs was same in both cases. Therefore, there was no reason
to assign higher royalty in one case than the other. Accordingly, he held
royalty @ 2% of FOB sales as arm’s length price in both cases.

Held

Royalty from UAE Co

– When the agreement was in existence, the
Taxpayer provided technical know-how and R&D support for manufacturing of
products to the Taxpayer. Further, UAE Co had paid royalty @ 1% in accordance
with the agreement even when no product was manufactured with the help and
support of the Taxpayer since it was using the trademark of the Taxpayer.

– The agreement was not renewed on completion.
Therefore, it had ceased to exist with effect from financial year 2005-06.
Thus, for the year under consideration, no royalty was payable. Further, the
products manufactured, as well as raw material used, by UAE Co were totally
different from those in India. The AO had not brought anything on record to
substantiate that the Taxpayer had provided technical know-how and R&D
support for manufacture of such products.

– UAE Co had incurred huge expenses on
marketing and advertising the brand of the Taxpayer. Moreover, the AO had also
not brought on record that:

• the Taxpayer had incurred expenses for
marketing the products of UAE Co; or

• the Taxpayer made any efforts or contributed
any money for establishing its name in UAE; or

• the products manufactured by UAE Co were not
different from the products manufactured in India by the Taxpayer; or

• the claim of the Taxpayer that the products
manufactured, and materials used, in UAE were totally different from those in
India had not been rebutted.

– Under section 92C of the Act, read with rules
10B and 10C of the Rules, ALP should be determined on the basis of similar
payments received by similarly situated and comparable independent entities. In
the present case, no comparable case was brought on record by the TPO or CIT
(A).

– Since the Taxpayer is not providing any
support to UAE Co, it will be fair and reasonable to charge royalty @ 0.75%.

Royalty
from Nepal Co

– For the year under consideration, Nepal Co
had not paid royalty to the Taxpayer since it had to incur market penetration
expenses.

– The contention of the Taxpayer that 80% of
production of Nepal Co was purchased by the Taxpayer had not been rebutted. It
is undisputed that royalty was payable in earlier year on sales. Therefore, it
is unbelievable that the Taxpayer charged the royalty on the purchases made by
it from Nepal Co to increase the cost of its own purchases. Even if it is
presumed that the Taxpayer should have charged the royalty, the same amount
would have been added in the purchase price paid by the Taxpayer. Thus, it
would have been revenue neutral.

– There was no agreement in existence between
the Taxpayer and Nepal Co. Also, nothing was brought on record to substantiate
that the Taxpayer incurred any expenditure which benefited Nepal Co in any
manner. Having regard to all the facts, charging of royalty was not justified
and addition made is deleted.

shailesh.kwebmaker

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