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Category: Tribunal News : PART B -International Taxation

Section 92C, the Act – Location savings and advantages are very much relevant in cross-border transaction but only for limited purpose of examination and investigation of transaction and not as a basis for determination of ALP and consequential adjustment.

20.  [2017] 84
taxmann.com 15 (Bangalore – Trib.)

Parexel International Clinical Research (P.) Ltd. vs. DCIT

A.Ys.: 2011-12 & 2012-13,

Date of Order: 16th June, 2017

Facts

The Taxpayer was a subsidiary of a dutch company (“F Co”) and
was engaged in providing clinical research services in India. Certain AEs of
the Taxpayer had outsourced the work of clinical trial and research services to
The Taxpayer in India. For its services, the Taxpayer was paid cost plus 15%
markup.

To benchmark its international transactions, the Taxpayer
selected 17 comparable companies having average PLI of 18.05%. Since operating
profit margin of the Taxpayer was within the tolerance range of +/- 5%, it
claimed that its international transactions were at arm’s length.

The Transfer Pricing Officer (“TPO”) observed that compared
to developed countries, regulatory, compliance and investigatory costs were
significantly lower in India, Hence, conducting trial in India through the
Taxpayer had resulted in location saving for the AE. Since benchmarking against
local comparables did not take this into account. Accordingly, the TPO applied
the profit split on account of location saving. Consequently, the location
savings in relation to the total cost of conducting clinical trials was
allocated in the ratio of 50:50 between the Taxpayer and the AE.

Aggrieved by the order of TPO, the Taxpayer appealed before
the Dispute Resolution Panel (DRP). However, DRP concurred with the view of the
TPO. Aggrieved, the Taxpayer appealed before the Tribunal. 

Held

–   Location savings is one of the primary
factors of any cross-border trade. However, such location savings are available
to all parties irrespective of whether the transaction is between the related
party or unrelated party.

–   Location savings’ advantage is universally
accepted in cross-border trade so far as the transactions are not entered into
solely for the purpose of avoiding taxes. On the other hand, BEPS is relevant
only if the sole purpose of the transaction is to shift profit to no tax or low
tax jurisdiction and treaty shopping.

–  Transfer pricing provisions for
determination of ALP are inserted to deal with such transactions between
related parties. While location saving can be a relevant factor for conducting
a proper enquiry for determination of ALP, if the comparable uncontrolled price
is available, location saving cannot be the basis for determination of ALP and
consequential adjustment.

11 Section 92B of the Act – Providing corporate guarantee in respect of loans taken by AE does not constitute international transaction; amendment to section 92B relating to international transaction of issuance of corporate guarantee applies prospectively from FY 2012-13. Transfer of funds with intention to make investment cannot be treated as international transaction especially where shares are allotted against such advances.

[2017] 86 taxmann.com 254 (Hyderabad Trib.)

Bartronics
India Ltd. vs. DCIT

A.Y: 2012-13                                                                      

Date of Order:
27th September, 2017

Section 92B of
the Act – Providing corporate guarantee in respect of loans taken by AE does
not constitute international transaction; amendment to section 92B relating to
international transaction of issuance of corporate guarantee applies
prospectively from FY 2012-13. Transfer of funds with intention to make
investment cannot be treated as international transaction especially where
shares are allotted against such advances.


FACTS

The Taxpayer,
an Indian company provided a corporate guarantee in respect of the borrowings
of one of its overseas associated enterprises (AEs) without charging any
guarantee fee. Further, the Taxpayer had provided certain interest free
advances to its AE. Such advances were recorded in the books of the Taxpayer as
loans.

The Taxpayer
contended that the furnishing of corporate guarantee is not an international
transaction for the reason that the amendment by Finance Act 2012 which
included corporate guarantee within the definition of “international
transaction” is prospective in nature and does not apply to the year under
consideration.

Further, the
advances were provided out of business expediency as an investment and/or as a
parental support to the AE from taxpayer’s surplus/owned funds; without
incurring any costs. Hence, they should not be treated as international
transaction. In any case, since AE had allotted shares against advances
provided by the Taxpayer in the subsequent assessment year, they could not be
treated as international transaction.

During the
course of assessment proceedings, Transfer Pricing Officer (TPO), imputed
corporate guarantee fee and interest on advances in the hands of the Taxpayer.
Aggrieved by the order of TPO, Taxpayer appealed before the DRP. DRP confirmed
the action of the TPO.

Aggrieved by
the order of DRP, Taxpayer appealed before the Tribunal.

HELD

–  Although
the definition of “international transaction” was amended by FA 2012, to
include corporate guarantee within its ambit with retrospective effect, such
amendment has to be treated as effective from FY 2012-13.

–   Although
different views have been taken by different Tribunals on the prospective
applicability of the FA 2012 amendment, Taxpayer can adopt a view which is
favourable to him until a contrary view is taken by a higher court. Reliance in
this regard was placed on the decision of Dr. Reddy Laboratories [2017] 81
taxmann.com 398 (Hyd. Trib). Thus, corporate guarantee granted by the Taxpayer
prior to FY 2012-13 did not qualify as an “international transaction”.

–   Though the
advances were classified in the books of the Taxpayer as “advances”, what is
relevant is to evaluate the intention of providing the advances. Mere
classification of transaction as loans and advances in the balance sheet did
not qualify them as loan.

–   Taxpayer
had transferred the funds with the intention of investing in its AE. In fact,
shares were allotted by the AE against such advances. Thus, granting of such
advances could not be treated as international transaction. Reliance was placed
on KAR Therapeutics & Estates (P.) Ltd. [IT Appeal No. 86 (Hyd.) of 2016].
Thus, ALP adjusted in this regard was also not warranted.

5. [2017] 79 taxmann.com 199 (Bangalore – Trib.) Flughafen Zurich AG vs. DDIT A.Ys.: 2007-08 to 2009-10 and 2011-12 Date of Order: 10th March, 2017

Article 12, India-Switzerland DTAA; Section 9(1)(vii), the Act  – Where foreign company seconding highly qualified skilled managerial personnel to Indian company was obligated to pay them remuneration outside India, and the purpose was to avail managerial services, the amount received from Indian company was FTS under DTAA as well as the Act.

FACTS
The Taxpayer was a company incorporated in, and tax resident of, Switzerland. It was engaged in providing operations and management services to airports. It had, inter alia, entered into Expatriate Remuneration Reimbursement Agreement (“the Agreement”) with an Indian airport operator company (“I Co”) for secondment of skill personnel.

The Taxpayer claimed that since I Co had the right to issue directions to the seconded employees, they had worked under the direct control and supervision of I Co. Thus, they satisfied employee-employer relationship test. Consequently, payment of salary to them, even though routed through the Taxpayer, could not be considered as Fees for Technical Services (‘FTS’).

The AO held that the payment received by the Taxpayer from I Co was chargeable to tax as FTS under section 9(1)(vii) as well as India-Switzerland DTAA.

Before the Tribunal, the Taxpayer contended that:
–    the purpose of secondment was to assign the employees to exclusively work full time for I Co;

–    therefore there was employer-employee relationship between I Co and the seconded employees;

–    the parties had understood and agreed that by assignment of assignees the Taxpayer shall not be considered to have rendered any services whatsoever to I Co;

–    the Taxpayer shall not be held responsible for any act or omission of the assignees during the assignment with I Co;

–    the parties had also understood and agreed that in addition to remuneration paid to the assignees directly by the I Co in India, the assignees would be entitled to remuneration payable by the Taxpayer outside India;

–    documents between the Taxpayer and assignee and between I Co and assignees showed that the assignees too had accepted the terms of the Agreement; and

–    hence, the payment by I Co was merely reimbursement of salary paid by the Taxpayer to the assignees in foreign currency outside India.

The Taxpayer further contended that in Centrica India Offshore Pvt. Ltd. vs. DCIT [364 ITR 336 (Del)]11, seconded employees came to India on deputation for a short period whereas in its case the term of assignment varies from one year to several years and hence, its facts were distinguishable from the said decision.

The tax authority contended that the fact that despite the secondment the Taxpayer was under obligated to pay the assignees outside India showed that employee-employer relationship between assignees and the Taxpayer had not ceased and employee-employer relationship between assignees and I Co did not exist.

HELD
–    Secondees were under the employment with the Taxpayer. Therefore, it was not employment or recruitment by I Co.

–    Secondment was as per the requirement of I Co and in respect of the existing employees of the Taxpayer.

–    All the assignees/secondees were holding high managerial position such as CEO and CCO showing that they had expertise. Therefore, the purpose was to avail the services of highly qualified experts.  

–    In Intel Corporation vs. DDIT [IT(TP)A No.1486/Bang/2013], the Tribunal had considered identical issue. There was no material variation in the terms and conditions of the secondment in the case of the Taxpayer and those in the cases considered by the Tribunal in the said decision and in Food World Supermarkets Ltd. vs. DDIT [174 TTJ 859].

–    Further, there is no significant difference between the definition and the language in Explanation 2 to section 9(1)(vii) and that of FTS in Article 12(4) of India-Switzerland DTAA. Once a payment is for managerial service then it is irrelevant to examine the aspect of provision of service by technical or other personnel. Accordingly, there are no distinguishing facts or circumstances which warrant taking a different view.

4. [2017] 77 taxmann.com 267 (Mumbai – Trib) Qad Europe B V vs. DDIT A.Ys.: 1998-99 & 1999-2000, Date of Order: 21st December, 2016

Article 12, India-Netherlands DTAA; Section 9, the Act  – Since software license issued by Dutch company to Indian customer did not permit ‘adaptation’ as defined in Copyright Act, 1957, payment made by Indian customer was not towards ‘use’ of copyright; hence, it was not ‘royalty’ under DTAA.  

FACTS
The Taxpayer was a company incorporated in Netherlands. It was also a tax resident of Netherlands. The Taxpayer entered into software license agreement with an Indian company (“I Co”). The principal terms and conditions of the said agreement were as follows.

–    The Taxpayer had granted non-exclusive, non-transferable, license for perpetual use on one hardware system which may include up to four servers.

–    I Co did not acquire any copyright in the product.

–    The software was for exclusive use of I Co for the purpose of its own business. I Co was not permitted to exploit it commercially or to assign, transfer or sublicense it.

–    While I Co was permitted to modify source code, it was not permitted to modify object code10.
–    Only the Taxpayer had modification rights of software.

In light of the aforementioned terms and conditions, the Taxpayer treated income arising from the said transaction as its business income. Since it did not have any PE in India, it did not offer the income to tax in India.

According to the AO, the payment received by the Taxpayer on account of sale of software to I Co was ‘Royalty’ and, therefore, it was taxable in India in the hands of the Taxpayer u/s. 9(1)(vi) of the Act.

HELD
–    The Taxpayer had enabled I Co to change source code so as to make the product compatible to the local laws and regulations. The said change in the source code could not be operational till the object code was modified by the Taxpayer. Hence, the limited right of modification qua the source code granted to I Co cannot be viewed adversely.

–    The computer program was governed by The Copyright Act, 1957. I Co was not permitted to do any act referred to in section 14 of the Copyright Act, 1957. Thus, the Taxpayer had not granted any copyright to I Co.

–    Analysis and comparison of various provisions of the Copyright Act with the relevant clauses of the said agreement showed that the said agreement did not permit I Co to carry out any alteration or conversion of any nature, so as to fall within the definition of ‘adaptation’ as defined in Copyright Act, 1957. The right given to the customer for reproduction was only for the limited purpose so as to make it usable for all the offices of I Co in India and no right was given to I Co for commercial exploitation of the same.

–    It is also noted that the terms of the agreement did not allow or authorise I Co to do any of the acts covered by the definition of ‘copyright’. Hence, the payment made by I Co could not be construed as payment made towards ‘use’ of copyright as contemplated under the provisions of the Act and DTAA when read together with the provisions of the Copyright Act, 1957.

–    DTAAs of certain countries (such as, Malaysia, Romania, Kazakhstan and Morocco) specifically include software payment within the definition of ‘Royalty’. However India-Netherlands DTAA does not include software payment while defining ‘Royalty’. Hence, payment received by the Taxpayer on account of sale of software, could not be characterised
as ‘Royalty’.

–    I Co had made payment for use of the software and not the ‘process’ involved in it. Since the definition in article 12(4) of India-Netherlands DTAA did not include consideration for the use or right to use ‘computer programme’ or ‘software’, the same could not be imported into it. Perusal of clauses of the Master Agreement showed that the customer had paid consideration for ‘use of computer software’ and not for ‘copyright of the computer software’. India-Netherlands DTAA treats consideration for the use of copyright of a laboratory or artistic work, etc. as ‘Royalty’. Hence, there is no question of including consideration for use of a laboratory or artistic work, etc. within the ambit of ‘Royalty’ as defined in article 12(4) of the DTAA.

–    Consideration for sale of software should be covered in Explanation 4 to section 9(1)(vi) and accordingly taxable as such. However, since no corresponding amendment is made to India-Netherlands DTAA, the Taxpayer can choose more beneficial provision, i.e., DTAA.

–    Since the payment received by the Taxpayer is in the nature of business profits, it is assessable under Article 7 of India-Netherlands DTAA and not under article 12.

3. [2017] 78 taxmann.com 109 (Mumbai – Trib.) Valentine Maritime (Gulf) LLC vs. ADIT A.Y.: 2007-08, Date of Order: 18th January, 2017

Section 44BB, the Act – Since section 44BB of the Act does not envisage only direct use of the plant and machinery in the prospecting for or extraction or production of mineral oils, hire charges for hiring of barge used for offshore accommodation were also subject to taxation u/s. 44BB.

FACTS    
The taxpayer was a foreign company incorporated in UAE. It was engaged in oil and gas construction industry. During the relevant year, the taxpayer earned income from hiring of two tug boats to Indian companies and earned hire charges from them. The tug boats were used by the hirer in Bombay High offshore field for oil platform related work. The barge was used by the hirer for offshore accommodation/construction activities and was not directly involved in connection with prospecting of oil. In its return of income the taxpayer claimed that the hire charges of two tug boats and the barge were exempt in terms of Article 7 read with Article 5 of India-UAE DTAA.
The AO concluded that in terms of Article 1, read with Article 4, of India-UAE DTAA the Taxpayer was not a resident of UAE. Therefore, it did not qualify for benefit under India-UAE DTAA.

As an alternate contention, the Taxpayer claimed that hire charges should be subject to taxation in accordance with section 44BB of the Act. The AO rejected the alternate contention on the ground that the Taxpayer had not proved that the vessels were used for the purpose of prospecting of or extraction or production of mineral oils. Accordingly, the AO held that the earnings were in the nature of royalty in terms of section 9(1)(vi) of the Act and levied taxed accordingly.

In appeal, the CIT(A) held that the tugs were actually used by the hirer in connection with prospecting for or extraction or production of mineral oils. He further held that the barge was used for offshore accommodation/construction activities and was not directly involved in connection with prospecting of mineral oil. Accordingly, he held that the income from hiring of barge was in the nature of royalty.

HELD
–    Insofar as the tug boats are concerned, they have been used in connection with prospecting for or extraction or production of mineral oils.
–    In Lloyd Helicopters International Pty Ltd. vs. CIT [2001] 249 ITR 162 (AAR), AAR has held that even the income derived from providing of helicopter services to facilitate operation of extraction and production of mineral oil was taxable in accordance with section 44BB of the Act.

–    Following the ruling of AAR, and the phraseology of section 44BB, even the earnings from hiring of barge were eligible for taxation u/s. 44BB.

2. [2017] 78 taxmann.com 240 (Mumbai – Trib.) APL Co. Pte Ltd. vs. ADIT A.Y.: 2008-09, Date of Order:16th February, 2017

Article 8, 24, India – Singapore DTAA – As both the conditions for invoking of Article 24 were not fulfilled, benefit of Article 8 of India-Singapore DTAA in respect of shipping income derived from India could not be denied.

FACTS
The Taxpayer was a company incorporated in, and tax resident of, Singapore. It was engaged in operation of ships in international waters, mainly for transportation of cargo and containers globally. Inter alia, the Taxpayer also carried cargo to and from India. The Taxpayer had a wholly owned subsidiary in India which was acting as its shipping agent in India. The Taxpayer claimed that in term of Article 8 of India-Singapore DTAA, its gross freight earning in India were not chargeable to tax in India.

The AO called for certain documents to verify the claim of the Taxpayer. Out of 136 ships, the Taxpayer could not provide documents in respect of 8 ships. Hence, the AO denied treaty benefits in respect of income from 8 ships. In appeal, invoking limitation of benefits (LOB) provision in Article 24 of India-Singapore DTAA, CIT (A) denied treaty benefits on entire income on the ground that there was no nexus between remittance from India of freight collected in India and the amount that was finally remitted into Singapore, and further that the income was not taxable in Singapore.

HELD
–    Two conditions should be fulfilled to invoke Article 24. Firstly, income should be exempt or taxed at lower rate in source state. Secondly, only the income received in residence state should be taxable.

–    Under Singapore tax law, shipping enterprises are required to furnish statement of income derived from operations of foreign ships in Singapore. The income from shipping operations is treated as ‘accruing in or derived from Singapore’ and taxed on accrual basis. This is also confirmed in the certificate issued by Singapore revenue authority.

–    Use of the term “only” in Article 8 of India-Singapore DTAA shows that shipping income of a Singapore tax resident enterprise is taxable only in Singapore and not in India. Therefore, question of any kind of exemption or reduced rate of taxation in source state does not arise.

–    Accordingly, the condition precedent for invoking Article 24, namely, income should be exempt or taxed at lower rate in source state was not fulfilled. Therefore, Article 24 could not be invoked.

1. [2017] 79 taxmann.com 128 (Delhi – Trib.) Cairn U. K. Holdings Ltd vs. DCIT A.Y. 2007-08, Date of Order: 9th March, 2017

Section 9(1)(i), the Act – Transfer of shares of Jersey company holding shares in Indian company by UK company to another group company was indirect transfer of asset; capital gain arising from such transfer was subject to tax in India

FACTS
The Taxpayer was a tax resident of UK. The Holding Company (Hold Co) of the Taxpayer was acquiring oil and gas assets in India through its subsidiaries. Following is the diagrammatic presentation of the original holding structure.

With a view to simplify the group structure, for better and effective local management and to access capital market, the group effectuated internal reorganisation in a series of transactions in which the Taxpayer was a party.
Briefly, the reorganisation comprised the following transactions.

–    Hold Co entered into share exchange agreement with the Taxpayer and transferred its entire shareholding in nine wholly owned Indian subsidiary companies to the Taxpayer in exchange of issue of shares by the Taxpayer to Hold Co. No capital gain tax was paid on this transaction1.

–    The Taxpayer setup a subsidiary in Jersey (Jersey Co). The Taxpayer entered into share exchange agreement with Jersey Co and transferred its entire shareholding in nine wholly owned Indian subsidiary companies to Jersey Co in exchange of issue of shares by Jersey Co. Jersey Co derived substantial value from assets located in India.

–    Subsequently, the Taxpayer formed another subsidiary in India (I Co). The Taxpayer infused purchased certain shares if I Co for cash consideration. Thereafter, the Taxpayer transferred its entire shareholding in Jersey Co to I Co. I Co paid the consideration partly in cash and partly by issue of shares of I Co. I Co recorded the excess amount over the book value of shares of Jersey Co as goodwill.

–    Subsequently, I Co issued shares by way of IPO of its shares. Post-IPO, the shareholding in I Co was: UK Co ~69% (including ~20% subscribed in cash and ~49% received in exchange of shares of Jersey Co) and public ~31%.

Following is the diagrammatic presentation of the post-reorganisation holding structure.

The AO treated transfer of shares of Jersey Co by the Taxpayer to I Co as indirect transfer of assets in India u/s. 9(1)(i) of the Act and accordingly, assessed capital gains tax in the hands of the Taxpayer.
In appeal before the Tribunal2, the Taxpayer contended as follows.

–    The taxability of the transaction under the indirect transfer provisions should be denied, as the said retroactive amendment is bad in law and ultra vires.

–    The Transactions undertaken by the Taxpayer were for internal reorganisation with a view to consolidate Indian business operations. Such internal reorganisation did not result in any change in controlling interest. Hence, such transaction was non-taxable.

–    The Taxpayer relied on Calcutta HC decision in the case of Kusum products Limited3 to suggest that: post-internal reorganisation no real income accrued to the Taxpayer as all Indian assets were available in different form; and mere accounting entry cannot be regarded as income, unless real income was actually earned.

–    For the purpose of computing capital gain, the cost of acquisition should be stepped up to the fair value of the shares of Jersey Co on the date of acquisition. Further, there was no timing difference between the acquisition and disposal of shares by the Taxpayer, and accordingly the full value of consideration and the cost of acquisition were same.

–    The Taxpayer also relied on Delhi HC decision in New Skies Satellite and contended that the provisions of the Act as were in existence on the date of notification of India-UK DTAA were to be considered and retroactive amendment in relation to indirect transfer provisions was to be ignored.

HELD

On transfer of shares of Jersey Co to I Co

–    Validity of retrospective amendment
    On the contention of non-applicability of indirect transfer provisions, due to the same being retrospective in nature and ultra vires, the Tribunal concluded that it  is not the right forum to challenge validity of provisions of the Act.

–    No change in controlling interest due to internal reorganisation
    The steps undertaken were not mere business reorganisation. It was a fact that the series of transactions culminated into the IPO of I Co from which the funds were used to pay part consideration to the Taxpayer for acquisition of shares of Jersey Co.

–    Property being situated in India
    The Indian WOS, which controls the oil and gas sector in India, will be regarded as the property in which the shareholders have the right to manage and control the business in India. Therefore, any income arising through or from‘ any property in India shall be chargeable to tax as income deemed to accrue or arise in India in terms of the indirect transfer provisions of the Act.

–    No real income accruing in the hands of Taxpayer  
    The audited financial statements of the Taxpayer discussed about disposal of part of the company’s investment and resultant exceptional gains earned upon disposal of shares. Hence, the Taxpayer was not justified in arguing that no real income had accrued.

–    While computing capital gains, cost of acquisition should be stepped up to fair value of Jersey Co.
    Perusal of the provisions of the Act show that the property held by the Taxpayer (i.e., shares of Jersey Co) and its mode of acquisition did not fall under any of the clauses of the Act which required substitution of cost of acquisition in the hands of the previous owner4.
 
    The Tribunal also denied the Taxpayer’s contention on transaction being in the nature of swap and leading to resultant step up in cost of acquisition by stating that in the present case, the price of the shares in each of the agreement is identified and the amount of acquisition recorded in the books of account represents cost of acquisition of share which cannot be substituted by
fair value.

–    Whether ITL provisions  at the time when India-UK DTAA was signed is to be considered
 
    The Tribunal disregarded the argument of the taxpayer and held that:

•    As per the India-UK DTAA, capital gains are taxable as per the domestic law of respective countries. Hence, the provisions in DTAA cannot make the domestic law static when both states have left it to domestic law for taxation of any particular income.

•    Where exemption is provided with retroactive effect under domestic law, non-resident cannot be denied exemption by citing that such law was not in existence at the time DTAA was entered into.

•    DTAA is a mechanism of avoiding multiplicity of taxation globally. If taxes are chargeable in residence state (i.e. UK), the taxpayer should not suffer tax in the source state. The facts indicated that capital gains were not taxable in the residence state. Accordingly, there was no multiplicity of tax being levied.

•    Distinguished the Taxpayer’s reliance on Delhi HC ruling in the case of New Skies Satellite5 which held that amendments made under domestic law cannot be applied to relevant DTAAs.

•    Where the provisions of DTAA simply provide that particular income would be chargeable to tax in accordance with the provisions of domestic laws, such article in DTAA cannot limit the boundaries of domestic tax laws.

On levy of interest

The Tribunal relied upon various judicial precedents6  and agreed with the Taxpayer’s claim that it could not have visualised its liability for payment of advance tax in the year of transaction. Consequently, interest on tax liability arising out of retrospective amendment cannot be levied7. The Taxpayer was also subject to withholding tax. However, based on the SC ruling in the case of Ian Peter Morris vs. ACIT8  and Delhi HC ruling the case of DIT vs. GE Packaged Power Incorporation9, which held that a non-resident cannot be burdened with interest for default of withholding compliance and the fact that liability arises out of a retrospective amendment which could not be foreseen, the Tribunal ruled in favour of the Taxpayer.

Section 92B of the Act – Accretion to brand value, resulting from use of brand name of foreign AE under technology use agreement; since that agreement was accepted as an arrangement at an arm’s length price, an aspect covered by that agreement did not result in a separate international transaction requiring benchmarking.

13. [2017] 81 taxmann.com 5 (Chennai – Trib)

Hyundai Motor India Ltd vs. DCIT

A.Ys.: 2009-10 to 2011-12,

Date of Order: 27th April, 2017

Facts

The Taxpayer was a fully owned subsidiary of a South Korean
automobile company (“FCo”). It was engaged in the business of manufacturing
cars in India. The Taxpayer and FCo had entered into agreement for use of
technology (“the agreement”). Under the agreement, the Taxpayer was mandated to
use the trademark owned by FCo (“the trademark”) on every vehicle manufactured
by it.

According to the TPO, by using the trademark, the Taxpayer
had significantly contributed to its development in Indian market and thereby
FCo had ‘benefited due to brand promotion activity carried out by the
Taxpayer’. Hence, The TPO opined that FCo should have compensated the Taxpayer
with arm’s length amount for the benefit acquired at the cost of the Taxpayer
which was deprived of developing its own brand name and logo.

The TPO took a view that the increase in brand value each
year could be attributed to every vehicle manufactured by all the group
companies. Since sales of the Taxpayer was 18.07 % of the global sales of FCo
group, 18.07% of the global appreciation in the brand value should be
attributed to the Taxpayer. This amount was quantified at Rs. 198.66 crore and
added to ALP of the Taxpayer.

The DRP confirmed the addition.

Held

Whether increase in brand value constitutes ‘international
transaction’? 

–   The TPO has emphasised on the benefit
accruing to FCo from increased brand valuation as a result of the Taxpayer selling
cars in India, and not as a result of conscious brand promotion by the Taxpayer
such as, incurring of advertising, marketing and sales promotion expenses.

–  According to the TPO, the trigger for the
impugned ALP adjustment is not the expense incurred by the Taxpayer, or any
efforts made by the Taxpayer, for brand building for FCo, but the mere fact of
the sale of cars made by the Taxpayer. Though the Taxpayer had not rendered any
services, it should be compensated for the increase in brand valuation, proportionate
to sale of cars by the Taxpayer vis-à-vis the global sale of cars of
that brand, as the increase in the brand valuation is, to that extent, due to
sale of cars by the Taxpayer.

–  The difference is that while AMP is a
conscious effort, brand building by sales simplictor is a subliminal exercise
and by-product of the economic activity of selling the cars in India.

     Whether use of brand name was privilege or
obligation of the Taxpayer?

–   FCo owns a valuable brand name which has
respect and credibility globally including in India. Hence, the use of brand
name owned by FCo is a privilege, a marketing compulsion and of direct and
substantial benefit to the Taxpayer.

Whether mere
use of brand name results in AEs?

–   U/s. 92A(2)(g) of the Act, two enterprises
are deemed to be AEs if “the manufacture or processing of goods or
articles or business carried out by one enterprise is wholly dependent on the
use of know-how, patents, copyrights, trade-marks, licences, franchises or any
other business or commercial rights of similar nature, or any data,
documentation, drawing or specification relating to any patent, invention,
model, design, secret formula or process, of which the other enterprise is the
owner or in respect of which the other enterprise has exclusive rights”.

–   Hence, there can never be a comparable
controlled price for the kind of transaction between the Taxpayer and FCo
because, the moment use of an intangible like brand name is involved, the
entities entering into the transactions will become AEs.

     Whether incidental benefit to AE could be
‘international transaction’?

–   It is a fact that the use of brand name,
owned by FCo, in vehicles manufactured by the Taxpayer does amount to
incidental benefit to the AE of the Taxpayer since increased visibility to the
brand name does contribute to increase in its valuation.

–   In terms of section 92B of the Act, an
international transaction includes a mutual agreement or arrangement between
two or more AEs for the allocation or apportionment of, or any contribution to,
any cost or expense incurred or to be incurred in connection with a benefit,
service or facility provided or to be provided to anyone or more of such
enterprises.

–   This is not a case of allocation of,
apportionment of, or contribution to, any costs or expenses in connection with
a benefit, service or facility. There is no dealing in money in the present
case. Therefore, this limb of the definition is not relevant.

–   In respect of intangible property, only
purchase, sale or lease of intangible property is covered within ‘international
transaction’. However, in this case there is no purchase, sale or lease of
intangibles.

–  Even extended definition in Explanation
(i)(b) to section 92B(2), does not cover accretion to the value of intangibles.
Further, the TPO has also not raised the issue that the consideration paid for
the transactions under this agreement is not an arm’s length consideration.

–     Accretion in brand value due to use in
products of the Taxpayer cannot be treated as service either. A service should
be a conscious activity. A passive exercise cannot be a service. What is
benchmarked is not the accrual of ‘benefit’ but rendition of ‘service’. The
expressions ‘benefit’ and ‘service’ have different connotations, and what is
relevant, is ‘service’ and not the ‘benefit’. In this case, there is no
rendition of service.

–   For determination of arm’s length price, mere
rendition of service is not sufficient; it should be intended to result in such
benefit for which an independent enterprise would pay. Thus, two aspects need
to be present – first, rendition of service and second, benefit accruing from
such service. In the present case, since the first condition is not satisfied,
there is no question of benchmarking the benefit.

–   Unless a transaction affects profits, losses,
income or assets of both the enterprises, it cannot be an ‘international
transaction’. If the assets of one of the enterprises increase unilaterally,
without any active contribution by the other enterprise, such increase in
assets cannot amount to an ‘international transaction’.

–  The Taxpayer has not incurred costs, nor has
it made conscious efforts, for accretion in value of brand owned by FCo. Such
accretion also does not have any impact on profit, losses, income or alteration
in assets of the Taxpayer. Therefore, it cannot result in an ‘international
transaction’ qua the Taxpayer.

– It is not the case of the revenue
that there was any sale, purchase or lease of intangibles. Accretion to brand
value was a result of use of the brand name of foreign AE under the technology
use agreement which permitted as well as bound the Taxpayer to use the brand
name of FCo on the products manufactured by the Taxpayer. Since that agreement
had been accepted to be an arrangement at an arm’s length price, an aspect
covered by that agreement could not be subject matter of yet another
benchmarking exercise. Therefore, such accretion did not result in a separate
international transaction requiring benchmarking.

Sections 9, 172 of the Act; Article 9 of India-Denmark DTAA – since; director of shipping company was resident of Denmark; had been operating business wholly from Denmark; all important decisions were taken in Denmark; tax residency certificate issued by Denmark authorities showed shipping company as resident of Denmark, place of effective management and control of shipping company was in Denmark and accordingly, profits arising from operations of ships in international traffic were not taxable in India.

12. [2017] 80 taxmann.com 217 (Rajkot – Trib)

Pearl Logistics & Ex-IM Corporation vs. ITO

A.Ys. 2010-11 TO 2013-14,

Date of Order: 20th March, 2017

Facts

The Taxpayer was an agent of a Denmark based ship broker
(“DenCo”). DenCo was ‘disponent owner’ and another company (“FCo”) was
charterer of ship which carried cement to ports in India. Freight was payable
by FCo to DenCo.

The Taxpayer filed return of income under section 172(8) and
claimed that since DenCo was beneficiary of freight, it was entitled to benefit
of India- Denmark DTAA. Hence, DenCo was not liable to pay tax on fright in
India.

Held

–   According to section 172, income of owner or
charterer which receives freight is chargeable to tax. In this case, freight is
received by DenCo which has also earned the freight. Hence, income of DenCo is
chargeable to tax in India.

–   As per the tax residency certificate issued
by Danish tax authority, DenCo is resident of Denmark. Hence, DenCo can avail
of the benefit of India-Denmark DTAA.

–   As per article 9 of India-Denmark DTAA,
profits derived from operation of ships in international traffic shall be
taxable only in the State where the ‘place of effective management’ of the
enterprise is situated.

–   The Taxpayer has furnished several documents
showing that: the Director of DenCo was resident of Denmark; he was operating
business wholly from Denmark; all the important decisions were taken in the
meeting in Denmark. Therefore, the place of effective management and control of
DenCo was in Denmark.

–     DenCo was resident of Denmark and its ‘POEM’
was in Denmark. Therefore ‘head and brain’ of DenCo was situated in Denmark.
Accordingly, in terms of article 9 of India-Denmark DTAA, the profits derived
from operation of ship were not taxable in India.

Section 9 of the Act; Article 12 of India-USA DTAA – since professional fee paid to a US company for global biopharmaceutical strategic counselling and advisory services was for rendition of services and not for right to use information concerning industrial, commercial or scientific experience, it was not covered within definition of ‘royalty’ under article 12(3)(a) notwithstanding that in process of availing these services Taxpayer benefited from rich experience of service provider.

11.
[2017] 80 taxmann.com 275 (Ahmedabad – Trib)

Marck Biosciences Ltd. vs. ITO

A.Y.: 2009-10, Date of Order: 28th March, 2017

Facts

The Taxpayer was an Indian company. It paid professional fee
to a US company (“USCo”) for global biopharmaceutical strategic counselling and
advisory services, which comprised (a) business promotion; (b) marketing; (c)
publicity; and (d) financial advisory. In the agreement, the services were
termed as ‘Strategic and Financial Counselling Services”. According to the
Taxpayer, income embedded in professional fee paid for the said services was
not taxable in India in terms of India-USA DTAA. Hence, it did not withhold tax
from the said payment.

According to the AO, however, the rendition of services by
USCo constituted parting with the “information concerning industrial,
commercial and scientific experience”. Hence, the services rendered by
USCo were covered within the definition of “royalty” under Explanation 2 to
section 9(1)(vi) as also under article 12(3)(a) of India-USA DTAA.

Held

–   The payments made by the Taxpayer were for
rendition of the services, which comprised (a) business promotion; (b)
marketing; (c) publicity; and (d) financial advisory. The payments were not for
use of any information concerning industrial, commercial or scientific
information’.

–   The nature of payment should be characterized
from the activity in consideration of which the payment was made. The payment
was made for rendition of services and not for right to use any information
concerning industrial, commercial or scientific experience that was in
possession of the service provider.

–   The fact that in the process of availing
these services, the Taxpayer benefits from rich experience of the service
provider is wholly irrelevant. Accordingly, the impugned payment was not
covered within the definition of “royalty” under article 12(3)(a) of India-USA
DTAA.

Sections 9, 115A of the Act; Article 12 of India-Italy DTAA – on facts, since the new agreement executed by Indian company with foreign company had different terms from the earlier agreement, it could not be regarded as extension of old agreement; hence, royalty was taxable in terms of section 115A @10.5 per cent.

10. [2017] 80 taxmann.com 100 (Pune – Trib)

Piaggio & CSpA vs. DCIT

A.Ys.: 2010-11 and 2011-12,

Date of Order: 21st March, 2017

Facts

The Taxpayer was a company based in Italy. It was
manufacturing motorised two, three and four wheelers. It had a subsidiary in
India (“ICo”). The Taxpayer entered into agreement with ICo on 31-10-2003 for
grant of license of technology to manufacture three wheelers for goods
transportation in consideration for payment of royalty (“the old agreement”).
In terms of India-Italy DTAA, royalty was taxed @20 %.

Subsequently, on 1-8-2008, the Taxpayer and ICo entered into
another agreement (“the new agreement”). The Taxpayer offered the royalty
received in terms thereof for taxation @10.55 % as per section 115A of the Act.

According to the AO, the new agreement was merely an
extension of the old agreement. He, therefore, concluded that even in terms of
new agreement, royalty was chargeable to tax @20 %.

Held

–   Comparison of the terms in the old agreement
and the new agreement showed one main material difference. While the old
agreement mentioned two specific models, the new agreement mentioned class of
vehicles. Pursuant to the new agreement, ICo launched different models which
became possible because of the new agreement.

–  Another difference was that the old agreement
granted license only for sale in India, whereas the new agreement granted
license also for sale to any other country as may be agreed between the
Taxpayer and ICo.

– On the expiry of the old agreement, the
Taxpayer and ICo had renegotiated certain terms which culminated into the new
agreement. Accordingly, the new agreement was not an extension of the old
agreement but an independent legally enforceable agreement.

–  Therefore, the applicable tax rate on the
royalty income as per section 115A was 10 %.

22. TS-40-ITAT-2017(Del) Net app B.V vs. DDIT A.Ys.: 2008-09 and 2010-11, Date of Order: 16th October, 2016

Article 5 of India-Netherlands DTAA – Indian subsidiary
rendering certain services to its parent, carries on subsidiary’s own business
in India and does not result in PE trigger for parent in India. Mere fact that
subsidiary and parent have common directors does not result in exercise of control
by the parent on the subsidiary

Facts

Taxpayer, a Netherlands Company (FCo), was engaged in the
business of –

–  Sale of storage system equipment and products
including embedded software

–  Sale of subscriptions

–  Installation, warranty and professional
services with respect to data migration, data integration and disaster recovery
services.

FCo sold goods and services in India through third party
distributors who were appointed on non-exclusive basis. Further, FCo had a
subsidiary in India (ICo), which rendered certain services to the FCo pursuant
to a “commission agent agreement (CAA)”. In terms of CAA, services rendered by
ICo included, marketing and sales support services, assistance in organising
trade shows and pre sales marketing, etc.

Assessing Officer (AO) contended that (a) FCo had a business
connection in India and hence its income in India was chargeable to tax under
the Act; (b) marketing activities being the core business activities of FCo
were carried on by ICo in India. Without such activities of ICo supply/services
by FCo was not possible in India; (c) ICo acted as sales office in India and
hence created a Permanent Establishment (PE) for FCo in India under
India-Netherlands DTAA; (d) Alternatively, ICo had the power to conclude
contracts on behalf of FCo in India as both the entities have common directors
and hence created a dependent Agent PE (DAPE) in India.

FCo contended that the sales in India were carried on by it
through independent distributors. Further, ICo did not have an authority to
conclude contracts on behalf of FCo in India nor did it maintain any stock of
goods on behalf of FCo. ICo derived income from other activities in its own
rights such as IT and ITEs services and hence was not economically dependent on
FCo. Merely because FCo and ICo have common directors does not result in DAPE
in India.

FCo also contended that ICo was merely a service provider and
its employees were working under ICo’s own control and instruction. ICo did not
result in a fixed place PE or Agency PE of FCo in India. Without prejudice, the
activities carried on by ICo are preparatory and auxiliary and hence does not
result in tax presence in India.

Held

–  Services rendered by ICo to FCo, results in a
business connection for FCo in India and thus income of FCo is subject to tax
in India under the Act. One will have to thus evaluate taxability under the
DTAA.

–  A subsidiary company by itself does not
constitute a PE. None of the employees of the FCo are present in India nor are
the personnel or employees of FCo visit India. ICo is a separate legal entity
and has its own board of directors, premises, employees, contract, etc. and the
employees work under the control and supervision of ICo in India and not the
FCo. No evidence has been furnished to show that ICo carries on business of FCo
in India.

–  In terms of the CAA, ICo is required to
merely inform FCo if any orders are placed by the customer in India. It would
then be the sole discretion of FCo to accept or reject it. Further,  ICo has no authority to bind FCo in relation
to any orders received by it.

–   ICo is merely a service provider to FCo and
carries on its own business. It cannot be considered as carrying on the
business of FCo in India.

–  Common directors of FCo and ICo are not
engaged in the day to day activities, negotiation of contracts, marketing
function in India on behalf of the FCo. Nothing has been brought on record to
show that ICo was subject to detailed instruction and control of FCo. Merely
the fact that the directors are common does not result in exercise in control
by FCo over ICo.

–   The revenue streams of ICo also clearly
suggests that it does not derive its income wholly or substantially from FCo,
but from other group entities as well. Thus ICo does not qualify as a dependent
agent of FCo.

21. TS-701-ITAT-2016(Chny) Sical Logisticts Ltd. vs. ACIT(IT) A.Ys.: 2002-03 to 2005-06, Date of Order: 14th December, 2016

Article 12 of DTAA, Section 9(1)(vi) and 172 of the Act –
Payment made for hiring of vessel on time charter basis does not involve
control and possession of the vessel and does not amount to “equipment
royalty”. Hire charges are covered by section 172 and not subject to withholding
u/s. 195

Facts

The Taxpayer, an Indian company, was engaged in carrying on
the business of transporting coal. Taxpayer had hired the vessels owned by
Foreign Shipping Companies (FCo) for transporting the cargo on a time charter
basis and paid hire charges to FCo without withholding taxes thereon.

The Captain/Master of the vessel, crew and other staff of the
ship were controlled by the ship owner, i.e FCo. The repairs and maintenance as
well as the insurance of the vessel was taken care of by FCo. Taxpayer merely
intimated FCo about the availability of the cargo and from where to where the
cargo had to be moved.

Taxpayer argued that payments made to FCo was for
transportation of goods and hence covered u/s. 172 of the Act, which is a
complete code in itself and hence there is no requirement to withhold taxes
u/s. 195 of the Act.

AO contended that the charges paid by the Taxpayer were on
account of the use and hire of the ship and hence, it amounts to royalty within
the meaning of section 9(1)(vi) of the Act and Article 12 of DTAA and hence
subject to withholding u/s. 195 of the Act. Accordingly, AO disallowed the hire
charges paid to FCo for failure to withhold taxes by holding that section 172
is not applicable in respect of hire charges paid to FCo.

Aggrieved by the order of AO, the Taxpayer appealed before
CIT(A), who upheld the order of AO, Taxpayer thus appealed before the Tribunal

Held

–   In the case of Asia Satellite
Telecommunication Co. Ltd. vs. DCIT (332 ITR 340), it was held that for
payment to qualify as equipment royalty’, possession and control are over the
equipment is essential. In the present case, the Taxpayer has neither control
nor possession over the vessel. As noted, the captain/master and the crew were
instructed, directed and were under control of FCo and not the Taxpayer.

–  One needs to differentiate between ‘letting
the asset’ and ‘use of asset’ by the owner for providing services. In the
present case, hire charges paid to FCo was for services of moving the goods by
a fully manned ship. It was not for letting the vessel, Taxpayer only had the
right to utilise the space in the vessel and was not authorised to operate or
exercise control over the vessel.

–   In the present case, FCo did not enjoy any dedicated
berthing facility. Further, the vessel was in Indian waters only for a short
duration and hence does not result in a PE in India. Reliance of AO on Madras
HC ruling in the case of Poompuhar Shipping Corporation (360 ITR 257) is
wrongly placed as Madras HC was concerned with a case where the Taxpayer had a
facility of berthing at an Indian port guaranteed for foreign ship chartered
leading to creation of Permanent Establishment (PE) for the Taxpayer.

–  Thus payment of hire charges does
not amount to royalty under the Act as well as DTAA. The hire charges paid to FCo is covered by section 172 of the Act.

20. TS-7-ITAT-2017(Ahd)-TP ACIT vs. Veer Gems A.Y: 2008-09, Date of Order: 3rd January, 2017

Section 92A of the Act – Reference to “management, control
and capital’ in section 92A(1) is to be understood based on the illustrations
provided u/s. 92A(2) alone – A partnership firm is not controlled by an
individual and hence Clause (j) of section 92A(2) dealing with control by
common individuals and those relatives, does not apply to the facts of the
present case

Facts

Taxpayer, an Indian partnership firm and tax resident of
India, was engaged in the business of manufacture and sale, of polished diamonds
both in India and outside India. The partners of the Taxpayer firm were three
brothers (along with their wives and sons).

During the year under consideration, the Taxpayer firm had
entered into certain international transactions with a Belgian entity (FCo).
FCo was owned and controlled by fourth brother (along with his wife and son) of
the partners of Taxpayer firm.

Assessing Officer (AO) contended that since FCo is controlled
by another brother of the partners, it is to be treated as Associated Enterprises
(AE) in terms of section 92A(2) of the Act and, accordingly, made a reference
to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP)
of the transactions entered by Taxpayer with FCo . Thereby, the TPO made an ALP
adjustment u/s. 92CA(3) of the Act.

Aggrieved by the order of the TPO, the Taxpayer appealed to
Commissioner of Income-tax (Appeals) i.e. CIT(A).CIT(A) without discussing the
primary issue of the existence of an AE relationship in terms of section 92A of
the Act, proceeded to examine the correctness of the ALP and deleted the
impugned adjustment.

Aggrieved by the order of CIT(A), revenue appealed before the
Tribunal. Additionally, Taxpayer also appealed before the Tribunal.

Held

Section 92A(1) of the Act provides that an enterprise, in
relation to the other enterprise, would be regarded as AE if, the enterprise
participates, directly or indirectly, in the management or control or capital
of the other enterprise or if the persons who participate in management, control
or capital of both the enterprises are common.

Section
92A(2) of the Act only provides illustrations of the cases in
which an enterprise participates in management, capital or
control of another enterprise.

–   The terms ‘participation’, ‘management’, and
‘control’ are not defined under the Act. One has to thus take recourse to
sub-section (2) to section 92A of the Act which gives practical illustrations,
to understand the meaning of ‘participation in management or capital or
control’. These illustrations are exhaustive and not illustrative.

–   Section 92A(2) governs the operation of
section 92A(1) by controlling the definition of participation in management or
capital or control by one of the enterprises in the other enterprise. If a form
of participation in management, capital or control is not recognised by section
92A(2), it does not result in enterprises being treated as AEs.

–   Even if one enterprise ends up having a de
facto or even de jure participation in the management, capital, or control of
the other enterprises, the two enterprises cannot be said to be AEs, unless
such participation in management, capital or control is covered by section
92A(2). Tribunal relied on Orchid Pharma Ltd vs. DCIT [(2016) 76 taxmann.com
63 (Chennai)] and Page Industries Ltd vs. DCIT [(2016) 159 ITD 680
(Bang)]

–   Clause (j) of section 92A(2) which is
relevant in the present fact pattern provides that two enterprises are to be
treated as AE if one enterprise is controlled by an individual and the other
enterprise is also controlled by such individual or his relative or jointly by
such individual and relative of such individual. In the present case, since the
Taxpayer is a partnership concern, it cannot be said to be controlled by an ‘individual’
and consequentially clause (j) cannot be invoked in the present case.

–   Even though a certain degree of control may
actually be exercised by these enterprises over each other due to relationships
of the persons owning the enterprises, that itself is not sufficient to hold
the two enterprises as AEs.

–   Taxpayer and FCo are thus not to be treated
as AEs.

13. TS-921-ITAT-2016(Ahd)-TP Shell Global Solutions International BV vs. DDIT A.Y.s:2007-08 to 2010-11, Date of Order:17th November 2016

Article 9 of India – Netherlands DTAA – No
bar in Article 9 to address juridical double taxation – Not confined to ALP
adjustment only in hands of domestic entities – Non-availability of relief
under article 9(2) does not negate application of article 9(1)

Facts

The Taxpayer is a company incorporated in
and tax resident of the Netherlands. During the year under consideration,
Taxpayer rendered certain technical services to its associated enterprises
(AEs) in India.The consideration received by the Taxpayer for rendering the
aforesaid services was treated as Fees for technical services (FTS) under
Article 12 of India Netherlands Double Taxation Avoidance Agreement (DTAA) and
thereby, taxed @ 10% on gross basis. During the course of assessment
proceedings, arm’s length price (ALP) in respect of FTS was determined at a
higher level and adjustments under the transfer pricing regulations
wereproposed by the Assessing Officer (AO).

Without disputing mechanics and
quantification of the ALP adjustments, Taxpayer argued that the adjustment was
not justified as additional fees would have been taxed in India in the hands of
Taxpayer @ 10%, whereas the AE in India would have obtained tax shied @ 33.99%
and net effect of adjustment was base erosion of Indian tax. Taxpayer,
therefore,contended that such adjustments are contrary to the scheme of section
92(3) of the Act read with CBDT Circular No. 14 of 2001.

The Taxpayer filed objection before Dispute
resolution panel (DRP). The DRP rejected the objections.

Aggrieved, Taxpayer appealed before the
Tribunal, where theTaxpayer put forth additional claim of treaty protection and
contended that considering the language of Article 9 of India-Netherlands DTAA,
ALP adjustment can only be made in case of juridical double taxation and only
in the hands of domestic enterprise. The Taxpayer further contended that ALP
adjustment was not permissible in its hands under Article 9 of
India-Netherlands DTAA.

Held

(i)   In Instrumentarium
Corporation Ltd. Finland vs. ADIT [(2016) 71 taxmann.com 193 (SB)], the
Special Bench (SB) narrowed the scope of application of the “base erosion
theory” in transfer pricing matters. The Taxpayer was an ‘intervener’ in the
said decision and the argument of the Taxpayer on the base erosion was rejected
by SB.

(ii)  As per the wording of
Article 9, there is no bar to address juridical double taxation. As long as the
conditions precedent in Article 9 are attracted, the application of arm’s
length standards come into play.

(iii)  While Article 9(1) is an
enabling provision, TP mechanism under the domestic law is the machinery
provision. Once it is not in dispute that the arm’s length standards are to be
applied as per Article 9, it is only axiomatic that the manner in which arm’s
length standards provided under the domestic law need to be applied.

(iv) The provisions of Article
9(1) are clear and unambiguous and permit ALP adjustment in all situations in
which the arm’s length standards require higher profits in the hands of any
“one of the enterprises, but by reason of those conditions, have not so
accrued” to be “included in the profits of that enterprise and taxed
accordingly”. The AO has no discretion to read this provision as confined to
enabling ALP adjustment in respect of only domestic entities.

(v)  The non-availability of
corresponding adjustment relief under Article 9(2) does not deter application
of Article 9(1). Therefore, the ALP adjustment cannot be negated onthe ground
that no relief against such taxation is granted by the residence state. An
element of double taxation is inherent in respect of taxation of FTS, which is
taxed in both countries under the treaty. However, in such cases also, the
taxation in source country is not dependent on the relief granted by residence
country. Thus, mere increase in quantum of such taxable income in the source
jurisdiction, due to application of arm’s length principle, need not always be
visited with corresponding adjustment under article 9(2) in the residence
jurisdiction.

(vi) It may not be correct to
suggest that there is conflict between Article 9 and domestic transfer pricing
legislation. There is a school of thought that domestic arm’s length principle
goes much beyond tax treaty’s normal rule making scope since this arm’s length
principle governs taxation of an enterprise in general and the tax treaties do
not restrict domestic law in this respect. The profit adjustment mechanism
envisaged in tax treaties do not deal with supra national income determination.
Therefore, the provisions of tax treaties cannot be seen as restricting, or
overriding, domestic law mechanism on transfer pricing aspects.

(vii) The transfer pricing
legislation is an anti-avoidance provision. It cannot be rendered ineffective
on the basis of the limitations in the provisions of Article 9. Section 90(2)
of the Act gives somewhat unqualified superiority to the treaty provisions over
the provisions of the Income Tax Act which contain transfer pricing legislation
as well. It will infringe the neutrality of an anti-abuse law– notwithstanding
whether it is a specific anti-abuse regulation (SAAR) or a general anti-abuse
regulation (GAAR)– if it is considered to apply only to a non-treaty situation
but not to a treaty situation.

TS-489-AAR-2016 MERO Asia Pacific Pte Ltd Date of Order: 17th August, 2016

On Facts, a single contract for offshore supply and onshore
services was to be treated as composite and indivisible contract – if goods
were delivered in India with the seller bearing the risk, insurance and customs
duty till the point of completion of project work in India, supply  was 
to  be  regarded 
as  completed in India.

Facts

The
taxpayer was a resident of Singapore and was engaged  in 
the  business  of 
executing  contracts  in relation to structural glazing and wall
cladding works. The Taxpayer had set up project offices (PO) in India for the
purpose of executing the work subcontracted to it by one of the Indian
contractor.

In
terms of sub-contract, taxpayer was required to design the curtain wall and
façade, supply materials and carry out installation and other works in India.
Taxpayer was also responsible for delivering goods at construction site in India.

The
taxpayer contended that the supply of goods outside India was to be considered
as a separate contract from the installation work contract. Further as title to
the goods passed outside India and the payment for offshore supply was also
received outside India, income from offshore supply of goods did not accrue or
arise in India. Even if the PO created a business connection or Permanent
establishment (PE) in India, income from offshore supply was not directly or
indirectly attributable to the PO in India. Hence, such income was not taxable
in India.

The
issues before the AAR were: (i) whether the amount received by the taxpayer for
offshore supply of goods was taxable in India; and (ii) if yes, what was the
extent of profit that could be attributed to the business connection and/or PE
in India.

AAR Ruling

Held 1: on the issue of whether contract was divisible

a.
A single contract was entered into by the taxpayer for all the activities of
designing, supply and installation work. the 
contract did not provide any bifurcation between  supply 
of  goods  and 
erection/installation in  the  contract 
either  in  the 
context  of  taxpayer’s work and responsibilities or with
respect to the payment schedule.

 b. Further, payment schedule of the contract
was linked to different milestones of the work, viz., designing, drawing,
supply  and  commissioning 
of  the  entire work. Major milestones were not linked
to supply/sale of plant and materials.

c.
Merely picking up one portion of contract, selectively to show that it
represents independent scope of work is incorrect. Hence, in the present
situation, division is imaginary and artificial.

d.
Even though  the  invoices 
showed  that  sale 
of materials was in Singapore, taxpayer was responsible for delivering
and steering materials at site and was responsible for the risk and insurance
until completion of the project in India. The customs duty for clearance of
goods at Indian port was also paid by the taxpayer. All these factors indicate
that the offshore supply was completed in India and not in Singapore.

e.
The Sale of Goods act makes it clear that property in goods passes when the
parties intend it to pass. in the present case, having regard to the conduct of
the parties as narrated above,  the
intention of the parties was that the property in goods was to pass only when
the installation and erection of entire works was completed in India.

Held 2: On role of PO in offshore supply of Goods and profit
attribution

a.
PO had come into existence much before the design of material and offshore
supply. PO had its own designing team and was working on the contract much
before supply of goods and material started.

b.
PO was also actively involved in designing, selecting and procuring supplies. The
PO cleared the goods from  customs  in  India  and 
paid  customs  duty. 
In these circumstances, taxpayer’s contention that the PO had no role in
supply of goods and materials or that no profit was attributable to the PO in India
was incorrect.

Held 3: Attribution of profits

Since the contract was a composite
one, entire amount was taxable in India.

17 Section 5(2)(a) of the Act – Benefit of Circular 13/2017 regarding non-taxability of remuneration received by non-resident in NRE account available also where such income was received for the first time in India; hence, such income was not taxable under the Act.

TS-219-ITAT-2017(Kol)

Shyamal Gopal Chattopadhyay vs. DDIT

A.Y.: 2011-12, Date of Order: 2nd June, 2017

Facts

Taxpayer, a non-resident individual, was a marine engineer
employed by a Hongkong shipping company (HCo). During the year under
consideration, Taxpayer was a non-resident. Taxpayer received remuneration in
foreign currency from HCo which was directly remitted to the NRE account in
India of the Taxpayer.

Taxpayer argued that salary income for services rendered
outside India is not taxable under the Act. Furthe, since salary was received
outside India in foreign currency and remitted to NRE account, it was not
taxable in India u/s.5 of the Act on receipt basis.

Relying on the decision of the Mumbai Tribunal in the case of
Capt. A. L. Fernandes vs. ITO [81 ITD 203], AO observed that if the
place where the recipient gets the money (on first occasion) under his control,
is in India, such income is to be considered as received in India. According to
AO, since the income was remitted by the employer of the Taxpayer to his bank
account in India, the Taxpayer had control over the money for the first time in
India. Therefore, AO held that such income was received in India.

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

Held

–   In terms of Circular 13/2017 dated
11.04.2017, salary accrued to a non-resident seafarer for services rendered
outside India on a foreign going ship (with Indian flag or foreign flag) is not
to be included in the total income merely because such salary is credited in
the Non-resident rupee (NRE) account maintained with an Indian bank by the
seafarer.

–   Remittances of salary into NRE Account
maintained with an Indian Bank by a seafarer could be of two types:

–   Situation 1: employer directly crediting
salary to the NRE Account maintained with an Indian Bank by the seafarer;

–   Situation 2: employer directly crediting
salary to the account maintained outside India by the seafarer and the seafarer
transferring such money to NRE account maintained by him in India.

–   Credit to account outside India and
subsequent transfer to NRE account would be outside the purview of provisions
of section 5(2)(a) of the Act, as what is remitted is not “salary
income” but mere transfer of Taxpayer’s own funds from one bank account to
another which does not give rise to “Income”.

–   In the present case, the employer has
directly credited the salary, for services rendered outside India, into NRE
bank account of the seafarer in India.

–   Circular 13/2017 is vague. It is not clear
whether the expression “merely because” used in the Circular refers
to direct credit to NRE account or transfer of funds to the NRE account and
whether or not it covers both types of credits to NRE account.

–   Accordingly, benefit of doubt should be given
to the Taxpayer by interpreting the Circular as covering both the situations.

–   Though such an interpretation of the Circular
would make provisions of section 5(2)(a) of the Act redundant, such
interpretation is binding on the revenue. Reliance in this regard was placed on
SC decision in the case of Indian Oil Corporation, wherein it was held that
when a circular is in operation then the revenue will be bound by it. Revenue
then cannot plead that the circular is not valid or contrary to the provisions
of the statute.

–   Thus salary income received in NRE account
was not taxable in India.

16 Section 92E of the Act – Allotment of shares is an international transaction; Taxpayer is required to furnish Form 3CEB for reporting such transaction.

TS-319-ITAT-2017(Mum)-TP

BNT Global Pvt. Ltd. vs. ITO

A.Y.: 2011-12, Date of Order: 25th April, 2017

Facts

Taxpayer was an Indian
company. During the course of assessment proceedings, AO observed that the
Taxpayer had received foreign inward remittance on account of share capital and
premium from one of its existing shareholder who was also a director of the
Taxpayer Company. Though no adjustments were made, AO held that the allotment
of shares was an international transaction and levied penalty of INR 1 lakh
u/s. 271BA the Act as the Taxpayer did not file Form 3CEB.

The Taxpayer contended that share allotment transaction is
not an international transaction and in absence of any other international
transaction entered into by the Taxpayer, it was not required to file form
3CEB. Taxpayer appealed before CIT(A), who upheld the levy of penalty.
Aggrieved by the order of CIT(A), the Taxpayer appealed before the Tribunal.

Held

–   It is mandatory for a person entering into
international transactions to furnish Form 3CEB setting forth the particulars
of international transactions.

–   Transaction of share investment, clearly
falls within the ambit of section 92E of the Act and hence it has to be
reported in Form 3CEB. 

–   In IL&FS Maritime Infrastructure Co. Ltd.
(ITA No. 4177/Mum/2002 dated 23.07.2013), co-ordinate bench of the Tribunal has
held that share investment transactions fall within the purview of section 92E
of the Act. Hence, Taxpayer is required to file form 3CEB for such transactions
before the due date. In case of default, penalty u/s. 271BA would be attracted.

–   Thus, Taxpayer’s contentions that it was not
required to file Form 3CEB, since the provisions of section 92E of the Act were
not applicable to allotment of shares does not hold good.

–   Taxpayer’s reliance on Vodafone India
Services Pvt. Ltd. vs. ACIT (2014) 368 ITR 1 (Bom) is not applicable to the
present case, since in the aforesaid case Form 3CEB was filed by the Taxpayer
and issue considered therein was validity of arm’s length price adjustment made
by Transfer Pricing Officer (TPO) to issue of equity shares at a premium.

–   Failure on the part of the Taxpayer to
furnish the audit report in Form 3CEB is a violation of the provisions of
section 92E of the Act. Accordingly, penalty under the Act was leviable u/s.
271BA.

15 Sections 9 of the Act; Article 13 of India-Germany DTAA – Payment made for use of standard operating procedures amounts to sharing of information concerning industrial, commercial or scientific experience and taxable as royalty under India-Germany DTAA.

TS-209-ITAT-2017(Ahd)

Oncology Services India Pvt.Ltd. vs. ADIT

A.Y.: 2009-10, Date of Order: 1st June, 2017

Facts

Taxpayer, an Indian company, had
entered into an agreement for use of standard operating procedures (SOPs)
developed by a German group entity (GCo) in order to harmonise all required
software systems, policy and processes. The Taxpayer was also granted access to
the database, email server and hardware and software of GCo for the aforesaid
purpose. During the year under consideration, the Taxpayer had made payments to
GCo as per the agreement, however, no tax was deducted at source on such
payments by the Taxpayer.

During the course of assessment
proceedings, the Assessing Officer (AO) observed that the payments were made
for “using the name, goodwill and market reputation” of GCo and held that
income from such payment is taxable in India as royalties u/s. 9(1)(vi) of the
Act.

Taxpayer argued that payments were in the nature of business
income and in absence of PE of GCo in India, not taxable in India. Further, GCo
had permitted it to use the brand name, logo and website without any cost or
financial obligation. Hence, no part of the payment may be attributed to such
use.

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 use of name, brand, logo and website was
without any cost or financial liability. Hence, no part of the payment made to
GCo could be attributed to such use.

–   SOPs granted were “matured validated standard
procedures” which were developed by GCo over a period of time and approved by
the regulatory bodies. The access to database, and allied activities like
harmonisation of software systems, policy and process, were only incidental to
this main object of sharing the SOPs and thus cannot be viewed in isolation.

–   Sharing of SOPs was in effect
sharing of the information about the scientific experiences by GCo. Sharing of
such information was covered within the limb of “use of or right to use
information concerning industrial, commercial or scientific” in Article 13(3)
of India-Germany DTAA. Thus, the payment for sharing of the SOPs was taxable as
‘royalties’ under the India-German DTAA.

14. TS-605-ITAT-2016(HYD) Qualcomm India Private Limited vs. ADIT A.Y.s: 2006-07 to 2009-10, Date of Order: 28th October, 2016

Section 9(1)(vi) of the Act – (i) End user
software license package was a copyrighted article, not license to use the
copyright – payment was not royalty – consequently, payment for ‘support
services’ was also not royalty; (ii) Payment was for internet and bandwidth
services provided by service provider – sophisticated equipment installed by
service provider for providing service – service recipient did not have
exclusive right to use such equipment – payment was not royalty

Facts

The Taxpayer was an Indian company providing
software design, development and testing services to its group companies (its
customers) through its various units in India. The Taxpayer charged
consideration at cost plus 15% for such services.

In respect of AYs 2006-07 to 2009-10, the
tax authority had conducted survey u/s.133A of the Act to examine compliance of
TDS provisions by the Taxpayer.

It was noticed that the Taxpayer had made
several foreign remittances for end user software license packages to companies
in USA, UK, Germany, Japan, Singapore, etc. without deducting tax
u/s.195 of the Act. Since the payments were made for purchase of the
copyrighted article, Assessing Officer (AO) characterised the payment as
royalty for use of copyright, both u/s. 9(1)(vi) of the Act as well as under
respective DTAAs.

Taxpayer also made certain remittances
without deduction of tax to an American Company (USCo) for ‘leased circuit
line’. AO held that the payment being for use of scientific or commercial
equipment was taxable under clause (iva) of section 9(1)(vi) of the Act.

On appeal, CIT(A) confirmed AO’s order.
Aggrieved with the order of CIT(A), the Taxpayer filed appeal before Tribunal.

Held

Taxation of copyrighted software

(i)  The Taxpayer had purchased
end user software license packages which provided the Taxpayer with the right
to use the software. The Taxpayer used it for testing working of equipment.
Thus, the Taxpayer used the software as tools of its business.

(ii) Software purchased by the
Taxpayer was a copyrighted article. It could not be construed as license to use
the copyright. This issue was covered by decision of Delhi High Court in PCIT
vs. M. Tech Indian (P) Ltd. (ITA No. 890.2015 dated 19.01.2016). Hence, the
payment could not be termed as royalty.

(iii) Consequently, payment for
‘support services’ also could not be treated as royalty.

Taxation of bandwidth services

(i)  USCo had provided
connectivity facility to the Taxpayer which mainly consists of advanced
connectivity network and access equipment. These were connected through
under-sea cable and further connected by the routers and digital circuits.
Connectivity was for voice and data communication. The equipment was technical,
such as, ‘modem’ and ‘routers’. It was installed only at premises of customers
of the Taxpayer in USA and not in India.

(ii) US Co provided internet or
bandwidth services to its customers globally, including to the Taxpayer, as
standard services. The undersea cables and the routers etc., were part
of the equipment used by USCo for rendering services to its customers globally.
It could not be said that the Taxpayer was given exclusive right to use the equipment.

(iii) This issue was covered by
decisions of Delhi High Court in Asia Satellite Telecommunications Co. Ltd.
(332 ITR 340) and Estel Communications (P) Ltd. (318 ITR 185) and decision of
Tribunal in Infosys Technologies Ltd. (45 SOT 157). Accordingly, payment made
to USCo being for providing internet and bandwidth services, was not in the
nature of royalty. Consequently, the Taxpayer was not required to deduct tax at
source.

TS-545-ITAT-2016(Del) International Management Group (UK) Ltd. vs. ACIT (IT) A.Y.: 2010-11, Date of Order: 4th October, 2016

Article 13 of the india-uK DTAA, S. 9(1)(vii) of the act – (i) profits
to the extent of the activities carried on through Service PE should be taxable
as business profits under the DTAA; (ii) additional income satisfying make
available condition which is not attributable to PE in india should be taxed as
FTS under the DTAA; (iii) Source rule exclusion applicable to FTS under the act
does not apply as services are utilised for business or earning income from a
source in india

Facts

Taxpayer,   a  UK   tax 
resident,  was  engaged 
in  the business of event
management and talent representation activities in sports events. The taxpayer
entered into a memorandum of understanding (mou) with Board of Control for
Cricket in india (indian entity) for assistance in establishment,
commercialisation and operation of indian Premier league  (‘event’). The services under the MoU, inter
alia, included advising and assisting indian entity  in connection with the following aspects.

Structure of the league.

League rules and regulations.

Franchisee agreements.

Legal implementation budget.

Media rights agreements.

Trading and auction of the
players.

Hospitality guidelines in
relation to the league.

Provision of legal handbooks.

On the basis of the mou, a
service agreement was entered into between taxpayer and the indian entity for
holding the cricket event in india. For this purpose, the taxpayer had deputed
its employees and other third party freelancers for undertaking on-ground
implementation, event management and supervision activities in india. However,
due to some reasons, the venue for the event was shifted from india to South
africa and the remaining services were rendered outside india. During the year under
consideration, the length of stay of taxpayer’s employees and freelancers
exceeded 90 days in india. Accordingly, 
Service Permanent establishment (Pe) 
of the taxpayer was established in india.

The taxpayer contended that:

– 
Amount attributable to the services rendered in South africa were not
taxable in india as they were not attributable to PE in india;

– 
Once income was attributable to Service Pe, it cannot be taxed under
fee  for technical Services (FTS) as both
are mutually exclusive;

– 
Even if FTS article is applied, the services do not make available any
technical knowledge or skill, etc.; and

– Income attributable to such
services is not taxable in india under the DTAA.

Taxpayer argued that even u/s.
9(1)(vii) of the act, the amount was protected by source rule exclusion as the
services were utilised by indian entity for the business outside india.

However, the ao Held that even
the amount received by the taxpayer, 
which was not attributable to the service Pe, was also taxable in india
as FTS under the act, as well as under the DTAA.

Upon filing of objections against
order of AO, the Dispute resolution Panel (DRP) directed that the balance
consideration be taxed as FTS on a protective basis and regarded as business
income to be attributed to the PE on substantive basis. Aggrieved, the
taxpayer, as well as the AO, preferred an appeal before ITAT.

Held 1: Attribution to PE

– As per article 7, income which
is attributable to a PE is taxable in the state in which PE is situated. Further,  as per FTS article, income which is
effectively connected with a PE is taxable as business income and FTS article
ceases to apply.

– For income from services which
are in the nature of FTS, to be regarded as “effectively connected” with the
Pe, one of the following conditions should be established:

i.   PE should be engaged in the performance of
such services or it should be involved in actual rendering of such services, or

ii.  PE should arise as a result of its own
activities, or

iii. PE should,
at least, facilitate, assist or aid in the performance of such services,
irrespective of the other activities that the PE performs.

– Also,  the 
term  “effectively  connected” 
should  not be understood to mean
the opposite of “legally connected” but something in the sense of “really
connected”. Therefore,  the activities
mentioned in the contract should be connected to the PE not only in the form
but also in substance.

– In the contract under
consideration, activities carried by the taxpayer outside india were not
concerned with the functioning of the PE but were carried out by the head
office of the Taxpayer itself. Thus the activities carried on outside india
cannot be treated as being effectively connected with the PE in india and hence
will be taxable as FTS under the DTAA.

– 
The  contention of the taxpayer
that the contract with indian 
entity  itself  was 
effectively  connected  with the PE in india and hence, the whole of
the revenue involved in the contract should be considered as effectively
connected is incorrect.

Held 2: Make available condition

– Technology is considered “made
available” only when the service recipient is enabled to absorb and apply the
technology contained therein.  In order
to satisfy the make available test, the technical knowledge, experience, skill
etc. must remain with the service recipient even after the rendering of the
services has come to an end and the service receiver is at liberty to use the
acquired technical knowledge, skill, know-how and processes in his own right.

– 
In the present case, indian entity is enabled to absorb and apply the
information and advice provided by the taxpayer for conducting sporting events.
The documentation and material provided enables indian entity to use the
know-how and documentation independent of the services of the taxpayer in the
future. Furthermore,  it may not be
appropriate to say that in the absence of the taxpayer, the indian entity, on
its own, cannot hold/organise the event.

– 
Thus,  the services provided by
the taxpayer to indian entity satisfy the ‘make available’ condition. Hence,
income from such services was taxable as FTS under the DTAA.

Held 3: source rule exclusion

– In this case, it was an
established fact that indian entity was carrying on business in india and not
outside india.

– 
The source of income of the indian entity was in india, and not outside
india.

– The source of income of indian
entity could not be regarded as being outside india merely because performance
of the event was outside india. Thus, 
the consideration for services outside india is taxable as FTS even
under the act.

Section 9(1)(vi),(vii) of the Act – composite consideration paid for acquiring various rights including use of marks for advertisement and promotion did not qualify as royalty or FTS since it was not for manufacture and sale of products; however, payment made solely for the use of ICC marks in manufacture and sale of licensed products qualified as royalty

9. 
TS-112-ITAT-2017(Del)

DCIT vs. Reebok India Company

A.Y. 2011-12, Date of Order: 20th March, 2017

Facts

The Taxpayer was an Indian company. It had entered into an
agreement with ICC, a tax resident of BVI for a composite consideration. The
agreement comprised a bundle of rights including association as official
partner and the manner in which the Taxpayer was allowed to advertise/market
its products during ICC events. Under the agreement, the Taxpayer acquired two
categories of rights – ‘promotional and advertising rights’ and ‘marketing
rights’. The Taxpayer was required to pay ‘Rights Fee’ and ‘Royalty’ to ICC.

The ‘Rights Fee’ was payable in respect of a bundle of twenty
one rights which, inter alia, included right to:

–  display boards and signage on match grounds;

–  use past videos and footage from matches for
internal and promotional/advertising purposes;

–  use designations such as “official partner of
ICC”, “ICC official cricket equipment supplier”, etc.;

–  promote itself on website of ICC and other
related websites as the official sponsor of ICC events;

– receive complimentary tickets for ICC events
and also to purchase tickets on preferential basis;

–  display and sell licensed products at ICC
events through the existing concessionaires;

–  identify backdrops for ICC events and other
official press conferences concerning major ICC events, commensurate with the
level of sponsorship rights of the Taxpayer;

–  access specified zones at ICC events for brand
promotion;

–  use ICC marks in connection with manufacture,
distribution, advertising, promotion and sale of the Taxpayer’s products.

The ‘Royalty’ was payable in respect of sale of licensed
products manufactured by the Taxpayer using ICC marks.

Thus, both the first and second categories included payments
for the right to use ICC marks in manufacture and sale of the Taxpayer’s
products.

While the Taxpayer contended that the payment in respect of
‘Rights Fee’ was not in the nature of royalty or fees for technical services
(FTS), the AO held it to be royalty and/or FTS. Since the Taxpayer had not
withheld taxes, the AO disallowed the same.

The DRP held that ‘Rights Fee’ was not in the nature of
royalty or FTS and, hence, it was not taxable under the Act.

Held 1

Taxability of rights other than rights in relation to use of
ICC marks in manufacture and sale of products of the Taxpayer

–  Out of the bundle of twenty one rights in
respect of which the ‘Rights Fee’ was paid, twenty rights were exclusively for
advertisement and promotion of the Taxpayer in connection with ICC events. Only
part of one right involved use of ICC marks for advertisement and promotion and
the other part of the right was for manufacture and sale of products.

– In cases where the advertisement/promotion
rights did not involve the use of designation/ ICC marks, there was no question
of treating the payment as royalty and it would qualify as advertisement
expense.

–  In Sheraton International Inc. (2012) 17 ITR
457 (Del), the High Court had held that consolidated payment for the use of
trademark, trade name etc., in rendering of advertisement, publicity and
sales promotion services was neither in the nature of royalty nor FTS. Since
‘Rights Fee’ was exclusively paid for use of ICC marks for advertisement and
promotion and not for manufacture and sale of licensed products, question of
treating as royalty cannot arise.

–  The tax authority had contended that since
India did not have DTAA with BVI, income of ICC should be taxable u/s.9(1)(i)
of the Act. However, such contention could not be accepted as the Taxpayer had
established before the AO that ICC had no ‘business connection’ in India.

Held 2

Taxability of rights in relation to use of ICC marks in
manufacture and sale of products of the Taxpayer 

–  Generally, payment made for use of trademark,
patents etc., on goods manufactured and sold would qualify as royalty
under the Act.

–  In the present case, the two categories of
payments – ‘Rights Fee’ and ‘Royalty’ – were overlapping. The right to use ICC
marks in manufacture and sale of products was covered by both the categories.

–  While ‘Royalty’ was exclusively for the use of
ICC marks in manufacture and sale of products, ‘Rights Fee’ was for granting
rights to a bundle of twenty one rights which, inter alia, included the
right to use ICC marks in advertisement, promotion, marketing and sale of
products.

–    In absence of any separate consideration for
the right to manufacture under the ‘Rights Fee’, and there being no mechanism
for apportioning ‘Rights Fee’ towards the use of ICC marks for manufacture and
sale of licensed products, no part of ‘Rights Fee’ was attributable to the use
of ICC marks for manufacture and sale of licensed products. Consideration for
such use was exclusively covered under the ‘Royalty’ clause of the agreement.

 

–Accordingly, only the payment made
by the Taxpayer under the second category (i.e., ‘Royalty’) which was for use
of ICC marks in manufacture and sale of products, qualified as royalty under
the Act.

18. ITA No. 642/ Kol / 2016 (Unreported) ITO vs. Emami Paper Mills Ltd A.Y. 2012-13, Date of Order: 4th January, 2017

Section 9(1)(vii) of the Act, Article 12 of
India-Poland DTAA – A ‘contract of work’ is different from a ‘contract of
service’. In ‘contract of work’, the activity is predominantly physical whereas
in ‘contract of service’, the activity is predominantly intellectual. Hence,
payment made under ‘contract of work’ did not constitute FTS.

Facts  

The Taxpayer is an Indian company. The
Taxpayer engaged a Polish company for dismantling of machinery, sea worthy
packing of the same, stuffing it in containers and loading the containers on
trucks. The Polish company carried out the said services in Sweden. In
consideration for these services, the Taxpayer made certain payments to the
Polish company without withholding tax from the payments.

The AO concluded that the payments made to
the Polish company for dismantling and sea worthy packing of machinery was
highly technical and skill oriented and hence it was in the nature of “fees for
technical services” (FTS) in terms of section 9(1)(vii) of the Act as well as
Article 13(4) of India-Poland DTAA. The CIT(A) reversed the decision of the AO
on the grounds that though technical personnel were involved in the work done
by Polish Company, the payment was for a works contract and not for a contract
of service.

Held

–  The
agreement for dismantling of the machinery was part and parcel of the
transaction of purchase of plant and machinery. Perusal of various clauses of
the said agreement showed that the payment was not made for technical services
and did not require any technical skill.

–   The
two expressions ‘Contract of work and ‘Contract of service’ convey different
ideas. In ‘Contract of work’, the activity is predominantly physical and
tangible and intellectual only to some extent. Though the work of a gardener,
mason, carpenter or builder who undertakes “contract of work” also involves
intellectual exercise as he has to bestow sufficient care in doing his job, the
physical (tangible) aspect is more dominant than the intellectual aspect. On
the other hand, in ‘Contract of service’, the activity is predominantly
intellectual, or at least, mental.

–   Thus,
‘contract of work’ is clearly different from ‘contract of service’. ‘Contract
of work’ does not require any technical knowledge or specific skill.

–   In
case of the Taxpayer, Polish company was hired to dismantle the machinery,
which did not require any technical expertise and special skill. Thus, the
agreement was for ‘contract of work’. The payment did not acquire character of
FTS merely because the Taxpayer hired a person resident outside India.

–   In
case of the Taxpayer, Polish company was hired to dismantle the machinery which
was in the nature of ‘contract of work’ and not ‘contract of service’. Hence,
payment made by the Taxpayer for the work done by Polish company did not come
within the ambit of FTS.

17. [2017] 77 taxmann.com 149 (Ahmedabad – Trib.) Elitecore Technologies (P.) Ltd vs. DCIT A.Ys.: 2009-10, Date of Order: 3rd January, 2017

Article 23 of India-Indonesia DTAA, Article
25 of India-Singapore DTAA – Tax credit is to be allowed only to the extent the
corresponding foreign income has suffered tax in India.

Facts

The Taxpayer was a wholly owned subsidiary
of an American company. It was engaged in the business of software development.
Major portion of income arising to the Taxpayer was in the form of passive
income earned by way of release of retention money and income from maintenance
contract entered into with customer. During the relevant previous year, the
Taxpayer did not have any taxable income under the normal provisions of
the Act. However, its book profits were taxed under Minimum Alternate Tax (MAT)
provisions in section 115JB of the Act.

In the course of assessment, the AO noted
that the Taxpayer had claimed foreign tax credit. This credit was in respect of
the taxes withheld in Singapore and Indonesia. Referring to Article 23 of
India-Indonesia DTAA and Article 25 of India-Singapore DTAA, The Taxpayer had
claimed tax credit to the extent of the entire amount of tax withheld.

However, according to the AO the tax credit
was to be allowed only to the extent the corresponding income had suffered tax
in India. The extent to which income had suffered tax in India was to be computed
by taking ratio of gross foreign receipts to the overall turnover of the
Taxpayer and applying that ratio to the actual MAT liability (i.e., doubly
taxed income was considered after allocating all the expenses including the
expenses in relation to India sourced income in the ratio of foreign sourced
turnover to total turnover).

Held

–   The
Tribunal observed that there are two aspects to be considered. First, the
quantum of income which is to be treated as taxed. Second, the manner in which
the eligible tax credit is to be computed.

–   DTAAs
provide that foreign tax credit shall not exceed the income tax  attributable to doubly taxed income.

–   DTAAs
use the expression ‘income’ which essentially implies ‘income’ embedded in the
gross receipt, and not the ‘gross receipt’ itself. Even as per the UN Model
Commentary, the basis of calculation of income tax is total net income.
Therefore, it is the gross income derived from the source state less any
allowable deductions (specific or proportional) connected with such income
which is to be treated as doubly taxed income. Hence, considering the gross
receipts for computing admissible tax credit is not correct.

–  In
the present case, there is a peculiar situation. A major portion of foreign
sourced income was passive income in nature.

–  Hence,
to that extent, allocation of all the expenses incurred by the Taxpayer to such
earnings will not be justified. Moreover, profit element should be computed on
reasonable basis and not by taking into account the ratio of entire income to
entire turnover of the Taxpayer. The same could have been relevant if the
Taxpayer had not furnished a reasonable computation of income embedded in the
related receipts.

–   However,
because of the aforementioned peculiar situation, this decision cannot be the
authority for the general proposition that only marginal or incremental costs
incurred in respect of foreign income should be taken into account and the
overheads cannot be allocated thereto.

–   Thus
foreign tax credit is to be computed by apportioning actual tax paid under MAT
in the ratio of doubly taxed income to total profits.

–   Tax
credit in respect of both Indonesia and Singapore should be computed separately
as is provided in respective DTAAs. The formula for limitation of tax credit under
Article 23(1) of India-Indonesia DTAA and Article 25(2) of India-Singapore DTAA
is broadly the same. The tax paid under MAT provisions should be apportioned to
income from Indonesia and Singapore respectively.

–   Since
tax withheld in Indonesia was higher than the apportioned amount, the tax
credit was to be restricted to the apportioned amount.

–   Since
tax withheld in Singapore was lower than the apportioned amount, tax credit for
entire withheld tax was available.

16. [2016] 76 taxmann.com 341 (Ahmedabad – Trib.) Torrent Pharmaceuticals Ltd vs. ITO A.Y.: 2008-09, Date of Order: 25th October, 2016

Section 9(1)(vi) of the Act, Article 12 of
India-Switzerland DTAA – Since MFN clause in India-Switzerland DTAA provides
for negotiation by both countries for lower tax rate or restricted scope, in
absence of amendment to DTAA, MFN benefit could not be availed. In the absence
of automatic application of MFN clause, make available condition cannot be
drawn into India-Switzerland DTAA.

Facts:

The Taxpayer was an Indian company engaged
in manufacturing and marketing of pharmaceutical products. During the relevant
year, the Taxpayer had made payments, inter alia, to a tax resident of
Switzerland (payee), in consideration for rendering consultancy services. The
Taxpayer did not withhold tax from the payments.

The Taxpayer contended that:

–  the
payee did not part with any technical knowhow which could be used by the
Taxpayer independently on its own;

–   Protocol
to India-Switzerland DTAA contains most favoured nation (“MFN”) clause in
respect of Articles 10 to 12;

–   India-Portugal
DTAA containing ‘make available’ condition in respect to payments made for
technical services was executed and notified subsequent to India-Switzerland
DTAA;

–   although
such ‘make available’ condition in respect of technical services was explicitly
not contained in India-Switzerland DTAA, it was deemed to have been applicable
by virtue of India-Portugal DTAA;

–   accordingly,
scope of FTS under India-Switzerland DTAA should be restricted to the same
scope as that under India-Portugal DTAA; and

–   since
the make available condition is not satisfied, the payments made to the payee
do not qualify as Fee for Technical Services (FTS).

Held

–   India-Switzerland
DTAA or Protocol thereto does not have ‘make available’ provision in respect of
FTS.

–   The
Protocol to India-Switzerland DTAA provides that if, after its execution on
16-02-2000, India enters into any DTAA/Protocol with a member of OECD, and if
India limits its taxation to a rate lower or scope more restricted than that
provided in India-Switzerland DTAA, then Switzerland and India shall enter into
negotiation without undue delay in order to provide similar treatment to
Switzerland as in case of the third State.

–   Since
there is no automatic MFN application, and since Switzerland and India have not
amended DTAA in respect of lower rate or restricted scope, the contention of
the Taxpayer that pursuant to India-Portugal DTAA, ‘make available’ condition
should also be applied to India-Switzerland DTAA cannot be accepted.

Sections 195, 90(2) of the Act, Article 13 of India-Italy DTAA – Withholding tax obligation arises only if income is taxable; as royalty is taxable under Article 13 of India-Italy DTAA only on payment/receipt, section 195 will be triggered only on payment; even if a taxpayer opts for beneficial provision under the Act, withholding tax obligation will be triggered only when income is taxable as per the DTAA.

8.  TS-134-ITAT-2017
(Ahd)

Saira Asia Interiors Pvt. Ltd vs. ITO

A.Y. 2011-12, Date of Order: 28th March, 2017

Facts

The Taxpayer was an Indian company. It was required to make
payment towards technical know-how to FCo, which was a resident of Italy. The
Taxpayer accounted the liability on accrual basis in its books of account for
AY 2011-12. However, it did not withhold and deposit tax in respect thereof
during that year. The Taxpayer made payment in AY 2012-13 and duly withheld and
deposited tax thereon.

According to the AO, withholding obligation of the Taxpayer
arose at the time of credit in the books of account (i.e., AY 2011-12). Hence,
the AO held that the Taxpayer had belatedly withheld tax. Therefore, he raised
demand for interest on delayed deposit of taxes.

According to the Taxpayer, in terms of India-Italy DTAA, royalty
was taxable in the hands of FCo only when it was actually “paid”. Hence, there
was no withholding obligation on the Taxpayer when the payment was accounted in
its books of account.

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

Held

–  Withholding tax liability under the Act is a
vicarious liability. Hence, as held by the Supreme Court in G. E. Technology
Centre Pvt. Ltd. vs. CIT (2010) 327 ITR 456 (SC), if the income embedded in
a payment is not taxable under the Act, the withholding tax liability is not triggered
.

– The withholding tax provision cannot be
applied in vacuum. It should be read in conjunction with the charging
provisions under the Act as well as the provisions of the DTAA, depending upon
whichever is more beneficial.

– In terms of Article 13(1) of India-Italy DTAA,
royalty is taxable only when it is actually paid to the non-resident. Further,
in terms of Article 13(3), the term “royalties” means payments of any
kind “received”. Thus, mere credit does not trigger the tax liability. This view
is also supported by the decision of the Mumbai Tribunal in National Organic
Chemical Industries Ltd. (2005) 96 TTJ 765 (Mum).

–    Since the amount was not taxable at the time
of credit of the amount, the Taxpayer did not have any tax withholding obligation.

–    Article 13(2) restricts the tax liability in
India to 20% whereas section 115A prescribes tax @10%. Hence, in view of
section 90(2), the Taxpayer can exercise the option of adopting the lower rate
of tax under the Act.

–  However, since under the DTAA tax liability is
on payment, adoption of the lower rate under the Act tax liability will not be
triggered on accrual of income.

Article 10 of India US DTAA – Foreign Tax credit (FTC) allowable upto lower of tax withheld or the limit prescribed in DTAA; FTC should be computed separately in respect of each item of income.

7.  TS-130-ITAT-2017
(Ahd)

Bhavin A. Shah vs. ACIT

A.Y. 2009-10, Date of Order: 29th March, 2017

Facts

The Taxpayer was an individual resident in India. He had
invested in shares of US companies and earned dividend therefrom during the relevant
year. Tax was withheld in US from the dividend received by the Taxpayer. The
Taxpayer offered such dividend for tax in India and claimed foreign tax credit
(FTC) aggregating to roughly 30% of the gross dividend in respect of tax
withheld in USA.

The AO rejected the claim of the Taxpayer on the ground that
FTC is available only in respect of actual payment made while filing return of
income (i.e., tax paid directly by the Taxpayer) and not on tax withheld in
USA.

While upholding the order of the AO, the CIT(A) observed that
the documents/ evidence furnished by the Taxpayer in support of the FTC claim
did not mention the name of the Taxpayer and/ or were not signed by the
relevant authorities and further that the taxes withheld were almost 30% of the
gross receipt.

Held

–  In accordance with Article 25 of India-USA
DTAA, if tax is withheld from dividend earned by the Taxpayer from USA, and if
he has offered such dividend to tax in India, FTC may be granted in respect of
tax withheld in the US.

–  Article 10(2) of India-USA DTAA stipulates the
maximum rate of tax chargeable in USA on dividend earned by the Taxpayer from
USA.

–  Thus, the following conditions should be
satisfied for claiming FTC in India in respect of dividend:

–  The Taxpayer should be a resident in India, in
terms of Article 4 of India-USA DTAA and not merely a resident under the Act.

–  Income received by the Taxpayer should be
“dividend” as defined in Article 10(3) of India-USA DTAA.

–  Dividend should have been taxed in USA in accordance
with Article 10(2) of India-USA DTAA.

–  Tax may be either by way of direct payment or
withholding.

–  FTC allowable should be restricted to lower of
tax withheld in USA or tax liability in India respect of such dividend.

– The particulars furnished by the Taxpayer
showed that while aggregate withholding tax rate in USA was higher than 25%, in
some cases tax was withheld at rates higher than 25% and in some cases at rates
lower than 25%. Hence, the contention of the Taxpayer for grant of FTC at blanket
rate of 25% was incorrect.

– Computation of FTC cannot be by way of
generalization. AO should ascertain the withholding tax rate in respect of each
dividend income. In cases where tax was withheld at rate lower than that
stipulated in India-USA DTAA, FTC should be granted at actual. In cases where
tax was paid/withheld at rate higher than that stipulated in India-USA DTAA,
FTC should be restricted to the amount corresponding to that rate.

–  The matter was remanded to the AO
to accordingly compute the eligible amount of FTC.

Section 2(22) of the Act, Article 13 of India Mauritius DTAA – Buyback at artificially inflated price would qualify as a colorable device for avoiding tax; consideration in excess of fair market price of the shares could be deemed as dividend

6. 
TS-110-ITAT-2017(Bang)

Fidelity Business Services India Pvt. Ltd. v. ACIT

A.Y. 2011-12, Date of Order: 22nd February, 2017

Facts

The Taxpayer was an Indian company and a wholly-owned
subsidiary of a Mauritius company (FCo). While FCo held 99.99% of shares in the
Taxpayer, a nominee held the balance shares on behalf of FCo.

During the relevant year, the Taxpayer undertook buyback of
its shares from FCo at price which was substantially higher than the face value
of the shares. FCo treated the income from such buyback as capital gains. In
terms of Article 13(4) of India-Mauritius DTAA, FCo claimed that capital gains
were not chargeable to tax in India.

The AO noted that FCo held 99.99% of shares of the Taxpayer.
Hence, the entire reserves and surplus were distributable only to FCo. The AO
concluded that FCo and the Taxpayer adopted buyback route to distribute
reserves and surplus to FCo as distribution of dividend would have entailed
dividend distribution tax. Accordingly, the AO held buyback as a colorable
device and reclassified the difference between the face value of the shares and
the amount distributed to FCo as deemed dividend u/s. 2(22)(d) of the Act.

The Taxpayer contended that:

– “buyback” is specifically excluded from the
definition of “dividend” under the Act;

–  prior to amendment of section 115QA with
effect from 1st June 2013 distribution by way of buyback was not
subject to tax;

–  Circular No. 3 of 2016 dated 26 February 2016
(2016 Circular) has clarified that buyback consideration between the period 1st
April 2000 and 1st June 2013 would be treated as capital gains
and not as deemed dividend; and

–   even if the transaction was undertaken with
the objective of avoiding taxes, the same cannot be disregarded, unless the Act
vests such power in the tax authority1.

The DRP
upheld the draft order of the AO. 

Held

– Section 2(22)(iv) specifically excludes
buyback consideration from the ambit of “dividend”. Further, tax on buyback is
applicable only from 1st June 2013. The 2016 Circular also clarifies
that buyback consideration between 1st April 2000 and 1st June
2013 should be taxed as capital gains.

–  To the extent of buyback undertaken at fair
market price (FMP), consideration would be treated as capital gains u/s. 46A.
Hence, in terms of India-Mauritius DTAA, it would not have been chargeable to
tax in India. However, a buyback undertaken at artificially inflated and
unrealistic price which does not represent FMP, would be considered as
colourable device particularly where the shareholder holds 99.99% of the share
capital.

–  Since neither the AO nor the DRP
had examined whether buyback price was artificially inflated and unrealistic
vis-à-vis the FMP, the matter was remanded to the AO to ascertain the same.

23. TS-34-ITAT-2017(DEL) GE Energy Parts Inc. vs. ADIT A.Y.: 2001-02, Date of Order: 27th January, 2017

Article 5 and 7 of India USA DTAA – LO of Taxpayer from
where core sales activities of the taxpayer as well as other foreign group
entities are carried on by the expatriates (employed by some of the foreign
group entities) constitute a fixed place PE in India for the Taxpayer as well
as other group entities. An agent who works for more than one entity related to
each other cannot be treated as independent. Such agent who carries on core
sales activities in India constitutes Dependent Agency Permanent Establishment
(DAPE) in India – profit attribution has to consider all the functions performed
and risk taken by the PE

Facts

The Taxpayer was a USA company and tax resident of USA. The
Taxpayer was part of a group engaged in the business of sale of equipment
relating to oil and gas, energy, transportation and aviation business to
customers in India.

Taxpayer had set up a liaison office (LO) in India with the
approval of Reserve Bank of India (RBI), to carry out liaison activities in
India. Taxpayer entered into a service agreement with one of its Indian
affiliate in terms of which the Indian affiliate was required to act as a
communication link with regulatory authorities, provide information of customer
needs, and trends relating to group’s products in India, etc. A survey
under the Act was conducted at the premises of the LO followed by further post
survey enquiry. Following evidences were examined by the Assessing Officer
(AO). 

–   MOU signed with the customers

–   E-mail chains between the employees of
various group entities

–   Commercial proposals to customers and
purchase orders

–  Visa of expatriates

–   Linkedin profiles of personnel in India

–  Letter of awarding of contracts

–   Details of employees working in the liaison
office – like name, job description, self-appraisal report, employment letter

–  Lease deed of liaison office

–  Bank statements

–  Letters filed to RBI

–   Lease agreement in respect of residence of
expatriates

–   Power of attorney granted to expatriates for
issue of cheques

–   Statutory audit report

–   Attendance sheet of employees working in the
LO

Based on the
evidences, following facts were noted

– Various expatriates of foreign group entities
were working in India in leadership roles along with support by team of persons
employed by other group entities (ICo)

–  The expatriates as well as the employees of
ICo (group personnel) undertook various sales and marketing function including
price negotiation, supervision, administration and after sales activities of
the overall lines of businesses of the group irrespective of any specific
entity in India. These activities were carried out from the LO in India.

–   Group personnel managed the business of
foreign group entities, secured orders and did everything possible that could
be done qua the Indian operations of the overseas group in India.

–  Group personnel were fully involved in negotiating
the deal with the customers in India and were not merely acting as
communication channel

•    They made direct offers and entertained
requests of the customers for revision of the offers.

•   They were empowered to change/finalise the
terms and conditions of the customer contracts and hence decision making in
relation to the customer contracts was also done in India.

•    They were in full command of the sales
activities in India and did not tolerate the interference of the overseas group
in deciding the terms to be agreed with the customers or for modifying customer
contracts.

•    Entire correspondence with customers was
done in India by expatriates.

•    They advised overseas group about the manner
in which a proposal is to be sent to customer and this indicated that they
acted as a sales team in India.

–  Specific rooms/chambers in the LO were
allotted to the expatriates at the premises of the LO. Their computer, laptops
and business related documents were all stored in such allotted rooms.

–   Further the group personnel also occupied the
premises of the LO which was evident from the attendance sheet maintained for
people working at the LO premises.

AO contended that in terms of Article 5 of India-USA DTAA, a
sales outlet used for receiving or soliciting orders also constitutes a PE.
Thus the LO from where the sale related activities were carried out and which
was at the disposal of the expatriates resulted in a fixed place PE in India
for the Taxpayer.

Moreover, group personnel, who habitually concluded contracts
and secured orders in India wholly or almost wholly for the overseas group as
well as participated in the price negotiations.

Furthermore, the expatriates and employee also created
Dependent Agency Permanent Establishment (DAPE) in India. Consequently, profits
of Taxpayer making sales in India are liable to be taxed as business income in
India as per Article 5 and 7 of the India-USA DTAA .

Taxpayer argued that the sale consideration in relation to
sale of equipment was not taxable in India since the title in respect of these
equipment was transferred outside India as well as payment was also received
outside India. Moreover, the activities in India were limited to LO activities
as approved by RBI and this is evident by the fact that the RBI approval was
not revoked. Nonetheless, the activities carried out in India were of
preparatory or auxiliary character.

Held

ITAT while upholding the AO’s contention provided the
following justification:

On Fixed place PE

–   Core sales activities of finding the
customers and finalizing the deals with customers including the pre-sale and
post sales activities were done by the expatriates and employees in India. Such
activities being the core activities does not qualify as P&A.

–  The expatriates were constantly using the
premises of the LO, specific chambers/rooms were allotted to them in the LO
premise with their name plates affixed. Though the expatriates were on the
payroll of foreign group entity, they constantly occupied the premises of the
LO and carried out the activities on behalf foreign group entities.

–   Further the employees of ICo also occupied
the premises of LO and worked under the control and supervision of the
expatriates, who in turn worked for the foreign group entities. Evidences found
during the course of survey like attendance sheet maintained at the LO premises
also supported the fact that the premise was used by expatriates and employees
of ICo.

–   Marketing and sales are income generating
activities in themselves, since the core activities in relation to sales and
marketing is carried on in India through the LO, it constitutes a fixed place
PE. 

On Agency PE

–   In the facts of the case expatriates were
working for the foreign group entities who are related to one another. The mere
fact that expatriates work for more than one entity does not make them
independent. The related entities are to be treated as a single unit.

–   Article 5 of the DTAA does not require
negotiating ‘all elements and details of a contract for constitution of a PE it
only requires habitual exercises of an authority to conclude contracts so long
as agent’s activities are not in the nature of P&A

–   Since the activities of the expatriates are
not in the nature of P&A, they clearly have an authority to conclude
contract and hence constitute DAPE.

On attribution of income

–  As espoused by SC in DIT vs. Morgan
Stanley [292 ITR 416], there is no need of any further attribution to PE if
it has been remunerated at ALP.

However, if TP analysis does not adequately
reflect functions performed and risks assumed, there would be a need to
attribute further profits to the PE for those functions/risks which have not
been considered.

– In
the facts of the case, the survey revealed that the activities carried on by
group personnel was not merely liaison activities but extended to commercial
activities however the ALP was determined only on basis the liaison and not the
commercial activities undertaken in India. Since the commercial activities
resulted in a PE in India and such services have not been remunerated at all, there will be
need for further profit attribution to the PE.

Section 92C of the Act – As maximum international transactions were undertaken by Taxpayer with its AEs in Canada and USA where ALP was determined through MAP, and as only two transactions were undertaken with AEs in Australia and UK, margin determined through MAP with respect to major international transactions should be applied for remaining transactions also.

14.  [2017] 81
taxmann.com 169 (Bangalore – Trib)

CGI Information System & Management Consultants (P) Ltd
vs. DCIT

A.Y:2005-06, Date of Order: 21st April, 2017

Facts

The Taxpayer had rendered software development services to
its AEs in US, Canada, Australia and UK. AEs of Taxpayer in USA and Canada had
approached respective competent authorities for resolution of TP adjustment
dispute insofar as it related to software development services provided by the
Taxpayer with regard to international transactions through MAP under DTAA.
Under MAP, arm’s length price was determined at 117.5%. The Taxpayer had
maximum international transactions with its AEs in USA and Canada while those
with its AEs in UK and Australia were minimal.

In respect of International transactions of the Taxpayer with
AEs in Australia and UK, the AO adopted 25.32 % profit margin.

Held

–  In J. P. Morgan Services (P) Ltd vs. Dy
CIT [2016] 70 taxmann.com 228 (Mum. – Trib) held that whatever margin has
been applied through MAP with respect to major international transactions, the
same should be applied for the remaining transactions.

–  The maximum international
transactions were undertaken by the Taxpayer with its AEs in Canada and USA.
Only two transactions were undertaken with AEs in Australia and UK. Therefore,
the same ALP of 117.50 % should be applied with respect to remaining two
international transactions.

19. [2017] 77 taxmann.com 166 (Ahmedabad – Trib.) DCIT vs. Bombardier Transportation India (P.) Ltd. A.Ys.: 2013-14, Date of Order: 3rd January, 2017

Sections – 9(1)(vi) / 9(1)(vii) of the Act,
Article 12 of India-Canada DTAA – Use of certain equipment in course of
rendition of services does not result in any use of or right to use the
equipment for recipient of service. Hence, payment for such services cannot be
treated as royalty

Facts 1

The Taxpayer, an Indian company, was a
member-company of an international Group engaged in the business of
manufacturing and supply of rail transportation system. It was a wholly owned
subsidiary of a Singapore based Group Company. During the relevant assessment
year, Taxpayer had made payments to its Canadian Group Company towards its
share of costs in relation to the information system support services availed
by Canadian company at group level.

Before the AO the Taxpayer contended as
follows.

–  The
payments were made towards information system support services at group level.
The amounts were determined on the basis of cost allocation. The Taxpayer
contended that the since the payments were in the nature of reimbursements,
they could not partake the character of income.

–  Provisions
of section 9(1)(vi) of the Act treating the payments as ‘royalty’ could not be
invoked unless there was transfer of all or any of the rights (including
granting of any license) in respect of copyright of a literary, artistic or
scientific work.

–  Additionally,
in terms of Article 12(3) of India-Canada DTAA, only payments having an element
of use of IPRs could be considered as royalties whereas the impugned payments
were for standard facilities. Further, the Canadian company had not received
any payment for commercial exploitation of copyright embedded in the
applications.

–  Hence,
such payments did not qualify as ‘royalty’.

     However, the AO concluded
that the impugned payments were consideration for “use or right to use any
industrial, commercial or scientific equipment” and hence, taxable u/s.
9(1)(vi) of the Act as well as article 12(3)(b) of India-Canada DTAA. After a
detailed analysis of the payments, he was of the view that a major portion of
the payment was for the use or right to use industrial, commercial or
scientific equipment.

Held 1

(i)  The payments made by the
Taxpayer to Canadian company were in the nature of reimbursements based on cost
allocations and did not involve any income element.

(ii) Though rendition of
service may involve use of certain equipment it does not result in any use of
or right to use the equipment. Even if a part of consideration could be said to
be on account of use of equipment by breaking down all the components of
economic activity for which consideration is paid, it is neither practicable,
nor permissible, to assign monetary value to each of the components and
consider that amount in isolation for deciding character of that amount.

(iii) Even if the payment is
considered as payment for use of software, in absence of transfer of copyright,
it cannot be treated as royalty.

(iv) In Kotak Mahindra
Primus Ltd vs. DDIT [(2007) 11 SOT 578 (Mum)], deciding on a similar issue,
the Tribunal observed that the Indian company did not have any control over, or
physical access to, the mainframe computer in Australia, and that since the
payment was for specialised data processing, there cannot be any question of
payment for use of the mainframe computer.

(v) Thus, even if one were to
proceed on the basis that equipment was used in rendition of services, such
payment, or part thereof, cannot be treated as payment for use of equipment.
Further, details furnished by the Taxpayer support the fact of reimbursement.
Hence, the payment was not FTS. In absence of any income embedded in
reimbursement payment, question of withholding of tax did not arise.

Facts 2

The Taxpayer
additionally availed administrative, marketing and procurement services from
the Canadian company. AO contended that the services rendered by the Canadian
company were technical in nature and such services made available, technical,
knowledge, skill and experience to the Taxpayer. Hence, payment for such
services was covered as FTS under article of India-Canada DTAA.

Held 2

(i)  Article 12(4)(a) could be
invoked only if the services provided, inter alia, “make available”
technical knowledge, experience, skill, know-how, or processes or consist of
the development and transfer of a technical plan or technical design.

(ii) The services provided by
the Canadian company were simply management support or consultancy services
which did not involve any transfer of technology. The AO had also not contended
that the recipient of service was enabled to perform these services on its own
without any further recourse to the service provider.

(iii) In this context the
connotation of the expression ‘make available’ needs to be examined. Technology
is “made available” when the person acquiring the service is enabled to apply
the technology. in CIT vs. De Beers India Pvt. Ltd [(2012) 346 ITR 467
(Kar)], the Court held that the technical or consultancy service rendered
should be such that it “makes available” (i.e., imparts) technical knowledge,
etc. to the recipient whereby he could derive enduring benefit and utilise the
knowledge or know-how on his own in future without the aid of the service
provider.

(iv)  Since
the aforementioned tests were not satisfied in case of the Taxpayer, the
payment for services could not be considered as FIS. The fact that the services
rendered involved provision of certain technical inputs and that such inputs
resulted in providing value addition to the Taxpayer, was not relevant in
determining if make available condition is satisfied or not.

TS-752-ITAT-2016(DEL)-TP Aithent Technologies Pvt Ltd vs. DCIT A.Y.: 2008-09, Date of Order: 21st September, 2016

Sections 92B, 92F of the act – Transaction between indian HO
and foreign BO – is not subject to transfer pricing provisions

Facts

An
Indian company (‘Taxpayer’ or ‘HO’) had a branch office (BO)  in Canada. The taxpayer had entered into
certain transactions with its BO.  The
TPO/AO considered such transactions as ‘international transaction’ and determined
the arm’s length price (ALP) of the transactions.

The
issue before ITAT  was whether the TPO/AO
was justified in treating the transactions between the HO and BO as an
international transaction.

Held

–
According to principle of mutuality, no person can earn income nor suffer
losses from dealings with self. There cannot be a valid transaction of sale
between BO and HO. Hence, profit on such sales is not includible while
computing total income of ho. reliance in this regard was  placed 
on  Calcutta  tribunal’s 
decision  in  the case of Betts Hartley Huett & Co.
Ltd. vs. CIT (1979) (116 ITR 425).

–
A transaction can be treated as an international transaction, only if it is a
transaction between two or more associated enterprises (AEs).   Since BO 
is not a separate enterprise, one cannot treat a transaction between HO and
BO as an international transaction.

–
“Enterprise” has been defined u/s. 92F(iii), to include a  permanent 
establishment.  Thus,   a 
BO   can  be treated as an enterprise. Nevertheless,
the definition of ‘international transaction’ when considered in juxtaposition
to the definition of ‘enterprise’, give prima facie impression that all the
transactions between a BO  and its HO are
to be subjected to the transfer pricing provisions.

–
However, this prima facie impression loses its substance, when  the  HO
in question is an indian entity. This is for the reason that the indian entity
is taxable in india on its worldwide income, including the income earned
outside india through its branch.

–
When the accounts of the indian HO and BO 
are aggregated, income of the HO would be set off with an equal amount
of expense of the BO,  leaving thereby no
separately identifiable income on account of transactions between HO and BO.

–   Thus, 
over or under invoicing between the HO and BO will always be tax neutral
in the case of an indian entity having a PE outside india. ALP adjustment for
such transactions will result in charging tax on income which is more than the
amount legitimately due to the exchequer and hence, impermissible.

–  The aforesaid rationale is restricted only to
transactions between the indian HO and its foreign Bo.  In case where HO is a foreign entity, it is
taxable in india only on its indian income and hence, there may be an allurement
to such foreign entities to resort to over invoicing, to mitigate tax burden in
india. Hence, the above discussion does not apply to a case where the
transaction is between a foreign entity and its BO in india.

–   In 
the present case as the HO is an indian 
entity which offered the income earned from india as well as that earned
by its BO  to tax in india, transactions
between such indian HO and BO are not subject to TP provisions

P.S.:

i.   The ruling does not provide any clarity
about the nature of the transaction between indian HO and BO and the basis on
which ALP adjustment was suggested by the AO

ii.  PE of indian Company is considered as
resident in india. Hence,  transactions
between HO and BO  are unlikely to be
regarded as within the ambit of Indian Transfer Pricing Provisions.

TS-528-ITAT-2016(Mum) Kotak Mahindra Bank Limited vs. ITO A.Y.: 2012-13, Date of Order: 25th August, 2016

Article 13,15  of  India-UK 
DTAA, S.  9(1)(vii) of the act – Fees
paid to UK LLP for legal services in relation to acquisition of banking company
and setting up of USA branch qualifies as payment made for the purpose of
earning income from a source outside india. article 15, being a specific
provision dealing with legal services, overrides the general provisions of
article 13 dealing with technical and consultancy services – fees paid to UK
LLP is not taxable in india under the act 
as also DTAA

Facts

The
taxpayer, an indian company, was engaged in the business of banking. The
taxpayer  was contemplating the option of
acquiring banking company and/or setting up of a branch in US.  For this purpose, the taxpayer entered into
an agreement with a UK LLP to obtain certain legal services.

During
the relevant year, the employees of the taxpayer travelled to the USA.  During their visit, UK LLP made presentations
and discussed various legal or regulatory requirements in the USA in relation
to setting up of branch and acquisition of banking company in the USA.

The   taxpayer 
contended  that  the 
services  rendered by the UK LLP
were utilised for the purpose of earning income from a source outside india.
Hence, it cannot be deemed to accrue or arise in india by virtue of the source
rule exclusion u/s 9(1)(vii) of the act. Further, under the India-UK  DTAA (DTAA), such income is covered under
article 15 on independent Personal Services (IPS) and in absence of
satisfaction of conditions specified therein, the payment made to UK LLP is not
taxable in india even in terms of DTAA.

However,
ao contended that in absence of actual creation of a new source of income, the
source rule exclusion under the act is not applicable in respect of payments
made to UK LLP which is taxable as royalty/FTS under the act. Further, as
services rendered by the UK LLP had made available technical knowledge, skill
and experience to the employees of the taxpayer, the payment made to the UK LLP
qualifies as FTS under the DTAA.

Held

Taxability under the Act

–
The payment was made by the taxpayer to the UK LLP on account of the first
phase of the agreement. Under the first phase, the UK LLP was required to
educate the Taxpayer’s officials on various legal/regulatory requirements of
USA in relation to setting up of a bank branch and acquisition of banking
company.

–
The  nature of services indicated that
the payments were made with a view to carry on business and to create a new
source of income outside india, by way of establishment of new branch or
acquisition of a banking company.

–
The source rule exclusion is not restricted only to a case where there is an
existing source of income. As long as the payment is made for creation of a new
source of income, it is covered by the source rule exclusion.

Taxability under DTAA

–  Article 15, being a specific provision
dealing with independent professional services of    lawyers, overrides the general provisions
of article 13 dealing with a broader category of technical or consultancy
services1.

–
As Held by the Special bench of the tribunal 
in the case of Clifford Chance2, article 15 applies not only to
individuals but also to firms3. As the services were rendered outside india and
none of the employee of the UK LLP was present in india for more than 90 days,
such income is not taxable in india under article 15 of the DTAA.

Section 195 – payments made to non-residents for rent for office outside India, advertisement in foreign journals and exhibition expenses being business profits are not taxable in India in absence of a PE in India

12.  [2016] 74
taxmann.com 191 (Delhi – Trib.)

ITO vs. Brahmos Aerospace (P.) Ltd.

A.Y.:2011-12, Date of order: 14th September, 2016

Facts

The Taxpayer had made payments to certain non-residents
(NRs). The payments pertained to rent for office outside India, advertisements
and expenses for participation in exhibition outside India. Mistakenly, the
Taxpayer had withheld tax on the said payments at minimum rates and hence
Taxpayer applied for rectification u/s. 154 of the Act. However, the AO
contended taxes were required to be withheld @ 20% and rejected rectification
application of the taxpayer. The CIT(A) allowed the appeal of the Taxpayer.
Against the order of CIT(A), the revenue appealed to the Tribunal.

Held

–  The payments made to non-residents were in
respect of rent, advertisement and exhibition expenses. Such payments are in
the nature of business receipts of the payee and are taxable in India only if
the NR has a PE in India in terms of the relevant DTAA2 .

2   The decision does not mention DTAA of any
specific country and also does not refer to any specific Article (such as,
Article 7 read with Article 5) of any DTAA.

 – Since the NR does not have PE in
India, the receipts from the Taxpayer are not chargeable to tax in India.
Consequently, the Taxpayer is not required to withhold tax on such payments.

Subsequently concluded APA which accepted that the taxpayer was not a contract manufacturer for relevant years under appeal have considerable bearing on TP dispute and can be admitted as an evidence before the Tribunal

11.  ITA Nos.
779/Mds/2014, 801 Mds/2015 & 810/Mds/2016

Lotus Footwear Enterprises Ltd (India Branch) vs. DCIT

A.Y.s: 2009-10 to 2011-12,

Date of Order: 21st September, 2016

Facts

The Taxpayer was engaged in manufacture of footwear for its
associated enterprise (AE) in BVI. For FY 2009-10 to 2011-12, assessment orders
were passed basis the directions of the DRP. Certain adjustments were made
under TP by regarding the taxpayer to be a contract manufacturer. It is not
clear as to what was the claim of the taxpayer and basis on which the TPO
concluded that the taxpayer was a contract manufacturer permitting TP
adjustment during the years under appeal.

Taxpayer appealed against the assessment orders before the
ITAT and assailed the additions made on account of transfer pricing
adjustments.

Taxpayer had signed an APA in 2016 for FY 2014-15 to 2018-19,
with a roll back for three years from FY 2011-12 to FY 2013-14.

The APA was signed on the basis that for the years covered by
APA and the three earlier years for which roll back was claimed, the business
model of the taxpayer was that of a contract manufacturer and such change was
effected only after F.Y. 2010-11 (A.Y. 2011-12) due to multiple labour strikes
in its units. It was also claimed that roll back which was applicable for
earlier 4 years including one of the years under appeal viz. F.Y. 2010-11 (A.Y.
2011-12) was not made applicable, as for the relevant year, as per the facts
which the taxpayer could furnish before APA authorities, the taxpayer was not a
contract manufacturer. Thus, for F.Y. 2010-11, APA authorities had accepted the
contention of the taxpayer that it was not a contract manufacturer as against
departmental contention that the taxpayer was a contract manufacturer.

It is in this background that taxpayer relied on APA and
claimed that its contention about it not being a contract manufacturer during
the relevant years of appeal is to be accepted.

Held

Tribunal concurred that APA should be considered while
deciding the appeal of the Taxpayer, for the following reasons:

–   The APA rollback period was reduced to three
years only after considering and accepting the submissions of the Taxpayer that
it was not a contract manufacturer in FY 10-11 and the years prior to it.

–   Nature of business of the Taxpayer as
determined under APA would have considerable bearing on the ALP study of the
international transactions of the Taxpayer for the FYs under consideration.

–   Since the APA was concluded in May 2016, the
Taxpayer did not have the opportunity to submit it to the lower authorities.

Having regard to the above, the additional evidence was
admitted and the matter was set aside for fresh consideration.

Article 5 of India-Switzerland DTAA – on facts, subsidiary company and its managing director (MD) constituted fixed place PE and dependent agent PE of the taxpayer in India

10.  I.T.A.No.1742/Mds/2011

Carpi Tech SA vs. ADIT

A.Y.: 2008-09, Date of Order: 24th August, 2016

Facts

Taxpayer a company resident in Switzerland, was engaged in the
business of water proofing and providing drainage systems. During the relevant
assessment year, the Taxpayer had received certain amounts for undertaking a
project for an Indian company.

The Taxpayer contended that the project was only for 40 days (i.e.,
less than six months), and it did not have ‘continuous presence’ or ‘business
connection’ or ‘permanent establishment’ in India. Therefore, receipts from
such project is not chargeable to tax in India. The Taxpayer also had an Indian
subsidiary1 (“Sub Co”).

In the course of inquiry, the AO found that the Taxpayer had also
executed a project in financial year 2004-05 and 2005-06. The duration of the
said project was 105 days. Between the two projects, the time lag was three
years.

During the intervening period, the MD of Sub Co was making efforts
to secure other projects for the Taxpayer in India. The website of the Taxpayer
mentioned office-cum-residential address of the MD for correspondence. The MD
was given a power of attorney (PoA) to undertake the activities of the Taxpayer
in India. Further Sub Co also had a PoA to represent the Taxpayer in its
projects in India.

Based on these as well as several other facts, the AO concluded
that Sub Co and its MD were dependent agents exclusively acting for the Taxpayer
and that the income was subject to tax under Article 7. The DRP upheld the
order of the AO. 

1   While the decision mentions Indian company
as a subsidiary, the facts appear to indicate that though the name of Indian
company was similar to the name of the Taxpayer, all the shares were held by
two individual shareholders one of whom was MD of the company. Thus, impliedly,
the Taxpayer did not have any shares in the Indian company.

Held

–   The facts and the documents indicates that
all the actions related to the project were undertaken by or routed through Sub
Co or its MD. The MD was also holding PoA from the Taxpayer and signed all
documents on behalf of the Taxpayer.

–  It is not necessary that place of business
should be exclusively available to the Taxpayer. What is required is that to
constitute a PE, business must be located at a single place for reasonable
length of time though the activity need not be permanent, endless or without
interruption. In Sutron Corporation vs. DIT [2004] 268 ITR 156 (AAR) and
in Motorola Inc vs. DCIT [2005] 95 ITD 269 (Del) (SB), residence of
country manager was held to be fixed place of business since it was used as an
office address.

–   The residence of MD from where all activities
of the Taxpayer in relation to Indian project, such as participation in bids,
correspondence with customers, signing of contracts, execution of the project
and closure of the project etc. was carried on triggered a fixed place
PE for the Taxpayer in India.

–   Sub Co incurred all the project-related
expenses. The Taxpayer reimbursed these expenses

–   The activities of the Taxpayer and Sub Co
were intertwined and Sub Co participated in economic activities of the
Taxpayer. Sub Co was the face of the taxpayer in India and had a PoA to
represent the Taxpayer in India. Thus the premises of Sub Co also resulted in a
fixed place PE for the Taxpayer in India.

–   Further the Taxpayer was relying on the skills and knowledge of the
MD. His role was critical to all the aspect of the contract through the stage
of signing to its execution.

–  There was no evidence for the claim of the
Taxpayer that MD of Sub Co was independent agent because he represented other
companies. While an independent agent would be required to have objectivity in
execution of tasks of its principal, role played by MD could not be easily
separated from services of the Taxpayer. MD was acting exclusively or almost
exclusively for the Taxpayer.

–   The functions performed by MD or Sub Co could
not be considered as preparatory or auxiliary in character. The Taxpayer had
not demonstrated that it had a mere passing, transient or casual presence in
India. Accordingly, Sub Co and MD constituted fixed place PE and dependent
agent PE of the Taxpayer in India.

Article 7 & 5 of India-UAE DTAA; – In absence of a specific article on Fee for technical service (FTS), income from services rendered in the normal course of business is to be classified as business income; in absence of a Permanent establishment (PE) in India, income from such services is not taxable in India

9.  [2016] 75
taxmann.com 83 (Bangalore – Trib.)

ABB FZ-LLC vs. ITO

A.Y: 2012-13, Date of Order: 28th October, 2016

Facts

The Taxpayer was a company incorporated in and resident in
UAE. The Taxpayer had entered into an agreement with an Indian company for
providing certain services. In consideration, the Taxpayer received certain
fee.

According to the Taxpayer, in absence of a specific article
on FTS in the India-UAE DTAA, income from services is to be classified as
business profit under Article 7. Further, in absence of a PE in India, the fee
is not chargeable to tax in India. The Taxpayer however, did not dispute that,
the receipt was FTS in terms of section 9(1)(vii) of the Act.

AO however, contended that if a DTAA does not have any clause
for taxation of any item of income, such income is to be taxed in accordance
with the Act. Since the Act has a specific provision for taxing FTS, such
specific provision would prevail over the general provision of DTAA.
Accordingly, AO applied provisions of section 9(1)(vii) of the Act and taxed
the fee as FTS. The Dispute resolution panel (DRP) confirmed the view of the
AO.

Held

–   If royalty or FTS is derived from regular
business activities of the Taxpayer, it is to be regarded as business income
under the Act as well as DTAA. However, if these items of income are separately
classified, then taxation would be as applicable to that classification.

–   Income is derived by the taxpayer from
providing services, which is a regular business activity, and hence such income
from such services is to be classified as business income under the DTAA.

–   Absence of a specific provision in the DTAA
is not an omission but an agreement between the two contracting states not to
separately classify such income as FTS. Once the income is classified as
falling within the ambit of other article of the DTAA, thereafter, scope of
assessing such income cannot be expanded by importing classification from the
Act and taxing such income under that classification in the Act.

–   Accordingly, in absence of specific Article
dealing with FTS in India-UAE DTAA, the fee received by taxpayer would be
taxable in terms of Article 7 and in absence of a PE of the Taxpayer in India,
such income is not chargeable to tax in India.

–    Reliance in this regard can be placed on the
Tribunal decision in the case of IBM India Pvt Ltd vs. DDIT (ITA Nos.489 to
498/Bang/2013), wherein the Tribunal held that even if the payments were
not covered by Article 7, they would be covered under Article 23 (other income)

15. TS-896-ITAT-2016(Rjt)-TP WocoMotherson Advanced Rubber Technologies Limited vs. DCIT A.Y.s: 2006-07 to 2011-12, Dated: 29th September, 2016

Section 92CA of the Act – Provision for
technical assistance does not essentially require the technology to be owned by
the service provider for use of technology – AO has to examine as to how much
is the arm’s length consideration for such services – high tax jurisdiction or
low tax jurisdiction is not relevant for the purpose of determination of arm’s
length price – where group is able to reduce tax burden by locating their units
is not a relevant factor under Indian Transfer pricing provisions

Facts

The taxpayer, an Indian entity, was engaged
in manufacture of high quality rubber parts, rubber plastic parts, rubber metal
parts and liquid silicon rubber parts. The Taxpayer had entered into
international transactions with its Associated Enterprises (AEs) (FCo1 in
Sharjah and FCo2 in Germany). FCo2 had granted non-exclusive licence to the
Taxpayer to manufacture, use, exercise or sell the licensed products at NIL
royalty. FCo1 was to provide technical assistance services in relation to the
licensed products. The Taxpayer made payments to FCo1 in relation to the
technical services.

The Transfer Pricing Officer (TPO) objected
that though the Taxpayer paid technical service fees to FCo1, all the
intangibles associated with manufacturing process were owned by FCo2.
Accordingly, TPO conducted TP adjustment in hands of the Taxpayer considering
the FTS paid to FCo1 as NIL. Taxpayer argued that the technical service
agreement with FCo1 was for achieving operational and technical competencies
relating to know-how and technology licensed by FCo2. For rendering technical
assistance, the service provider need not require be the owner of the
technology.

The Taxpayer filed objections before Dispute
resolution panel (DRP). DRP rejected the same on the ground that the services
provided by FCo2 and FCo1 are not distinct; when the same services were
received by the Taxpayer from FCo2 without any consideration, transaction with
FCo2 was an internal CUP (Comparable Uncontrolled Price). Therefore, the
services received from FCo1 should have been benchmarked at NIL.

Aggrieved, the Taxpayer approached the
Tribunal.

Held

(i)   While agreement with FCo2
was for “use of knowhow and inventions”, the agreement with FCo1 was for
“provision for technical assistance required for use of technology”.The nature
of services under the two agreements was distinct even though somewhat
interconnected.

(ii)  Provision for technical
assistance required for use of technology did not require the technology to be
owned by the service provider for use of technology.

(iii)  It is undisputed that
FCo1 had the requisite expertise and skills available for rendition of
technical services. Once the rendition of services is reasonably evidenced, it
cannot be open to the TPO to disregard the same and come to the conclusion that
these services need not have been compensated for or ought to have been
rendered by FCo2 or some
other person.

(iv) In the course of
ascertaining the arm’s length price (ALP), all that the AO has to examine is as
to how much is the consideration that the Taxpayer would have paid for the
services in arm’s length situation, rather than sitting in judgment over
whether the Taxpayer should have incurred these expenses at all.

(v)  Whether or not the person
entering into transaction is in a high tax jurisdiction or low tax jurisdiction
is also not relevant for the purpose of determination of ALP

(vi) The base erosion, which is
sought to be checked by the transfer pricing provisions in India, is the tax
base in India. Indian transfer pricing cannot be, and is not, concerned with
whether entire Group, as a whole, has been able to reduce their tax burden by
locating their units rendering technical services outside Germany.

(vii)  Further,
even if the services rendered, or believed to have been rendered, by FCo2 are
the same as those rendered by FCo1, the same being an intra AE transaction,
cannot be treated as a valid internal CUP. It is only an uncontrolled
transaction, i.e. between the independent enterprises, which can be used as a
benchmark to ascertain ALP. Thus, a transaction between the AEs cannot be
considered as a valid input for application of CUP method. Relied on a rulings
in the cases of Skoda Auto India Ltd. vs. ACIT [(2009) 30 SOT 319 (Pune)] and
ACIT vs. Technimont ICB India Pvt. Ltd. [(2012) 138 ITD TM 23 (Mum)].

[2016] 67 taxmann.com 47 (Delhi – Trib.) Kawasaki Heavy Industries Ltd. vs. ACIT A.Y.:2011-12, Date of Order: 11th February, 2016

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Section 9(1) of the Act and Article 5 of India- Japan DTAA – In absence of authority to undertake core business activity or to conclude contracts, specific authority granted under power of attorney to an employee of LO will not result in constitution of PE of nonresident.

Facts
The Taxpayer, a Japanese Company, was headquartered in Japan. The Taxpayer established a Liaison Office (“LO”) in India. The Taxpayer had executed a Power of Attorney (“POA”) in favor of one of the employees of the LO.

The Taxpayer contended that purchase orders were directly raised by Indian customers on the HO of the Taxpayer, the HO directly sent quotation/invoices to Indian customers and all these documents were signed and executed by the HO directly without any involvement of LO. Further, the POA in favour of the employee was LO specific and did not grant any authority to the employee to undertake any core activities on behalf of the Taxpayer or to sign and execute the contracts. The Taxpayer also submitted documents supporting its contentions.

While the authority granted under POA was LO specific, without rebutting the documents submitted by the Taxpayer or bringing on record any other material, the AO held that the Taxpayer had granted unfettered powers to the employee and hence, the LO constituted PE in India of the Taxpayer. The AO also observed that the LO was operating beyond the scope of permission granted by RBI.

Held
POA showed that the authority granted to the employee was LO specific. Hence, the conclusion drawn by the AO that the authority granted is unfettered was incorrect. The POA did not demonstrate that the employee was authorised to undertake either the core business activity or to sign and execute the contracts. Therefore, AO’s observation that it was beyond the scope of RBI permission was perverse.

While the Taxpayer had supported its contention with documentary evidence, the AO had not rebutted the evidence nor did he bring on record any material in support of the conclusion that the Taxpayer had PE in India.

It has been brought on record that purchase orders were directly raised by Indian customers on the Taxpayer. The Taxpayer directly sent quotation/invoices to Indian customers and all these documents were signed and executed by the Taxpayer directly without any involvement of LO. No material has been brought on record to show that LO carried on core activities in India.

Accordingly, the LO of the Taxpayer did not constitute PE in India of the Taxpayer.

[2016] 67 taxmann.com 105 (Delhi – Trib.) Vertex Customer Management Ltd. A.Y.: 2004-05, Date of Order: 4th March, 2016

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Section 9(1)(i) of the Act; Article 5, 13 of India-UK DTAA –Indian company to whom Taxpayer outsources some of its business in a continuous, real and intimate manner results in business connection under the Act; (ii) on facts, the Taxpayer did not have ‘fixed place PE’ or ‘service PE’ or ‘dependent agent PE’ under DTAA Where PE is remunerated on arm’s length basis, no further profit can be attributed; Amount paid as consideration for equipment use, qualifies as royalty, even if it is paid at cost

Facts
The Taxpayer was a company resident in the UK (“UKCo”). It was engaged in providing sales related outsourcing services to its clients. The Taxpayer had a group company, which was resident of India (“ICo”). The Taxpayer had outsourced certain services to ICo. The Taxpayer incurred certain expenses in respect of treasury, taxation, and finance to facilitate ICo in delivering its services to the customer. ICo reimbursed such expenses to the Taxpayer. Taxpayer had claimed that since payments received from ICo were towards reimbursement of expenses and hence not taxable in India.

Further, the Taxpayer had granted ICo right to use certain equipments outside India. In its return of income, the Taxpayer claimed that consideration received from ICo for equipment use was in the nature of royalty in terms of Article 13(3)(b) of India-UK DTAA . It also claimed that since the reimbursement was on cost basis, it was not taxable.

However, the AO concluded that Taxpayer had Permanent Establishment (PE) in India in terms of India-UK DTAA and it also had ‘business connection’ in terms of the Act. Accordingly, he taxed profit attributable to the PE. He also attributed the reimbursement of expenses and royalty in hands of the Indian PE of the Taxpayer.

The questions before the Tribunal were as follows.
(i) Whether the Taxpayer had a business connection in India?
(ii) Whether the Taxpayer had a fixed place PE in India?
(iii) Whether the Taxpayer had a service PE in India?
(iv) Whether the Taxpayer had a dependent agent PE in India?
(v) If a transaction is at an arm’s length price, whether any further profit can be attributed to PE?
(vi) Whether in absence of any income element, mere expense reimbursement could be considered royalty chargeable to tax in terms of India-UK DTAA ?

Held
(i) ‘Business Connection’ in India
On the basis of various decisions on the issue, it is apparent that there should be a continuous, real and intimate connection between the activity carried on by the non-resident (NR) outside India and the activities carried on in India. Further, such activity should contribute to the profits of the NR in his business. The relationship between the NR and the resident should be something more than mere trading on principal-toprincipal basis.

In the present case the Taxpayer secures orders from its customers on behalf of the ICo and outsources the job to ICo. There is a continuous relationship between the Taxpayer and ICo in India. The contract entered by the Taxpayer outside India are carried out in India. The responsibility of the Taxpayer vis-à-vis its customer is concluded in India. The responsibility of the Taxpayer cannot be segregated and will complete only after ICo provides services to the customers. Hence, the Taxpayer had a continuous, real and intimate connection resulting in business connection in India in terms of section 9(1)(i) of the Act.

(ii) Fixed place PE in India
To constitute a fixed place PE, all the following conditions should be satisfied.

(a) There is a place of business.
(b) Such place is at the disposal of the Taxpayer.
(c) Such place is fixed.
(d) Business of the Taxpayer is wholly or partly carried on through such place.

In case of the Taxpayer, it was not established whether the premises of ICo or client was made available to the Taxpayer. Thus, ICo’s premises cannot be said to be at the disposal of Taxpayer since it has no right to occupy the premises but is merely given access for the purpose of work. Also the services provided in India were in the nature of Business process outsourcing (BPO) services and back office operations. Thus, relying on India UK DTAA and the decision in DIT vs. Morgan Stanley & Co. Inc. [2007] 292 ITR 416 (SC), the Tribunal held that the Taxpayer did not have a fixed place PE in India.

(iii) Service PE in India
In the absence any material brought on record to show that of the Taxpayer having deputed its employees to India, question of ‘Service PE’ cannot arise.

(iv) Dependent agent PE in India
An agent is not considered an independent agent if: (a) he performs activities wholly or almost wholly for the non-resident and its group companies; and (b) the transactions between the agent and the non-resident are not on arm’s length basis. In absence of any material on record to show that ICO was a dependent agent of Taxpayer, the Taxpayer cannot be said to have ‘dependent agent PE’ in India.

(v) Attribution of further profit
No further profit can be attributed to the PE in respect of transaction if transfer pricing analysis has fully captured functions performed, assets deployed and risks assumed. Thus even if it is accepted that the taxpayer has PE in India, since the PE is remunerated at arm’s length price, no further profit can be attributed to the PE.

(vi) Reimbursement characterized as royalty.
The reimbursement on cost basis as consideration received for equipment use qualifies as royalty under India-UK DTAA . The amount claimed by the Taxpayer as reimbursement on cost basis is similar to the consideration received for equipment use. Accordingly, the amount should also be treated as royalty.

[2015] 64 taxmann.com 415 (Delhi) Pepsico India Housing (P.) Ltd. v ACIT A.Ys.: 2002-03. Date of Order: 22.12.2015

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Section 92C of the Act – if taxpayer has exported goods to AE at cost and AE, in turn, has sold them at its purchase price, the transaction meets arm’s length standard, ALP adjustment addition is not justified.

Facts
The taxpayer was an Indian company and a membercompany of Pepsico Group. During the relevant assessment year, the taxpayer had exported certain goods, which, based on the functions performed by the taxpayer, could be classified in two categories. In respect of the first category of goods, the taxpayer performed all the functions and undertook risks similar to that of a normal trader in ordinary course of business. In respect of second category of goods, the taxpayer acted as mere facilitator and performed the function of a service provider. The taxpayer grouped all the exports together and benchmarked them.

According to the taxpayer, it enjoyed Star Export House status. To retain it, it had to export certain minimum value of goods. The sellers and the prices of the goods that it exported were finalized by the buyers and the taxpayer acted as mere facilitator. Hence, it exported the goods at the same price at which it purchased them. The loss incurred by it was due to forex rate fluctuations.

In his report, the Transfer Pricing officer (TPO) observed that: the taxpayer had incurred losses by exporting the goods to its AE at the same price at which it purchased; the taxpayer had not even recovered cost incurred on storage, transportation and interest; as per OECD transfer pricing guidelines, two or more transactions can be aggregated only if they are closely interlinked or continuous or form one integral whole and cannot be analysed separately.

The TPO further observed that not recovering remuneration from AE amounts to shifting of profits and, there was no justification for the taxpayer to undertake forex risk. Therefore, TPO determined the ALP and the adjustment to the income of the taxpayer.

Held

It was an admitted fact that the loss incurred by the taxpayer was only on account of foreign exchange fluctuation as the commodities were sold to the AE at the same rate at which these were purchased from the local market.

On a similar issue, in DCIT vs. Global Vantedge P Ltd4 (ITA Nos. 1432 & 2321/ Del/2009 and 116/Del/2011) the ITAT held that ALP adjustment cannot exceed  the amount received by the AE from the customer and the actual value of international transactions (i.e. the amount received by the taxpayer in respect of international transactions).

In the present case, the taxpayer had sold goods to AE at the same price at which they were purchased from the local market. The AE, in turn, had sold them to the customers at the same price at which they were purchased from the taxpayer.

Hence, the international transactions with AE met the arm’s length standard. Therefore, addition on account of arm’s length price of international transactions was not justified.

[2016] 65 taxmann.com 247 (AAR – New Delhi) Cummins Ltd. Date of Order: 12.01.2016

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Article 13 of India-UK DTAA – Fee for supply management service was neither Fee for Technical Services (FTS) nor royalties in terms of Article 13 of India-UK DTAA – not taxable in India in absence of Permanent Establishment (PE) in India.

Facts
The applicant was a company incorporated in the UK. An Indian company (“IndCo”) was engaged in the production of turbochargers. IndCo purchased turbocharger components directly from suppliers in UK and US. The applicant had entered into Material Suppliers Management Service Agreement with IndCo. In terms of the Agreement, IndCo paid supply management service fee @5% of the base prices of the suppliers to the applicant.

The issues before the AAR were:
(i) Whether supply management service fee was FTS or royalties in terms of Article 13 of India-UK DTAA ?

(ii) Depending on answer to (i), as the applicant did not have PE in India, whether the payments were chargeable to tax in India?

(iii) If supply management service fee was not chargeable to tax in India, whether they were subject to transfer pricing provisions under the Act?

(iv) Depending on answer to (i) and (ii), whether IndCo was liable to withhold tax on supply management service fees?

Held

IndCo engaged the applicant only to ensure market competitive pricing from the suppliers. The applicant maintained contract supply agreement with suppliers after identifying the products availability, capacity to produce and competitive pricing. The applicant did not impart its technical knowledge and expertise to IndCo which enabled it to acquire such skills and use them in future. Therefore, the services did not satisfy the ‘make available’ condition under India-UK DTAA .

Relying on the decisions in De Beers India Minerals Private Ltd. (346 ITR 467) and Measurement Technologies Limited (AAR No.966 of 2010), services in the nature of procurement services can never be classified as technical or consultancy in nature and they do not make available any technical knowledge, experience, know-how etc.

The services rendered in this case were managerial in nature. With effect from 11th February, 1994, managerial services were taken out from the ambit of FTS under India-UK DTAA and ‘make available’ clause was inserted. This clearly showed the intention to exclude managerial services and include ‘make available’ requirement.

As the services were related to identification of products and competitive pricing and not to the use of, or the right to use any copyright, patent, trademark, design or model, plan, secret formula or process etc., they cannot qualify as royalties under Article 13 of India-UK DTAA .

Since the applicant had no PE in India, service fee was not chargeable to tax in India and hence, IndCo was not liable to withhold taxes.

PS: AAR held that the issue whether transfer pricing provisions applies is not applicable.

TS-10-ITAT-2016(Mum) Accordis Beheer B V vs. DIT A.Ys.: 2006-07. Date of Order: 13.01.2016

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Article 13(5) of India-Netherlands Double Taxation Avoidance Agreement (DTAA); Section 112 of the Act – Buy-back of shares under a scheme of arrangement was not “reorganisation” as contemplated in Article 13(5) of India-Netherlands DTAA, transfer did not qualify for participation exemption; however, the transfer qualified for concessional rate u/s. 112 of the Act

Facts
The taxpayer was a resident of Netherlands. It held 38.24% of shares of an Indian company (“IndCo”) whose shares were listed on Indian stock exchanges. During the relevant year, IndCo proposed a scheme of arrangement for buy-back of its shares. The said scheme was approved by the jurisdictional High Court. The taxpayer tendered all the shares held by it and received consideration resulting in capital gains. The taxpayer contended that in terms of Article 13(5)3 of India-Netherlands DTAA , the capital gains were not chargeable to tax in India.

According to the Tax Authority, since the taxpayer sold its shares to IndCo, which was an Indian resident, capital gain did not qualify for participation exemption under Article 13(5) of India-Netherlands DTAA . Further, according to him the concessional rate of 10% provided in the second proviso to section 112 of the Act was not applicable in case of the taxpayer and hence levied tax on capital gain @20%.

The moot point before the Tribunal was whether the shares tendered in the scheme by the taxpayer constituted “reorganisation” in terms of Article 13(5) of India-Netherlands DTAA .

Held
As regards whether buy-back is “reorganisation”

Since the scheme was approved by High Court, there was no colourable device.

Reorganisation should involve major change in financial structure of a corporation, resulting in alteration in rights and interests of security holders. In the present case, upon implementation of the scheme there was no change in the rights and interests of the shareholders. Only change was that pursuant to reduction of share capital the percentage of shareholding of the promoter group had gone up. That cannot be considered as change in the rights and interests of shareholders.

The reorganisation contemplated in section 390 of the Companies Act 1956 consists of either consolidation of shares of different classes, or division of shares into different classes, or both.

Transfer of shares pursuant to a buy-back scheme could not fall under the ambit of the term “reorganisation” since the objective of the scheme was not financial restructuring, but providing exit to non-resident shareholders.

As regards rate of tax

Having regard to the decisions in Cairn U.K. Holdings Ltd. (2013)(359 ITR 268)(Del) and ADIT vs. Abbott Capital India Ltd. (65 SOT 121)(Mum Trib), the taxpayer is entitled to the concessional rate of 10% under section 112 of the Act.

[2015] 64 taxmann.com 162 (AAR – New Delhi) Satyam Computer Services Ltd Date of Order: 01.12.2015

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Sections 9, 195 of the Act – Payment of penalty decreed by Foreign Court, being payment to Government, not subject to tax and hence, will not be subject to tax withholding under the Act.

Facts
The applicant was an Indian company. The shares of the Applicant were listed on Indian stock exchanges. The Applicant had also issued American depository shares which were listed on New York Stock Exchange. SEC of USA had filed complaint with US Court for violation of American Securities Law by the Applicant. The Applicant filed its consent and undertaking with SEC without admitting or denying the allegations in the complaint and agreed to pay penalty. The US Court levied civil penalty on the Applicant. The Court further decreed that “amount ordered to be paid as civil penalties pursuant to this Judgment shall be treated as penalties paid to the government for all purposes, including all tax purposes”.

The AAR examined the issue whether penalty payable pursuant to decree of US Court, which was paid to US Court/Government of USA was liable to tax withholding under the Act.

Held
Penalty pursuant to the decree of Court will not be subject to tax liability. Consequently, question of tax withholding u/s. 195 of the Act will not arise.

[2016] 65 taxmann.com 246 (AAR – New Delhi) Aberdeen Claims Administration Inc. Date of Order: 19.01.2016

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Sections – 4, 5, 9, 45, 48 of the Act –Settlement amounts received by FIIs pursuant to waiver of right to sue for damages caused by fraud in financial statements was compensation for not pursuing the suit and involved surrender of capital asset (viz., “right to sue”); though it was a capital receipt, as the computation provisions failed, capital gains could not be calculated; hence, it was not taxable as capital gains.

Facts
Several FIIs were holding American depository shares and equity shares of an Indian listed company (“IndCo”). There was public disclosure by the CEO of the Indian company about manipulation of financial results of IndCo. As a result, the price of securities of IndCo dropped steeply and the FIIs were forced to dispose of the securities, suffering huge losses. Several investors initiated class action litigation against IndCo. While initially claims of FIIs were also consolidated with those of the other investors, subsequently, the FIIs filed request for exclusion with the Court. The FIIs then separately negotiated the terms of settlement with IndCo and its auditors pursuant to which IndCo and its auditors agreed to pay settlement amount to FIIs.

The issue before the AAR was whether the settlement amount received by FIIs from IndCo and its auditors was taxable in terms of the Act.

The FIIs contended as follows.

As regards sections 4, 5 & 9 of the Act

Since the settlement amounts were not received in the ordinary course of business of the Applicant, and the Applicant is not engaged in the business of suing and seeking settlement from third parties, they would not qualify as “income” for the purposes of the Act.

Since section 9 of the Act refers to only specific streams of income the settlement amounts cannot be said to be deemed to accrue or arise in India in terms thereof.

The settlement amounts were linked to a law suit that arose outside India and was not determined on the basis of value of the underlying shares of IndCo. The suit was linked to allegation of fraud/negligence. The settlement amounts were not sourced in India. Hence, the territorial nexus principle was not fulfilled. This was established from the fact that the FIIs had sold the shares prior to initiation of the action.

Therefore, the settlement amounts cannot be brought to tax u/s. 9 read with Section 4 and Section 5 of the Act. This is on the basis that the settlement amounts were not connected with the Applicant’s business in India but for release of claims of FIIs against IndCo and its auditors. Therefore, the settlement amounts have no territorial nexus with India.

As regards section 45 of the Act
The settlement amounts were received on account of destruction of capital assets (i.e. the right to sue IndCo and its auditors).

Assuming that the settlement amounts were subject to Section 45 of the Act cost of acquisition and cost of improvement of a right to sue cannot be computed. Hence, owing to failure of computation mechanism no Capital Gains could arise under Section 48 and Section 55 (3) of the Act2.

The settlement amounts were received as compensation for the injury inflicted on capital asset of the trading (Equity and ADS shares held FIIs) and therefore not subject to Section 45 of the Act.

A ‘right to sue’ is property (and thus Capital Asset as defined under Section 2 (14) of the Act). Inherently, as a matter of public policy, a ‘right to sue’ is not transferable. Thus, there cannot be any transfer of a right to sue under Indian law. Consequently, any capital receipt arising from a right to sue cannot be considered capital gains u/s. 45 of the Act. The Gujarat High Court has accepted this proposition in Baroda Cement and Chemicals vs. C.I.T. (158 ITR 636). Also, in Vania Silk Mills Pvt. Ltd. vs. C.I.T. (191 ITR 647), the Supreme Court has laid down that receipt on account of destruction of capital assets is not subject to capital gains.

The tax authority contended as follows.
The FIIs were pass-through entities engaged in the business of trading in securities and the loss was incurred by them in the course of that business. The recipients of the settlement amounts were the FIIs (and not participating investors) who were in the business of purchase and sale of securities.

Unlike an investor, Mutual Funds change their portfolios frequently and sometimes prefer even booking losses. The FIIs decide to move out of a market on local as well as international factors. The buying and selling of shares is done very regularly and frequently. These are characteristics of a trader and not of an investor. Merely because in order to attract investments the Government has decided to treat the gains of FIIs as capital gains, the same does not alter the basic character of the activity but only changes the matter of taxability.

Any fall in price of share cannot be regarded as destruction of asset. Rise and fall in prices of securities, be it for one reason or the other, is a normal business incidence and neither the rise in price creates an asset nor the fall in price destroys an asset. Capital receipt arises only when receipt is for destruction of the profit making apparatus or crippling of the recipient’s profitmaking apparatus. However, when the structure of the recipient’s business is so fashioned as to absorb the shock as one of the normal incidents of business activity the compensation received is no more than a surrogatum for the future profits surrendered. Hence, it should be treated as a revenue receipt and not a capital receipt.

The settlement amounts received were not for relinquishment or extinguishment of the right to sue but as a compensation for the loss of potential income suffered in the course of their business operations.

Held

In Union of India vs. Raman Iron Foundry, AIR 1974 SC 265, the Supreme Court has held that the only right which the party aggrieved by the breach of the contract has, is the right to sue for damages, which is not an actionable claim and it is amply clear from the amendment in section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred.

However, in CIT vs. Mrs Grace Collis and other 2001 248 ITR 323, the Supreme Court has held that the expression “extinguishment of any rights therein” does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer. Hence, the right to sue can be considered for the purpose of capital gains u/s. 45 of the Act.

In CIT vs. B.C. Srinivasa Setty (1981 128 ITR 294), the Supreme Court has held that the charging section and the computation provisions together constitute an integrated code and a case to which the computation provisions cannot apply was not intended to fall within the charging section. It was further held that none of the provisions pertaining to the head ‘capital gains’ suggests that they include an asset in the acquisition of which no cost of acquisition at all can be conceived. It is clear that if right to sue is considered as a capital asset covered under the definition of transfer within the meaning of section 2(47) of the Act, its cost of acquisition cannot be determined. In the absence of such cost of acquisition, the computation provisions failed and capital gains cannot be calculated. Therefore, right to sue cannot be subjected to income tax under the head ‘capital gains’.

Since the settlement amounts have been received against surrender of right to sue, it cannot be considered for the purpose of capital gains u/s. 45 of the Incometax Act.

The settled legal position is that FIIs are not engaged in trading business. The facts also show that the shares were purchased as investors and not as traders and in the books of accounts also they were treated as capital investment.

While the settlement amounts were relatable to shares (i.e., if shares would not have been purchased the question of class action or right to sue would not have arisen), they were received not as part of business profit or to compensate the future income but as a result of surrender of the claim against IndCo and its auditors. Hence, even in accordance with the principle of surrogatum, such amounts were not assessable as income because they did not replace any business income.

TS-724-ITAT-2015(DEL) ITO vs. Santur Developers P. Ltd. A.Y.: 2006-07, Date of Order: 24.07.2015

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Article 26(4) of India USA DTAA – In absence of similar provision for withholding taxes on payment to a resident Taxpayer on sale of land, there is no requirement to withhold taxes on sale consideration paid to Non-resident (NR) pursuant to non-discrimination Article of India- USA DTAA .

Facts
The Taxpayer, an Indian company, entered into an agreement to purchase a piece of land jointly owned by three parties. One of the co-owner of the land was a citizen of USA and a NR in India. The agreement was executed by an Indian resident who was holding the general power of attorney for the other owners.

The sale consideration was paid to the Indian resident constituted attorney in Indian rupees. The Taxpayer did not withhold taxes on such payment. The Tax authorities contended that the Taxpayer was required to withhold taxes u/s. 195 of the Act and hence, levied penalty for failure to withhold taxes.

The Taxpayer contended that since the agreement as well as payment was made to a resident in India, provision of section 195 of the Act did not apply. Further, section 195 applies only to remittance made in foreign currency, whereas in the present case since payment was made in Indian currency, tax was not required to be withheld under Act. Without prejudice to the aforesaid, it was contended that in absence of any provision relating to withholding of taxes where sale proceeds of an immovable property are paid to a resident person, there should not be any withholding requirement on payments to NRs applying the non-discrimination clause of India-USA DTAA

Held
The Tribunal did not rule on the applicability of section 195 as it was not contested before it.

In absence of a provision requiring Taxpayer to withhold tax on payment of sale proceeds to a resident, pursuant to non-discrimination article of the DTAA, Taxpayer was not required to withhold taxes on payment made to NRs.

TS-28-ITAT-2016(DEL) ACIT vs. NEC HCL System Technologies Ltd. A.Y.: 2008-09, Date of Order: 22nd January, 2016

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Section 9(1)(vii) of Act – Outsourcing fees paid by Japanese branch office of an Indian company to a non-resident (NR) and used for business development activities outside India, cannot be deemed to accrue or arise in India

Facts
The Taxpayer is a joint venture between an Indian Company (Indian JV Partner) and a Japanese Company (Japan JV Partner). The Taxpayer was engaged in the business of providing offshore software engineering services and solutions to F Co and its group companies.

The Taxpayer set up a branch office in Japan (Japan BO). The Japan BO was engaged in undertaking extensive sales and marketing activities in addition to bidding for projects and obtaining work from the customers from Japan and outside Japan (business development activities).

The Taxpayer entered into a framework agreement with Indian JV Partner and its group entity in Japan. The framework agreement was to facilitate sub-contract of software development work by Japan BO if the same could not be serviced by the taxpayer or Japan BO. During the relevant financial year, Japan BO paid certain outsourcing fee to another Japanese Company, which was group entity of Indian JV partner, without withholding taxes thereon.

The Tax authority contended that Japan BO was merely an extension of The Taxpayer and the outsourcing was undertaken by Taxpayer from India. Thus, outsourcing fee paid to Japanese Company is deemed to accrue or arise in India and the payment is therefore taxable in India. Hence, it is liable to tax withholding. Consequently, tax authority disallowed such payments made to Japanese Company in the hands of the Taxpayer for failure to withhold taxes on outsourcing fee.

The Taxpayer contended that Japan BO has an independent existence and carries on independent business in Japan. Thus, the outsourcing services are utilised by Japan BO in business carried on in Japan. Therefore, fee for such services cannot be deemed to accrue or arise in India u/s. 9(1)(vii)(c) and hence, no withholding is to be done on the payment of outsourcing fees.

Held
Taxpayer has a BO in Japan which carries on business outside India. Therefore, Japan BO creates a permanent establishment (PE) of the Taxpayer in Japan.

Japan BO had five employees as sales manager for carrying out sales and marketing activities and two managers for general administrative affairs of the company who possessed the technical skills required to understand the requirements of the projects. From the details provided about the employees in Japan and their job profile, it was clear that such employees were engaged in business development activities of Japan BO in Japan. Some of the projects obtained by Japan BO were outsourced by Japan BO as per its own business needs.

Merely because the financial statement of Japan BO is incorporated in the financial statements of the Taxpayer, the same does not conclude that the expenses are borne by the Taxpayer and not it’s Japan BO.

Payments for fee for technical services borne by the Japan BO shall not be deemed to accrue or arise in India and hence was not taxable in India. Therefore, there was no liability to withhold taxes on such outsourcing fees.

TS-72-ITAT-2016(Mum) Goldman Sachs (India) Securities Pvt. Ltd. vs. ITO (IT) A.Y.: 2011-12, Date of Order:12th February, 2016

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Article 13 of India Mauritius DTAA – Buyback transaction cannot be treated as colorable device for avoidance of tax – Buyback results in capital gain and is exempt from taxes in India under Article 13 of India-Mauritius DTAA .

Facts
The Taxpayer, an Indian resident company, is a whollyowned subsidiary of a Mauritian company (FCo). The Taxpayer undertook a buyback on account of which shares were bought back at a value higher than its face value.

The Tax Authority contended that the buyback transaction was a colorable transaction to avoid payment of dividend distribution tax (DDT). Therefore, Tax authority regarded such buyback as capital reduction and considered the excess payment over face value of shares as distribution of accumulated profits to shareholders i.e., F Co. It was further held that, since the Taxpayer had not paid DDT, dividend received by FCo would not be eligible for exemption under the Act. Accordingly, Taxpayer was held liable to withhold taxes at the rate of 5% on gross payment to FCo under Article 10 of the DTAA. Since the Taxpayer had failed to withhold taxes, the Taxpayer was held to be an assessee in default and interest was also levied for such failure apart from recovery of tax.

The Taxpayer however contended that the amount remitted under the buyback transaction was in the nature of capital gains which was exempt from taxation in India under India-Mauritius DTAA. Accordingly, neither any tax was deductible nor was there any default in withholding of tax.

Held
Buyback of shares cannot be equated with capital reduction as they are two entirely different concepts as discussed and held in the Bombay High Court (HC) decision of Capgemini India Pvt. Ltd. (Company Scheme Petition No. 434 of 2014).

CBDT Circular No. 779 dated 14th September 1999 specifically states that shareholders would not be subjected to dividend tax but taxed under capital gains provisions upon buy back of shares.

It is true that buyback transactions are subject to Income distribution tax pursuant to amendment by the Finance Act 2013. However, as the transaction under consideration pertained to a period prior to this amendment, there is no ambiguity that those provisions will not apply for buyback under consideration. Hence, the said transaction could not be regarded as deemed dividend but should be subjected to tax as capital gains.

Since Article 13 of the DTAA specifically exempts such transaction from tax in India, the Taxpayer is not liable to withhold tax under the Act. Even if the payment was considered as dividend, the requirement to pay DDT would make the payment exempt in the hands of the shareholder. Accordingly, withholding tax provisions should not apply.

By placing reliance on the observations of the Bombay HC ruling of Capgemini (supra), the Tribunal ruled that if the Taxpayer entered into a transaction which did not violate any provision of the Act, the transaction cannot be termed as a colorable device just because it results in non-payment or lesser payment of taxes in that particular year. The whole exercise should not lead to tax evasion. Non-payment of taxes by an assessee in given circumstances could be a moral or ethical issue.

TS-126-ITAT-2016(Mum) Forbes Container Line Pte. Ltd. A.Y.: 2009-10, Date of Order: 11th March, 2016

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Section 44B of the Act and Article 8 of India-Singapore DTAA –Taxpayer providing container services cannot not be treated as engaged in shipping business. Article 8 of the DTAA and section 44B of the Act not applicable Income was liable to be taxed as business income. In absence of PE, such income is not taxable in India

Facts
The Taxpayer was a company incorporated in Singapore and engaged in the business of operating ships in international traffic across Asia and Middle East. The Taxpayer is a wholly owned subsidiary of an Indian Parent Co (ICo).

The Taxpayer filed a return of income claiming that the total income was NIL. However, AO contended that the Taxpayer had a real and intimate business connection in India for reasons that the ICo secured the business for Taxpayer in India and one of the directors of the Taxpayer was also a director in ICo, and such director looked after policy matters of the Taxpayer in India. Further, AO held that taxpayer had a fixed place of business in India. Further as ICO concluded various contracts on behalf of the Taxpayer with various Government agencies for carrying out various functions, ICo created an Agency PE for the taxpayer in India.

AO also contended that Taxpayer being a Non-vessel operating common carrier was not eligible to claim benefits under Article 8 of the DTAA, dealing with shipping income and the income of the Taxpayer would fall within the ambit of Article 7. The computation of such income would be governed by section 44B of the Act. However, the Taxpayer contended that it did not have a fixed place of business in India. Further, it was contended that as an independent entity all its decisions were taken in Singapore and ICo had no role in deciding taxpayer’s policies.

The Taxpayer appealed before First Appellate Authority (‘FAA ’). However, FAA upheld the order of AO.

Aggrieved by the order of FAA , the Taxpayer preferred an appeal before the Tribunal.

Held
On facts and records, it was clear that taxpayer was maintaining books of accounts as well as bank account in Singapore and all banking transactions were made from that account only. Nothing was brought on record to show that the effective control and management of taxpayer was in India.

Factors like staying of one of the directors in India or holding one meeting during the year under consideration or location of parent company would not decide the residential status of the Taxpayer.

The Taxpayer did not own or charter or took on lease any vessel or ship but was merely providing container services to its clients. Thus, the Taxpayer is not engaged in shipping business. This was also accepted by the AO. Therefore the provisions of section 44B dealing with income from shipping business would not be applicable in the present case.

The income of the Taxpayer had to be assessed as per Article 7 which deals with business income. In the absence of PE, such income is not taxable in India.

TS-187-ITAT-2016(Mum) Interroute Communications Limited A.Y.: 2009-10, Date of Order: 9th March, 2016

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Article 13 of India UK-DTAA – Payment for Interoute connectivity facility helping in connecting the calls to telecom operators in the end jurisdiction is neither for any scientific work nor for any patent, trademark, design, plan or secret formula or process. Payment is for a service and not for use of scientific equipment. Since service does not satisfy ‘make available’ condition, it does not qualify as Fee for technical services (FTS) under the DTAA .

Facts
The Taxpayer was a company incorporated in, and tax resident of UK. The Taxpayer was engaged in the business of providing international telecommunication network connectivity to various telecom operators around the world. The Taxpayer received certain amount from Indian customers towards the provision of virtual voice network (VVN). VVN is a standard inter-connect service provided to third party carriers. The Taxpayer contented that the income for use of VVN is in the nature of business income and since there was no PE in India, such income is not taxable in India.

The AO held that the Taxpayer provides use of its facilities/equipment/infrastructure to enable customers to interconnect with each other. Such facility includes proprietary software and hardware, technical expertise and other intellectual property. The AO observed that usage of such facilities amounted to usage of the Intellectual property held by the Taxpayer and hence, the payments received by the Taxpayer were in the nature of Royalty, or alternatively, FTS. Hence, the same was taxable in India. On further appeal, the First Appellate Authority also upheld the order of AO.

Aggrieved, the Taxpayer preferred an appeal before the Tribunal.

Held
Essentially, provision of VVN was connecting the call to the end operator, and, in that sense, it worked like a clearing house.

Payment made by the Indian entities can be held to be royalty only when it is payment for scientific work, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience (‘specified items’).

In the present case, the payment is not for a scientific work nor is there any patent, trademark, design, plan or secret formula or process for which the payment is being made. The payment is made for a service, which is rendered with the help of certain scientific equipment and technology. The Taxpayer is providing a facility which is a standard facility used by other telecom companies as well. Also, merely because the payment involves a fixed as also a variable payment, the same does not alter the character of service.

Though the Taxpayer may charge a fixed amount to cover its costs in employing enhanced capacity so as not to incur losses when this capacity is not used, but what the customer is paying for is a service and not the use of equipment involved in additional capacity, nor for any scientific work, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.

The payment for a service can be brought to tax under Article 13 of DTAA only when it makes available the technology in the sense that recipient of service is enabled to perform the same service without recourse to the service provider. Though the service rendered by the Taxpayer requires technical inputs, there is no transfer of technology. Hence, the make available condition is not satisfied. Therefore such payment is outside the ambit of fees for technical services (‘FTS’) taxable under Article 13 of the DTAA .

Further, since there is no dispute that the Taxpayer does not have any permanent establishment (‘PE’) in India, the payment made by Indian customers cannot be brought to tax in India.

TS-131-ITAT-2016(HYD) GVK Oil & Gas Limited A.Y.: 2009-10, Date of Order: 9th March, 2016

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Article 12 of India-US DTAA , Article 13 of India UK DTAA – Payment for fixed period, nonexclusive licence to use a dataset consisting of scientific as well as technical information, permitting its use only as a licensee, and not involving transfer of technical knowledge or experience or making available of technology, does not amount to royalty under the DTAA .

Facts
Taxpayer an Indian company was engaged in the business of Oil and Gas exploration. Taxpayer made certain payments to a USA and UK Company (FCo) towards a non-exclusive licence and right to use a dataset for an agreed licence fee.

The Taxpayer contended that the dataset was nothing but a compilation of data and licence was only for the use of data and not for providing any experience, knowledge or skill to the Taxpayer. Taxpayer also contended that

Use of the dataset is not a transfer of the copyright but it is a copyrighted article.

It was contended that the dataset was not customized according to the requirements of the Taxpayer nor was it for the exclusive use of the Taxpayer.

In absence of provision of knowhow, such licence fee does not qualify as royalty.

Against that AO observed that
NR agreed to grant non-exclusive license/right to use certain data and derivatives in consideration for an agreed license fee.

Such information/knowledge is not available in the public domain and available to the taxpayer only on securing a valid license.

Such payment amounts to consideration for information concerning industrial, commercial or scientific experience.

(a) In any case, the Taxpayer had ordered the dataset which was customised for the taxpayer. Accordingly, when such customised data is made available upon request of taxpayer, it becomes know-how as it cannot be used by any other party.

(b) Thus the licence fee amounts to royalty both under the Act as well as the DTAA and held the Taxpayer as an ‘assessee-in-default’ or failure to withhold taxes u/s. 195.

Held
The Taxpayer obtained a fixed period licence to use a dataset which is highly technical and complicated can be accessed only on the grant of a license by the owner.

On the expiry of licence, taxpayer is required to return the product or destroy the data accessed by him during the license period. However, taxpayer is not required to destroy the product produced by him by use of such data. This indicates that the data was made available to the taxpayer to enable it to process and use it for furtherance of its objects.

The definition of ‘Royalty’ under the Act is more exhaustive as compared to the definition under the India-USA and India-UK DTAA . Under the Act, consideration for granting of a license for the use of the property is also treated as royalty whereas, there is no such provision under the DTAA .

Reference was made to principle laid down in various judgments1 wherein it has been held that unless and until the license is given to use the copyrighted property itself, the consideration paid cannot be treated as ‘Royalty’.

In the facts of the case, license is granted to use information contained in the database. Further, the licenses are non-exclusive licenses and therefore, information/ data is not customized to meet the taxpayer’s requirements exclusively.

Though the information in the database is scientific as well as technical, taxpayer is permitted to use the information only as a licensee. It does not involve transfer of technical knowledge or experience. Therefore there is no use of copyright. Thus, under the DTAA unless the license is given to use the copyright itself, the consideration paid cannot be treated as royalty.

It is clear that FCo has only made available the data available with them but are not making available any technology available for use of such data by the taxpayer. Thus, such payments are not in the nature of ‘royalty’ as per the India-USA and India-UK DTAA and hence the provisions of S. 195 are not applicable.

PS: Royalty implications under the Act were not analysed as the royalty definition under the DTAA was considered to be narrower than royalty definition under the Act.

TS-144-ITAT-2016(Mum) Siro Clinpharm Private Limited A.Y.: 2009-10, Date of Order: 31st March, 2016

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Section 92B of the Act – Finance Act 2012, inserted explanation to section 92B expanding the scope of definition of international transaction inter alia to include the transaction of guarantee within its ambit should be applicable prospectively

Facts
The Taxpayer, an Indian Company, had given a guarantee to foreign banks on behalf of its associated enterprises (‘AE’). The Taxpayer did not charge any fee or commission for issuance of these guarantees. However, the AEs duly reimbursed the Taxpayer towards the bank charges incurred by the Taxpayer.

TPO held that the corporate guarantees, as provided by the Taxpayer to the bank, were specifically covered by the definition of ‘international transaction’ u/s. 92B and charged fees by imputing at arm’s length price. The same was upheld by the First Appellate Authority (‘FAA ’). Aggrieved Taxpayer appealed before the Tribunal.

Held
Finance Act 2012 inserted explanation to section 92B expanding the scope of definition of international transaction inter alia to include the transaction of guarantee within its ambit. Such amendment was stated to be clarificatory in nature and was made applicable with a retrospective effect.

Legislature may describe an amendment as ‘clarificatory’ in nature, but a call will have to be taken by the judiciary whether it is indeed clarificatory or not. The amendment in question is related to transfer pricing provisions which are in the nature of an antiabuse legislation. An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behaviour is acceptable or what is not acceptable. What triggers levy of taxes, is non-compliance with the manner in which the anti-abuse regulations require the taxpayers to conduct their affairs. In that sense, all anti-abuse legislations seek a certain degree of compliance with the norms set out therein. It is, therefore, only elementary that amendments in the anti-abuse legislations can only be prospective. It does not make sense that someone tells you today as to how you should have behaved yesterday, and then goes on to levy a tax because you did not behave in that manner yesterday. Reliance in this regard was placed on the decision of co-ordinate bench in the case of Micro Ink vs. ACIT (2016) 176 TTJ 8 (Ahd) and Bharti Airtel Ltd. (2014) 161 TTJ 428 (Delhi – Trib) and New skies (2016) 382 ITR 114 (Delhi). Hence, if the amendment increases the scope of international transaction u/s. 92B, then there is no way it could be implemented for the period prior to this law coming on the statute i.e. prior to 2012

Alternatively, the Tribunal held that if the amendment by Finance Act 2012 is considered clarificatory and does not add anything or expand the scope of international transaction defined u/s. 92B, then this provision has already been judicially interpreted in favour of the Taxpayers by the aforesaid Tribunal rulings, till it is reversed by a higher judicial forum.

Hence, Explanation to section 92B, though stated to be clarificatory and effective from 1st April 2002, has to be necessarily treated as effective from at best the AY 2013-14. Hence, the impugned adjustments must stand deleted.

TS-177-ITAT-2016(Mumbai ITAT) Capegemini S.A. A.Y.: 2009-10, Date of Order: 28th March, 2016

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Article 23 of India- France DTAA – Guarantee commission paid pursuant to a corporate guarantee agreement executed in France between a French Company and a French Bank, does not arise in India – Such commission is not taxable in India under the ‘other income’ article of the DTAA

Facts
The Taxpayer, a French Company provided a corporate guarantee to a French bank (bank). In lieu of such guarantee, the Indian branch of the bank provided loan to the Indian subsidiaries (ICo) of Taxpayer. ICo paid guarantee commission to the Taxpayer towards the guarantee given to the bank. The AO contended that the guarantee commission paid to the taxpayer arises in India and therefore, was taxable under “Other income” Article 23 of the India-France DTAA , for the following reasons

The guarantee had been provided for the purpose of raising finance by an Indian company

Finance was raised in India and the benefits were availed by Indian subsidiaries

Finance requirement was met by Indian branch of the French bank.

The Taxpayer, however, contended that guarantee commission did not arise in India and accordingly was not taxable in India.

Held
On appeal, ITAT held:

Guarantee commission received by the taxpayer does not accrue or arise in India, nor is it deemed to accrue or arise in India and therefore, it is not taxable in India under the Act.

Guarantee was given by a French company to a French bank in France. Therefore, such guarantee commission arises in France and not in India. Therefore, guarantee commission paid to the Taxpayer is not taxable in India under Article 23(3) of the DTAA .

[2016] 68 taxmann.com 336 (Chennai – Trib.) DCIT vs. Alstom T & D India Ltd A.Ys.: 2001-02, 2003-04 and 2004-05, Date of Order: 31st March, 2016

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Section 9, 40(a)(i) of the Act – to fall within the second exception provided in section 9(1)(vii) (b) of the Act, the source of income, and not the receipt, should be situated outside India.
Facts

The Taxpayer, an Indian company, was engaged in the business of manufacture of heavy electrical equipment. The Taxpayer had developed prototypes of certain equipment. As per the standards prescribed by the industry regulatory body, prototype development could be complete only after performance of certain design tests on the equipment. These tests were to be performed by an accredited international testing laboratory. The Taxpayer could not have exported the equipment to the international market unless these tests were completed and the results were benchmarked to the standards prescribed. Accordingly, the Taxpayer engaged an international testing laboratory for testing the prototypes and paid testing charges.

The Taxpayer remitted the testing charges to the laboratory without withholding tax.

In the course of the assessment, the AO invoked provisions of section 40(a)(i) of the Act and disallowed the payment. In appeal, CIT(A) relied on decisions in Havells India Ltd v ACIT 47 SOT 61 (URO) (Del) and held that the payment was covered by the second exception in section 9(1)(vii)(b) of the Act and hence, income accrued or arose in India. Consequently, tax was not required to be withheld from the payment. The tax department filed further appeal to the ITAT.

Held

  • Section 9(1)(vii)(b) provides for two exceptions. First exception is where the payment is made is respect of services utilized for business or profession carried on outside India. Second exception requires utilization of services for earning any income from source outside India.
  • For falling within the first exception, it is not sufficient to prove that the services are not utilised for business activities of production in India, but it is furthernecessary for to show that the technical services are utilised in a business carried on outside India. Nothing was brought on record to support this.
  • Without prejudice, the Taxpayer was concluding the export contracts in India. The products were manufactured in India and exported from India in fulfillment of the export contracts. Therefore, the Source of income was created when the export contracts were concluded.
  • Though the importer of the products was situated outside India, the importer was merely the source of money received.
  • The second exception in section 9(1)(vii)(b) requires the source of income, and not the receipt, to be outside India.
  • Since this condition was not satisfied, the payment was taxable in India.

[2016] 67 taxmann.com 138 (Delhi – Trib.) Krishak Bharati Cooperative Ltd vs. ACIT A.Ys.: 2010-11 & 2011-12, Date of Order: 9th March, 2016

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Article 25(4) of India-Oman DTAA –ICo is eligible to claim foreign tax credit (FTC) in respect of dividend income received from Omani Company, as dividend exemption was granted in Oman for attracting investments.

Facts
The Taxpayer an Indian co-operative society established a branch office (BO) in Oman. BO created a PE for the Taxpayer in Oman under the DTAA . Taxpayer also held shares in another company in Oman, from which the Taxpayer had received dividend income. Such dividend income was effectively connected with the BO. Such dividend income was exempt from tax in Oman. Vide its letter, Ministry of Finance of Oman clarified that dividend exemption was granted with the object of promoting economic development within Oman by attracting investments.

Taxpayer claimed tax credit for the Omani tax on dividend income which would have been payable in Oman but not paid by reason of exemption granted under the Omani tax Laws.

AO however contended that the dividend exemption exists across the board with no exceptions in Oman, thus it cannot be construed as an incentive granted for economic development and therefore denied such credit.

Held
Article 25(4) of India-Oman DTAA provides that tax payable for the purpose of computing the tax credit shall be deemed to include the tax which would have been payable but not paid by reason of for certain tax incentives granted under the laws of the source state for promoting economic development.

Ministry of Finance of Oman had clarified that the exemption on dividend income was introduced to promote economic development. Omani Tax Law can be clarified only by government of Oman and interpretation given by it must be adopted in India.

Therefore, by virtue of Article 25(4) of the DTAA Taxpayer is entitled to foreign tax credit in respect of tax that would have been payable in Oman but for the exemption.

TS-62-ITAT-2016 (CHNY) Foster Wheeler France SA vs. DDIT A.Ys.: 2008-09 & 2009-10, Date of Order: 5th February, 2016

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Section 9(1)(vii) of the Act; Article 12(4) of India-USA DTAA – since monitoring and review services provided to a specialist company by an American company ‘make available’ technical knowledge, etc. the payments made were FTS under India-USA DTAA.

Facts
The Taxpayer was a French company engaged in providing technical and engineering services. The Taxpayer had entered into an agreement with an Indian company for providing technical and engineering services in India. For providing these services, Taxpayer deputed his employees to India. Taxpayer also entered into another agreement with its affiliate, a USA Company (“USCo”) as per which USCo was required to monitor and review the work done by the employees of the taxpayer, deputed to India. As part of its services US Co was required to share best practices in engineering services in the form of written procedure, forms, and specifications to be adopted in execution of the work in India.

Though the TPO did not consider it necessary to make any adjustment, invoking the provisions of section 40(a)(i) of the Act, the AO disallowed the payments to USCo since the Taxpayer had not withheld tax from these payments. AO contended that the payment made to USCo amounts to FTS and is subject to withholding of taxes in India. Taxpayer argued that the services rendered by US Co did not make available any technical knowledge and hence does not qualify as FTS under the DTAA and no withholding is required on such payments.
The issues before the Tribunal were:

(i) Whether, as per the provisions of section 9(i)(vii) of the Act, the services provided by USCo were in the nature of FTS?

(ii) Whether, as per the provisions of Article 12(4)(b) of India-USA DTAA , the payments received by USCo could be characterised as FTS?

Held
As regards the Act
The payments made by the Taxpayer for provision of services in the nature of managerial, technical and consultancy services and utilised by the Taxpayer in its business in India, is liable to tax in India in terms of Explanation 2 to Section 9(1)(vii) as FTS.

As regards India-USA DTAA
To qualify as Fee for included services (FIS) under the DTAA , services should satisfy the “make available” condition.

Taxpayer received best practices in different engineering specifications as well as engineering details from US Co to be adopted in execution of the different phases of the project in India.

U S Co provided the best practices by way of written procedures and specifications and details. When the procedures and specifications are provided to the Taxpayer, which is also a specialized company in engineering and execution of construction, the specifications and details provided can very well be used in the business of engineering and construction.

Moreover, these specifications and procedures made available to the Taxpayer by USCo can very well be used by the Taxpayer for execution of other projects. Also, the Taxpayer was not a layman but was a specialist in engineering and construction.

The information, expertise, execution plan, project budget, technical standards and quality management standards provided by USCo is absorbed by the Taxpayer who is capable of deploying such technology in future without depending on USCo.

Hence, it could very well use these for its future business without any assistance from USCo. Hence, USCo had ‘made available’ its technical knowledge, expertise, knowhow, etc. to the Taxpayer.

ITA No. 1625/Mum/2014 Morgan Stanley Mauritius Company v. DCIT (IT) A.Y.: 2007-08, Date of Order – 29th January, 2016

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Article 13 of India-Mauritius DTAA – Additional consideration received for delay in making open offer, being an integral part of share transfer is a part and parcel of sale consideration, is covered by Capital Gains Article of the DTAA . Such payment does not constitute interest income in absence of a debtor- creditor relationship.

Facts
The Taxpayer, a company incorporated in Mauritius held the shares of an Indian Company (ICo). The Taxpayer transferred ICo’s shares to a Mauritius Company (FCo) under a scheme of open offer.

Together with the consideration for sale of shares, the Taxpayer also received additional consideration for delay in processing of open offer by FCo. As per the letter of open offer, it was clear that the initial offer price of the shares for transfer of each share was increased due to the delay in making the open offer. The Tax authority contended that such consideration was received for delay in making payment. Hence, it represented interest and was not part of sale consideration for the open offer. Accordingly, such additional payment would qualify as interest under the India-Mauritius DTAA and liable to source taxation in India.

However, the Taxpayer argued that as FCo had not provided any loan to Taxpayer, additional consideration cannot be said to be received in respect of any monies borrowed or for use of money. In absence of a debtorcreditor relationship between the Taxpayer and FCo, such additional consideration cannot be treated as interest.

Held
It is a fact that the regulatory authority i.e., SEBI, had approved the transaction. Further, since the transaction could not be completed in time due to certain reasons, FCo revised the offer price. The Taxpayer had no control over the decisions of FCo. Business decisions are governed by their own rules and laws and if considering the time factor, FCo agreed to increase the share price, it has to be taken as part of sale.

The Taxpayer owned shares of ICo and in response to the open offer by FCo, the Taxpayer agreed to sell the shares of ICo. It was a pure and simple case of selling of shares by the Taxpayer. The Taxpayer did not enter into any negotiations with FCo and transferred shares as per a scheme approved by SEBI.

Further, there was no debtor-creditor relationship between the Taxpayer and FCo. The Taxpayer had not advanced any sum to FCo and has not received any interest for the delayed repayment of principal amount. Reliance in this regard was placed on the Tribunal decision in the case of Genesis Indian Investment Company (ITA /2878/Mum/2006 dated 14th August 2013) wherein it was held that where the interest is received for delay in processing of buy back of shares in open offer after announcement of the intention of acquiring shares, such additional amount shall form part of consideration towards shares tendered in open offer.

Thus, the additional consideration received is part and parcel of total consideration and cannot be segregated under the head ‘original sales consideration’ and ‘penal interest’. Such additional consideration is not taxable in India by virtue of Article 13 of India-Mauritius DTAA .

TS-15-AAR-2016 Dow AgroSciences Agricultural Products Date of Order : 11th January, 2016

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Article 13(4) of India-Mauritius Double Taxation Avoidance Agreement (DTAA ) -Transfer of shares of an Indian company (ICo) by the applicant to its Singapore group entity (SCo) upon re-organisation, not a tax avoidant transaction

Facts
The Applicant is part of a large MNE group (Group) and a company resident and incorporated in Mauritius. The Applicant held majority (nearly 99.99%) of the shares of Indian Co (ICo) which was acquired by it in various tranches over a period of 10 years from 1995 to 2005.

The Group had presence all over the world and was divided into various regions based on their geographical locations. The Applicant belonged to the European region, while ICo belonged to the India, Middle East and Africa (IMEA) region. In the past, the IMEA region was dismantled and entities were realigned with other regions as per the geographical convenience. As a result of this realignment, ICo became a part of the focused Asia-Pacific region.

In order to achieve the objective of operational excellence, better control and administrative convenience, it was proposed to realign the holding of ICo and shift it to an entity in the Asia- Pacific region. Accordingly, it was proposed that Applicant would transfer the shares of ICo to its group entity in Singapore i.e., SCo.

Issues before the AAR were as follows:
Whether the entire arrangement of transfer of ICo’s shares in favor of SCo was a scheme to avoid taxes in India?

Whether the Applicant had a Permanent Establishment (PE) in India?

Whether income arising from such a transfer was taxable in India?

Held
On the issue of whether the arrangement was a tax avoidance transaction For the following reasons, it was held that the transaction of transfer ICo’s shares to SCo by the Applicant was not a tax avoidance transaction –

The Applicant had acquired shares of ICo in various tranches over a 10 year period. Such share acquisition which was carried out around 20 years ago for a substantial cost cannot amount to a scheme to avoid payment of taxes in India. ? T he Applicant had been operating for more than 10 years in Mauritius and hence, it cannot be said to be a shell company. Investment in ICo’s shares was carried out with prior approval of the Department of Industrial Policy and Promotion and Reserve Bank of India. In these circumstances, it cannot be said that shares were acquired with a view to sell them in future.

The need for realignment of the Group arose upon dismantling of the IMEA group in 2010. As a result, and in order to ensure better control, ICO’s holding was shifted to Asia-Pacific region. SCo was an upcoming entity in the Asia-Pacific region and, hence, it was proposed to realign the holding of shares of ICo from the Applicant to SCo. Additionally, all the shares of ICo were acquired five years prior to the present proposed re-organisation of the group. Hence, the proposed transaction is for sound business consideration.

On the issue of PE
It was a stated fact that the Applicant did not have an office or employees or agents in India. Neither did it have any activities in India. A tax residency certificate from Mauritius was also furnished by the Applicant. Further nothing was brought on record to show that Applicant had a PE in India. Therefore, it was held that the Applicant does not have a PE in India. On the taxability of transfer of shares of ICo

Considering the accounting treatment, intention, as also quantum of the transaction, the equity shares held by the Applicant in ICo should be considered as capital asset and not stock-in-trade.

The shares of ICo were held for a very long period of time (10-20 years). The objective of acquiring ICo’s shares as stated by the Applicant was not to trade in them but to hold them as investments. In fact, there was no trading in ICo’s shares by the Applicant, except for the proposed transfer. Hence, the shares of ICo would constitute capital asset in the hands of Applicant. Consequently gains from transfer of shares of ICo would result in capital gains in the hands of the Applicant. Such capital gains are taxable in India under the provisions of the Act

Gains on transfer of ICo’s shares would be covered by Article 13(4) of the DTAA which exempts gains from tax in India.

Section 92B of the Act – Issuance of corporate guarantees to compensate for lack of subsidiary’s core strength to raise bank finance being in the nature of quasi capital or shareholder activity and not provision of service, does not constitute ‘international transaction’.

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Facts

The Taxpayer, an Indian company, was engaged in the business of ink manufacturing. Taxpayer had a subsidiary company in USA (FCo) which manufactured ink for US markets by using material supplied by the Taxpayer. Taxpayer had issued corporate guarantees on behalf of FCo without charging any consideration for the same.

Taxpayer contended that neither these guarantees cost anything to it nor did it recover any charges for the same from FCo. Further, the guarantees were in the nature of quasi capital and not in the nature of any services. Accordingly, no income was required to be imputed.

However, the TPO computed the arm’s length price (ALP) of the corporate guarantee and proceeded to make Transfer Pricing adjustment in the hands of the Taxpayer.

Held

It is elementary that the determination of arm’s length price can only be done in respect of an ‘international transaction’. As per section 92B of the Act, an International transaction means a transaction between two or more associated enterprises (AE) either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.

Explanation to section 92B provides that the expression “international transaction”, inter-alia, includes capital financing, including any type of long-term or short-term borrowing, lending or guarantee and provision of services. The Explanation is to be read in conjunction with the main provision. A transaction of capital financing and provision of services can be covered only in the residual part of the definition of international transaction, i.e., “any transaction having a bearing on the profits, income, losses or assets of such enterprises”. In other words, the impact on “profit, income, losses or assets” is a sine qua non and it should be on real basis and not on a contingent or hypothetical basis, for a transaction of provision of service and capital financing to fall under the ambit of ‘international transaction’.

Reliance in this regard was placed on Tribunal decision in the case of Bharti Airtel Limited [(2014)(63 SOT 113)]. It is not correct to compare corporate guarantee and bank guarantee. A bank guarantee is a surety that the bank or the financial institution issuing the guarantee provides by committing that banks, will pay off the debts and liabilities incurred by an individual or a business entity in case they are unable to do so. Even when such guarantees are backed by one hundred percent deposits, the bank charges guarantee fee. However, corporate guarantee is issued without any security or underlying assets. There is no recourse available with the guarantor if there is any default. Such guarantees are issued based upon the business needs and group synergies and not based on the risk assessment or underlying asset which generally the banks ask for.

Corporate guarantees can also be a mode of ownership contribution, particularly where a guarantee given compensates for the inadequacies in the financial position of the borrower. There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution. For these reasons, bank guarantees are not comparable with corporate guarantees.

In the facts of the present case, guarantee has been provided to compensate for lack of core strength of the subsidiary for raising the finances from bank. Nothing was brought on record to contradict the same. Therefore the transaction of issuance of corporate guarantee is in the nature of shareholder activity and not provision of service. A transaction which is in the nature of shareholder activity does not amount to “provision of services”. Hence, it is outside the ambit of international transaction. Even if issuance of corporate guarantee is to be treated as ‘provision for service’, such service would need to be re-characterised in tune with commercial reality, as no independent enterprise would issue a guarantee without an underlying security. Reliance for this was placed on the decision of EKL Appliances [(2012) 345 ITR 241 (Del)]

Further, where the issuance of a corporate guarantee does not have a bearing on the profits, income, losses or assets, it does not constitute an international transaction. In the present case, the taxpayer had extended corporate guarantee to FCo. The guarantee did not cost anything to the Taxpayer and the Taxpayer could not have realised money by giving such guarantee to someone else during the course of its normal business. Thus, such arrangement did not impact the profits, income, losses or assets of Taxpayer. Hence, it falls outside the ambit of international transaction u/s. 92B of the Act.

Article 12 of India-Netherlands Double Tax avoidance Agreement (DTAA) – Payment of composite consideration for various interdependent services rendered as part of the basic refinery service package should be apportioned between chargeable technical services and non-chargeable commercial services.

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Facts

Taxpayer, a company incorporated and tax resident of Netherlands, rendered certain services to an Indian Company (ICo), who owned and operated refineries in India. These services contained two parts – basic refinery service package and certain optional services.

As part of the basic services, Taxpayer was required to provide ICo with certain deliverables such as manuals, guidelines, standards, etc., which were developed by the Taxpayer based on its expertise and experience in running refineries. Additionally after referring to the manuals if the employees of ICo required any personal assistance or advice, Taxpayer would render the requisite consultancy services and assistance to ICo.

As part of optional services, Taxpayer, when specifically requested by ICo, was required to provide consultancy services and assistance relating to various commercial or technical aspects of the day to day operations of the refinery.

Taxpayer contended that some part of basic refinery services represented supply of goods in the form of deliverables such as training manuals, guidelines, etc., and consideration for such outright transfer, was not in the nature of fee for technical services (FTS) under the India-Netherlands DTAA .

Further, Taxpayer contended that certain part of basic refinery package which were commercial in nature did not qualify as technical service. In any case, such service did not ‘make available’ any technical knowledge, experience, skill, know-how. By virtue of the MFN clause in the India-Netherlands DTAA , the make available condition contained in the India-USA DTAA can be read into India-Netherlands DTAA and since services rendered by Taxpayer did not satisfy the make available condition, it did not fall within the definition of fees for technical services of India-Netherlands DTAA . Taxpayer offered the balance portion as taxable in terms of India-Netherlands DTAA .

However, Tax Authority contended that the payments made by ICo towards basic refinery services was composite payment for holistic technical services and which cannot be split into technical and commercial services. Also, it is not correct to suggest that some part of services satisfy “make available” condition and other part of service does not satisfy “make available” condition. Accordingly, entire consideration should be treated as FTS even under the DTAA . Tax Authority also contended that India-Netherlands DTAA should be interpreted independently without making reference to the MOU between India-USA.

Held

Most Favoured Nation (MFN) clause of India-Netherland DTAA provides that if under any DTAA , India limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope in the India- Netherlands DTAA , the same rate or scope shall apply under the India- Netherlands DTAA also. India-USA DTAA provides a restricted definition of FIS, wherein services can be regarded to fall within the scope of FTS only if the same makes available technical knowledge, skill etc.

By virtue of MFN clause in India- Netherlands DTAA , FTS Article of India-Netherlands DTAA would stand amended in light of the beneficial provisions in India-USA DTAA.

Further, in terms of specific Notification, the MOU between India and USA with reference to Article 12 applies mutatis mutandis to India-Netherlands DTAA .

Certain services rendered as part of the basic refinery services, did not involve any transfer of technology and hence cannot be treated as FTS. Further services in relation to physical delivery of manuals, etc. would also not constitute FTS. The fact that these services or physical deliverables are interlinked with certain technical services does not alter the basic character of these services and physical deliverables.

The mere fact that the overall package is considered as a whole and the services are interlinked cannot be the basis for not apportioning the consideration. The consideration under the composite contract needs to be apportioned between chargeable technical services and non chargeable commercial services.

TS-113-ITAT-2016 (Mum) Rheinbraun Engineering Und Wasser GmbH v DDIT A.Y. 2002-03, Date of Order: 4th March, 2016

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Article 7, 12 of India-Germany DTAA – provision of consulting services for exploration, mining and extraction do not constitute PE in India under India-Germany DTAA.

Facts
The Taxpayer was a German company engaged in providing consulting services in relation to exploration, mining and extraction. During the relevant year, the Taxpayer had received remuneration from three Indian companies (ICo) for rendering Consultancy services in relation to exploration, mining and extraction projects undertaken by ICo. The Taxpayer offered the income from such services to tax as Fee for technical services (FTS) under Article 12 of India-Germany DTAA .

In the course of assessment, the AO observed that the project undertaken by ICo lasted for more than six months. Accordingly, the AO held that the services rendered by the Taxpayer being supervisory in nature, constituted a PE in India in terms of Article 5(2)(i) of India-Germany DTAA . Since income was effectively connected with the PE, the same had to be taxed as business income under Article 7. However, such business income had to be taxed on gross basis u/s. 44D (as subsisted for the relevant year).

However, the Taxpayer argued that the tenure of supervisory services should be considered independently and since the duration such services was less than 180 days, it did not create a PE in India. Even if a PE is triggered in terms of the specific provisions in the protocol to India-Germany DTAA such services would constitute FTS and not business income.

Held
The Taxpayer had rendered consultancy services and hence shall be governed by the provisions of in terms of Article 12 of the DTAA .

For the purpose of reckoning continuous stay for determination of PE, actual stay of employees should be considered and not the entire contract period1 .

While the Taxpayer had deputed one employee to India, that employee had not stayed in India for more than 180 days. Further, in two of the contracts, no supervisory charges were rendered.

Since Article 12(4), which deals with FTS, mentions ‘services of managerial’, technical or consultancy nature, payments received by the Taxpayer should be assessed in terms of Article 12 and not Article 7 of the DTAA .

Protocol to India-Germany DTAA provides that with respect to Article 7, income derived from a resident of a Contracting State from planning, project construction or research activities as well as income from technical services exercised in other State in connection with a PE situated in that other State, will not be attributed to PE. Hence, even if it is assumed that the Taxpayer had a PE in India, having regard to the Protocol, the income will not be treated as business income.

Accordingly, the payments received by the Taxpayer were to be taxed @10% and further, the provisions of section 115A of the Act were also not applicable.

TS-568-ITAT-2015(Del) Cincom System Inc vs. DDIT A.Ys: 2002-07. Order dated: 30.09.2015

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Section 9(1)(vi) of the Act, Article 12(3) of India- USA DTAA – Payment for access to networking facilities involving use of embedded software, is ‘royalty’ under the Act as well as India-US DTAA .

Facts
The Taxpayer, the US Company, was engaged in the business of providing software solutions including creating personalised document, management of solutions, managing complex manufacturing operations and building and maintaining personalised e-business software, development and solutions.

The Taxpayer entered into an agreement with its Indian Group Company (ICo), as per which the Taxpayer was required to provide ICo with an access to its internet and other email and networking facilities. For these services, ICo paid certain amounts to the Taxpayer. While for the first year under consideration, ICo claimed the payment was ‘fees for included services’, for subsequent years, it claimed they were not taxable in India. The Tax Authority, however, concluded that the payments were in the nature of royalty. However, the Taxpayer contended that such income is not taxable in India.

Held:
In the facts of the case, the Taxpayer provided ICo with access to its embedded software or Gateway for the purpose of enabling the customer from India to call the residents of USA or vice-versa. Therefore, the payment made by ICo to the Taxpayer would amount to payment for use of software and hence, would qualify as royalty u/s. 9(1)(vi) of the Act as well as under Article 12(3) of the India-US DTAA .

The Tribunal relied on the ratio of AAR decision in P. No. 30 of 1999, In re (1999) (238 ITR 296)(AAR), wherein it was held that payments made for access to US based global central processing unit would amount to royalty as such access allowed use of embedded secret software developed by Taxpayer.

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TS-342-ITAT-2015(Mum)-TP Aegis Ltd vs. ACIT A.Y. 2009-10. Date of Order: 27.07.2015

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Subscription of shares cannot be recharacterised as a transaction of
loan without any material exceptional circumstance highlighting that the
real transaction has been concealed.

Facts
The
Taxpayer, an Indian Company, was engaged in the business of providing IT
enabled business processing outsourcing services to its associated
enterprises (AE) for the third party contracts and in-house receivable
management services.

The Taxpayer subscribed to the redeemable
preference shares of its subsidiary outside India. Subsequently,
Taxpayer redeemed some of the preference shares at par.

The Tax
Authority observed that preference shares issued by subsidiary were
non-cumulative and redeemable at par without any dividend. Thus. the Tax
Authority recharacterized the transaction of subscription of preference
shares into a transaction of advancing of unsecured loan and imputed
interest thereon.

The Taxpayer contended that subscription of
preference shares represents an investment transaction for acquiring
participation interest in subsidiaries and hence, it should not be
characterised as a transaction of loan.

Held
The Tax
Authority is incorrect in recharacterising the transaction of
subscription of shares into a transaction of loan. One cannot disregard
any apparent transaction and substitute it, without any material of
exceptional circumstance highlighting that the real transaction has been
concealed or the transaction was a sham.

In absence of
evidences and circumstances to doubt facts of the case, The Tax
Authority cannot question the commercial expediency of any transaction
entered into by a Taxpayer. Thus, the transaction of investment in
shares cannot be given different colour so as to expand the scope of
transfer pricing adjustments by recharacterising it as interest-free
loan.

Since recharacterisation of share subscription into loan
cannot be done even in case of an independent enterprise, such
recharacterisation is not warranted even in the facts of the case.
Therefore, no interest should be imputed on such transaction. Reliance
in this regard was placed on Mumbai HC decision in the case of Dexiskier
Dhboal SA (ITA No. 776 of 2011).

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TS-588-ITAT-2015(RJT) GAC Shipping India Pvt. Ltd. as agents for Alabra Shipping Pte Ltd. vs. ITO (IT) A.Y: 2011-12. Date of Order: 09.10.2015

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Article 24 of the India-Singapore DTAA – Since income was taxable in Singapore on accrual basis, LOB Article could not be applied even though income was not repatriated to Singapore

Facts
The Taxpayer, a Singapore Co (FCo) owned a ship. FCo filed a tax return in India, through its representative assessee in India, in respect of freight earned from ship. Freight income of FCo was remitted to FCo’s bank account in UK.

In terms of Article 24 of India-Singapore DTAA provides that where an income is exempt from tax in a contracting state or where it is subject to beneficial rate of tax in a contracting state in terms of the DTAA and such income is subject to tax in that contracting state with reference to amount remitted to or received in the said contracting state, then the DTAA benefits would be available only with respect to amount remitted or received.

The Tax Authority contended that remittance to Singapore is a sine qua non for availing the benefits of the India- Singapore DTAA . Since the freight was remitted to UK, Tax Authority denied the benefits of DTAA.

FCo contended, freight income was taxable in Singapore on accrual basis by virtue of residence therein. This was confirmed by Singapore Tax Authority. Hence, the DTAA benefits should not be denied on freight income.

Held
Plain reading of Article 24 of the India-Singapore DTAA , indicates that provisions of Article 24 would apply only to the income which satisfies of the following two conditions
• Income should be exempt or taxed at reduced rate in source jurisdiction (i.e., India),
• Income should be taxed in residence jurisdiction (i.e., Singapore) only on receipt basis.

Scope of LOB Article should be appreciated in the background of a tax jurisdiction following territorial method of taxation. In such a case, the DTAA benefit must be confined to the amount which is actually subjected to tax in the home jurisdiction. The decision in Abacus International Pvt Ltd vs. DDIT (2013) 34 taxmann.com 21 (Mumbai – Trib.) can be distinguished since the onus is on the Taxpayer to show that income is taxable in Singapore on accrual basis, which the Taxpayer had not established in that case.

In this case, there is no dispute that the Taxpayer has offered its global income to tax in Singapore, on accrual basis, which is also confirmed by Singapore Tax Authority. Hence, Tax Authority cannot rely on the decision in case of Abacus. Accordingly, the LOB Article does not apply to the facts of the present case and DTAA benefit should be available in respect of freight income.

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TS-580-AAR-2015 Guangzhou Usha International Ltd. Date of Order: 28.09.2015

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Article 12 of India-China DTAA – Procurement services involving market research and providing technical advice on product or process upgradation, rendered from outside India, falls within the ambit of Fee for Technical Services (FTS) under Article 12 of India-China DTAA

Facts
The Taxpayer, a Chinese Company, entered into an agreement with its Indian Parent (ICo) for provision of services in relation to procurement of goods from vendors in China. Such procurement services were rendered by the Taxpayer from China. ICo considered the payment as FTS and while paying the fee, suo motu withheld tax @10% from the fee.

The Taxpayer argued that the payment received for procurement services does not accrue or arise in India nor can it be treated as deemed to accrue or arise in India. Further, since the fee for such services is not received in India, income is not taxable in India under the Act. Under Article 12(4) of India-China DTAA , such payment for procurement services does not qualify as managerial, technical or consultancy services. Additionally, since the services are performed in China and not in India, such services would not fall under the definition of FTS under the DTAA .

The issue before the AAR was whether fee paid by ICo to The Taxpayer is taxable in India in terms of Article 12 of India-China DTAA .

Held
FTS is defined in Article 12(4) of India-China DTAA to mean any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State.

Procurement services rendered by The Taxpayer included not only identification of the products but also generating new ideas for ICo post conducting market research. It also involved evaluating the credit, organisation, finance, production facility, etc. and giving advice in the form of a report to ICo. The Taxpayer also provided information on new developments in China with regard to technology/ product/process upgrade. These are specialised services requiring special skill, acumen and knowledge.

Further, in GVK Industries vs. ITO [(2015) TIOL-10(SCIT) l-10(SC-IT)], SC had noted that “Consultant” is a person who gives professional advice or services in a specialised field. Services rendered by Taxpayer clearly indicate that the Taxpayer has the skill, acumen and knowledge in the specialised field of evaluation of credit, organisation, finance and production facility, in conducting market research and in giving expert advice with regard to technology/product/process upgradation. Such specialised service clearly falls within the ambit of consultancy services. Accordingly, the payment was FTS in terms of the Act as also the DTAA .

The China-Pakistan DTAA uses the phrase “provision of rendering of services”, whereas the India-China DTAA uses the phrase ‘provision of service’. The present case relates to the India-China DTAA . Any other DTAA cannot influence the scope of India-China DTAA. It is not correct to suggest that income is not sourced from India.

It is not correct to suggest that source rule of the treaty is limited to services rendered in India. The treaty refers to, the phrase ‘provision of service’ which has not been defined anywhere in the DTAA. The phrase “provision of services” has a very broad meaning when compared to the phrase “provision of rendering of services” and it covers services even when they are not rendered in a contracting state (India in this case). As long as services are used in India, they would be included in the phrase “provision of service”. Reliance in this regard was placed on decision of AAR in the case of Inspectorate (Shanghai) Limited (AAR No 1005 of 2010) and Mumbai ITAT decision in the case of Ashapura Minichem (ITA No.2508/Mum/08).

Since the services rendered by the Taxpayer were consultancy services, fee paid by ICo was FTS under Article 12 of the India-China DTAA and was chargeable to tax in India @10%.

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[2015] 60 taxmann.com 432 (Mumbai – Trib.) IMG Media Ltd vs. DDIT A.Y..: 2010-11, Order dated: 26th August, 2015

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Article 13(3) and 13(4) of India-UK DTAA, s. 9(1)(vi) and 9(1)(vii)
–payment made to a UK Company for capturing and delivering live audio
and visual coverage of cricket matches was: neither FTS since
broadcasters or BCCI had not acquired technical expertise which enabled
them to produce the live coverage feeds on their own; nor Royalty since
there was no transfer of all or any right.

Facts:
The
Taxpayer was a Company incorporated in the UK and a tax resident of UK
having a tax residency certificate for the relevant year. The Taxpayer
was engaged in the business of multimedia coverage of sports events
including cricket. BCCI engaged the Taxpayer for capturing and
delivering live audio and visual coverage of cricket matches. The
Taxpayer had contended that since the cumulative period of stay in India
of personnel of the Taxpayer exceeded the threshold limit of 90 days in
the ’12 month’ period, from March 22, 2008 to March 21, 2009, service
PE of the Taxpayer was constituted in India under Article 5(2)(k) of
India-UK DTAA. Accordingly, the payment made by BCCI to the Taxpayer
constituted business income, taxable on net basis

The Tax
Authority contended that the amount received by the Taxpayer was in the
nature of FTS and Royalty and assessed the entire amount on gross basis.

Held:
On FTS
Having regard to the following facts, the Tribunal held that payment received by the Taxpayer was not FTS.

  • The
    Taxpayer had delivered the final product (i.e., program content)
    produced by it by using its technical expertise which was altogether
    different from provision of technology itself.
  • In the former
    case, the recipient would get only the product which he can use
    according to his convenience, whereas in the latter case, the recipient
    would get the technology/knowhow which would enable him to produce other
    program content on his own and thus, know-how would be made available
    and would constitute FTS.
  • The Tax Authority had not established
    that the broadcasters (acting on behalf of the BCCI) or the BCCI itself
    had acquired the technical expertise from the Taxpayer which would
    enable them to produce the live coverage feeds on their own after the
    end of contract.
  • Since the essential condition of “make
    available” clause was not satisfied, the amount received by the Taxpayer
    for delivering live audio and visual coverage of cricket matches was
    not FTS in terms of Article 13(4) (c) of India-UK DTAA.

On Royalty
Having regard to the following facts, the Tribunal held that payment received by the Taxpayer was not Royalty.

In
order to constitute ‘royalty’, the payment should have been made “for
the use of, or the right to use any copyright etc”. In the instant case,
the payment made to the Taxpayer was for producing the program content
consisting of live coverage of cricket matches.

The job of the
Taxpayer ended upon the production of the program content. BCCI was the
owner of the program content produced by the Taxpayer. The broadcasting
was carried out by some other entity licensed by BCCI.

Thus,
there was no question of transfer of all or any right. Therefore, the
payment received by the Taxpayer could not be considered ‘royalty’
either under India-UK DTAA or u/s. 9(1)(vi) of the Act.

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TS-501-ITAT-2015- (Mum) Lionbridge Technologies Private Limited vs ITO A.Y.: 2007-08, Order dated: 5th August 2015

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Section 195 – on facts, amount reimbursed towards allocation, without any mark-up, of cost of off-the-shelf software purchased from vendors, being not chargeable to tax in India, payer was not obliged to deduct tax u/s. 195

Facts:
A company incorporated in USA (“USCo”) had entered into global agreement with certain software vendors for purchase of standard off-the-shelf software to be used by its group entities across the globe including India. USCo made payments to the vendors and allocated the cost of the software, without any mark-up, amongst various group entities based on the number of desktop in each group entity. The Taxpayer, an Indian company, also reimbursed the allocated cost to USCo.

According to the Taxpayer, since the software was purchased off-the-shelf, and was acquired for use, the payment did not result in ‘royalty’ or ‘income’ in the hands of the recipient. Further the payment was merely reimbursement of cost without any mark up.

However, according to the Tax Authority, the payment was in the nature of ‘royalty’.

Held:
USCo had made the allocation at cost without charging any mark-up. There was no dispute about the reimbursement amount paid to USCo being not chargeable to tax in India.

It was not a case where USCo had developed software which was given for use to the Taxpayer. The software was purchased from vendors and cost was allocated. It was a case of pure reimbursement of cost without any mark-up.

Thus, there was no dispute that the amount paid to USCo, being purely a reimbursement, was not chargeable to tax in India. Thus, relying on the decision of the Supreme Court in G E India Centre Technology Ltd vs. CIT [339 ITR 587], it was held that there was no obligation on the Taxpayer to withhold tax u/s. 195

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TS-511-ITAT-2015 (Mum) Reuters Limited vs. DCIT A.Y.: 1997-98, Order dated: 28th August 2015

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Article 5(5) and 5(2)(k) of India-UK DTAA – income from distribution of
news and financial information products was not taxable in India in the
absence of dependent agent PE, and service PE under India-UK DTAA ?
Facts: The Taxpayer was a UK tax resident engaged in the business of
providing worldwide news and financial information products (“Reuter
Products”). The Taxpayer entered into three agreements with its Indian
Subsidiary (“ICo”) – License Agreement, Product Distribution Agreement
and Distributor Agreement (“DA”) – for independent distribution of
Reuter Products to Indian subscribers. In terms of DA, the Taxpayer
provided Reuter Products to ICo, which independently distributed it to
Indian subscribers.

While there was no dispute on the first two
agreements, in respect of DA, the Tax Authoroty held that the Taxpayer
had a PE in India in the form of ICo, as it was dedicated for the
business of the Taxpayer; and secondly, the Taxpayer had also deputed
its own employee as Bureau Chief during the relevant period, for
rendering services to ICo on its behalf. Accordingly, the entire
distribution fee was taxable on gross basis @20% u/s. 44D r.w. section
115A.

Held:

On Agency PE

Having regard to the following facts, the Tribunal held that ICo did not constitute agency PE of the Taxpayer.

  • Perusal
    of DA showed that ICo did not have any authority to negotiate or
    conclude contracts which would bind the Taxpayer nor to act as an agent
    of the Taxpayer qua distribution to Indian subscribers.
  • Perusal
    of contract between ICo and Indian subscribers showed that it was an
    independent principal-toprincipal arrangement and ICo had initiated
    litigation for recovery of debts from Indian subscribers.
  • Any news and material supplied by ICo to the Taxpayer was on principal-to-principal basis.
  • Income of ICo from subscription fee was far in excess of service fee.
  • Under DA, ICo had not earned any commission.
  • ICo
    was not subject to instructions or comprehensive control of the
    Taxpayer. It was bearing the business risk and was not acting only on
    behalf of the Taxpayer. Further, it was not “wholly or almost wholly”
    dependent on the Taxpayer in any manner since it was independently
    earning subscription fees, which were far in excess of service fees
    earned from the Taxpayer.

On Service PE
The
employee deputed by the Taxpayer was only acting as chief reporter and
text correspondent in India in the field of collection and dissemination
of news. There is no furnishing of services by the employee to ICo and
the employee had no role in providing Reuter Products to ICo, which
earned distribution fee. Thus Taxpayer did not trigger Service PE in
India.

Accordingly, distribution fee earned by the Taxpayer in India was not taxable in India.

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TS-390-ITAT-2015 (Del) Mitsui & Co. India Pvt. Ltd vs. DCIT A.Y.: 2007-08. Order dated: 20th August 2015

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Section 92C – Support services cannot be recharacterized as trading transaction and cost of sales to be excluded while computing Arm’s Length Price (“ALP”); No adjustment to be made where the difference between ALP and price charged is within ±5%.

Facts:
The Taxpayer, an Indian Company, was a wholly owned subsidiary of a Japanese Company (“JCo”). JCo was a general trading company) in Japan playing an important role in linking buyers and sellers of wide range of products. The Taxpayer was engaged in the business of providing support services to various group entities of JCo. The Taxpayer was a facilitator for the transactions entered into by JCo and its group entities.

During the relevant financial year, the Taxpayer had entered into various transactions, which included provision of services, purchase of goods (including capital goods), reimbursement of expenses (payments and receipts) and receipt of interest. The Taxpayer used Transactional Net Margin Method (“TNMM”) as the most appropriate method and used ‘Berry Ratio’ as the Profit Level Indicator (“PLI”) for benchmarking the transaction. It calculated the Berry Ratio by taking into account operating profit and operating expenditure. The Taxpayer contended that its average berry ratio was 1.34 as against 1.09 computed on the basis of the 20 comparables set out in the transfer pricing study and hence the transactions entered into were at arm’s length price.

The tax authority was of the view that data was to be used only for the relevant financial year and cost of sale should be included in the denominator of the PLI used and not the operating expenses.

As regards the support services, the tax authority held that it should be treated equivalent to trading and the income received therefrom should be considered as trading income and comparison should be made accordingly. However, the Taxpayer was of the view that Function, Asset and Risk (“FAR”) analysis of the service business is different from trading business. Hence, the Taxpayer approached DRP. DRP upheld the order of the tax authority. Aggrieved, the Taxpayer appealed before the ITAT.

Held:

Relying on judgment of Delhi High Court in Li & Fung India Pvt. Ltd. vs. CIT [361 ITR 85 (Delhi)], and in Mitsubishi Corporation India (P) Ltd vs. DCIT [ITA No. 5042/Del/11 dated 21.10.2014], it was held that it is impermissible to make notional addition in the cost base and then take into account the costs which are not borne by the Taxpayer. Thus, it was not correct on the part of the tax authority to include the cost of sales incurred by the Associate Enterprises (“AEs”) in respect of which the Taxpayer has rendered services and then to work out the profit for determination of the arm’s length prices1. Thus, Tax Authority was not right in including the cost of sales of AEs while determining ALP.

As per the provisions of section 92C, first the most appropriate method should be determined. Based on that, ALP should be determined by using various comparables. Further, when the difference between the ALP and the cost paid or charged is within the permissible range, no adjustment is required to be made.

Therefore as the margin was within the permissible range of 5%, the adjustment made to ALP was not sustainable and was to be deleted.

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[2015] 62 taxmann.com 318 (Hyderabad – Trib.) St. Jude Medical India (P) Ltd vs. DCIT A.Y.: 2009-10, Date of Order: 18-9-2015

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Section 92C, the Act – TPO cannot reject method consistently adopted by the taxpayer in past years for determination of ALP (which was not disputed by the tax authority) and apply another method without providing detailed reasons.

Facts
The taxpayer was engaged in the business of trading of medical devices. It had entered into international transactions with its AE for purchase of certain medical devices from its AE. The taxpayer was selling these devices in India to non-related parties. In its TP study, for determination of the ALP the taxpayer had adopted RPM and had adopted 4 companies as comparable companies.

According to the TPO RPM could be applied only where: the products were closely comparable; and where enterprise purchases a property or services from AE and then resells the same to unrelated enterprises. Further, one should ascertain the functions performed by the tested party before it resold the property or the services and also the cost incurred for performing these functions. Therefore, the TPO considered TNMM as more appropriate method in case of the taxpayer and proceeded to determine ALP accordingly.

Held
The taxpayer had been purchasing medical devices from its AEs even in the earlier years. This is evident from order of Tribunal in earlier year where tax authority has not disputed the method adopted by the taxpayer during its TP study.

Hence, there is no reason to dispute the same method during the relevant year. the order of the TPO merely reproduces the parameters to be taken into consideration for adopting the RPM for comparability analysis, but does not give detailed reasoning as to why the said method is not applicable.

Further, the TPO has not brought on record any evidence to support why the products sold by the comparable companies are not similar to the products sold by the taxpayer.

If the TPO desires to reject the method consistently being followed by the taxpayer and desires to adopt a different method, he is required to give his reasoning which he failed to provide in the present case.

Accordingly, the issue was remanded to the TPO for determination of the most appropriate method for determination of the ALP with directions that if he finds the RPM as the most appropriate method, then he shall also take into consideration the comparable companies selected by the taxpayer in addition to the companies selected by him for determination of the ALP.

[ITA No 7646 to 7653, 7654 to 7669/ Mum/ 2012] (Unreported) Mckinsey & Co. Inc vs. ADIT A.Y: 2009-10, Dated: 17.04.2015

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If the facts are similar, settlement reached under Mutual agreement procedure (MAP) for one assessment year also applies to other assessment years .

Facts:
The Taxpayer, a US company, was engaged in the business of providing strategic consultancy services. I Co was part of Taxpayer’s group and was set up to provide similar services to customers in India.

For rendering services in India, I Co availed following assistance from the Taxpayer.

• Advice on matters such as prevailing practices in various geographical areas, industries, etc. as may be relevant to the specific client assignment;
• Provision of information/data as may be specifically requested by I Co in areas such as population, GDP, inflation, production capacities, regulations, policy framework, etc., and
• Other advisory support as may be required by I Co for the purposes of executing the client assignments.

On similar facts, but for a different assessment year, Government of India and Government of USA had agreed under a Mutual Agreement procedure (MAP) that the services rendered by the Taxpayer would not fall in the category of fee for included services (FIS), and hence such fees will not be taxable in India.

For the year under reference, The Tax Authority held that services were chargeable in India as FIS and the MAP proceeding relating to a different assessment year is not applicable for the relevant assessment year.

Held:
India –USA DTAA provides the Taxpayers to approach the competent authorities of its resident State, where an action of the other State results in taxation not in accordance with the DTAA. The competent authorities are required to endeavour to resolve the issue through mutual agreement procedure. Any such agreement reached is implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States. Accordingly, even the Tribunal was bound by the settlement arrived under MAP proceedings. Hence services rendered by the Taxpayer are not taxable in India.

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TS-325-ITAT-2015 (Mum) Idea Cellular Limited vs. ADIT A.Ys: 2010-11, Dated: 10.06.2015

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Section 9(1)(v), 9(1)(vii) – “Arranger Fee” paid to foreign bank to facilitate loan from, and negotiating terms and conditions with, NR lender, is not in the nature of interest or fees for technical services (FTS).

Facts:
Taxpayer, an Indian Company (I Co), entered into term loan agreement with an a non-resident (“NR”) lender. This term loan was arranged by a foreign bank (F Co) as an arranger. As per the arranger agreement, F Co was required to act as an intermediary between I Co and the lender, liaise with the NR lender and negotiate the terms and conditions of the facility with the lender on behalf of I Co. For such services, I Co paid “arranger fee” to F Co. I Co contended that the payment made to F Co was not in the nature of interest under the Act and hence, taxes were not required to be withheld on “arranger fee”. However, the Tax Authority contended that the “arranger fee” was in the nature of interest or alternatively qualified as FTS and hence liable to tax u/s.9(1)(v)/(vii) of the Act.

Held:
The issues in appeal were decided as under:

Whether arranger fee can be regarded as interest

FCo, as an arranger, facilitated the credit facility between the lender and I Co on terms which were agreeable to both the parties. Thus, F Co had acted as a sort of broker or middleman for arranging the loan for I Co.

Interest is defined under the Act and the definition has two limbs. The main limb of the definition clearly provides that interest should be in respect of the money borrowed or debt incurred. F Co was not the lender because no debt was incurred by I Co in favour of F Co vis-a-vis the money borrowed. FCo was merely a facilitator who brought parties together for facilitating the loan/credit facility.

The second limb of the definition of interest is an inclusive limb and includes service fee or other charge. However, such fee or charge should also be in respect of money borrowed i.e. given by the lender to the borrower. The service fee or other charge does not bring within its ambit any third party or intermediary who has not given any money.

The fundamental proposition permeating between various kinds of payments covered by “interest” under the Act is that, those payments are paid or payable to the lender either for giving loan or for giving the credit facility. Nowhere the definition suggests that interest includes fees paid to a third party who did not give any loan or extend any credit facility.

The element of borrower-lender relationship is a key factor to bring the payment within the ambit of definition of interest under the Act. The Arranger fee may be inextricably linked with the loan or utilisation or loan facility but it is not a part of interest payable in respect of money borrowed or debt incurred.

Whether arranger fee can be regarded as FTS

“Arranger fee” is also not in the nature of ‘consultancy services’ as F Co did not provide any advisory or counselling services. The payment is also not for managerial services.

The term ‘managerial’ essentially implies control, administration and guidance for business and day-to-day functioning. It includes the act of managing by direction or regulation or superintendence. F Co was not involved in: providing control, guidance or administration of credit facility; or in day-to-day functioning of I Co; or in overseeing the utilisation or administration of the credit facility. Thus, on facts, F Co cannot be said to have rendered managerial services. Consequently, “arranger fee” cannot be termed as FTS within the meaning of section 9(1)(vii) of the Act. The Tribunal also relied on decisions in Credit Lyonnais ([2013] 35 taxmann.com 583) and Abu Dhabi Commercial Bank Ltd ([2013] 37 taxmann.com 15)..

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[ITA No.5406/DEL/2012] (Unreported) Pride Offshore International LLC (Presently known as Ensco Offshore International Taxation) vs. ADIT A.Y: 2008-09, Dated: 22.05.2015

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Section 44BB – Income from providing drilling rig on hire to a person who is engaged in drilling activities in India for ONGC is eligible for the benefit of presumptive taxation u/s. 44BB of the Act.

Facts:
Taxpayer, a Company incorporated in USA (USCo), was a non-resident (“NR”) engaged in the business of providing drilling rig, and rendering services and facilities in connection with prospecting, production and extraction of mineral oil. USCo provided an offshore drilling rig on hire to one of its group entity- also a NR (Group Co) which the Group Co used for drilling activity in India carried out on behalf of oil producing Indian company (I Co). USCo had a PE in India. The income from the contract entered into by USCo in India was effectively connected with that PE in India.USCo filed its return of income by declaring income from provision of drilling rig on presumptive basis u/s 44BB of the Act. However, the Tax Authority argued that the rig was not provided by USCo pursuant to a direct contract with I Co but was provided to a sub-contractor. Accordingly, the Taxpayer was not entitled to avail benefit of taxability u/s. 44BB of the Act.

Held:
The benefit of presumptive taxation u/s 44BB requires that the Taxpayer should be a NR and it should be

• engaged in the business of providing services or facilities in connection with the prospecting, production and extraction of mineral oil (first limb)or
• engaged in the business of supplying ‘plant and Machinery’ on hire used or to be used in the prospecting, or extraction of mineral oils (second limb)

The second limb requires that the NR Taxpayer must supply plant and machinery and such plant and machinery should be used for prospecting for extraction or production of mineral oils. The emphasis is on “use for” and not “use by”.

Whether the rig is deployed in the prospecting activities pursuant to a direct contract with I Co or pursuant to a contract with sub-contractor is nowhere the condition or any mandatory provision of section 44BB. The only essence is that equipment is used in the prospecting for or extraction of mineral oils.

Where the provision does not create any discrimination between the person who actually does the activity of prospecting for or extraction or production, and the person who supplies the plant and machinery, the narrow interpretation of the provisions is not permitted.

Further in the case of PGS Geophysical (269 CTR 433), Delhi HC laid down two conditions for the applicability of section 44BB as follows:
• Taxpayer should have a (Permanent Establishment) PE in India during the relevant period and
• The contract entered into by the Taxpayer in India should be effectively connected with that PE in India.

As both these conditions were fulfilled, benefit of section 44BB was available to USCo.

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IT A No. 599/LKW/2012 (Unreported) IT O vs. Shri Sharad Mishra A.Y. 2009-10 Order dated: 12-06-2015

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Presence in India for less than three hours on the day of arrival cannot be considered as one complete day in order to compute number of days of stay in India for determining residential status.

Facts:
Taxpayer arrived in India on 25.10.2008 from Hong-Kong by a flight at 9.10 P.M. Relying on Walkie vs. IRC [1952] 1 AER 92, Taxpayer contended that as his presence in India on the day of arrival to India was less than 3 hours, it should not be included in calculating the number of days of stay in India and since his total stay in India is 181 days in the relevant financial year, he qualifies as a nonresident for the relevant financial year. However, the Tax Authority contended that the day of arrival of the Taxpayer in India should be included for calculating the number of days of stay in India. Thus, the Taxpayer would qualify as a resident of India.

Held:
Arrival of the Taxpayer in India at 9.10 P.M and consequent presence in India for less than three hours cannot be treated as his stay for one complete day and should be excluded while computing the number of days of his stay in India.

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TS-336-ITAT-2015(Mum) Flag Telecom Group Limited v DDIT A.Ys: 2001-09 Order dated: 15-06-2015

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Sections 9(1)(i) and 9(1)(vii) – Standby maintenance charges does not amount to Fee for technical services (FTS) under the Act. Restoration services for restoring the telecommunication traffic is in the nature of business income and income would be attributable to the extent of length of cable situated in territorial waters of India.

Facts 1
The Taxpayer, a company incorporated in Bermuda, was engaged in the business of building high capacity submarine fiber optic telecommunication link cable system. The Taxpayer had built under-sea cable to link between United Kingdom and Japan for providing telecommunication link to various countries. The Taxpayer entered into a Capacity Sales Agreement (CSA) with an Indian Company (I Co). As per CSA, the Taxpayer was required to provide standby maintenance services to I CO.

The Tax Authority contended that the payment for standby maintenance is for rendering technical services and hence it is in the nature of Fee for technical services (FTS) under the Act.

Held 1:
U/s. 9(1)(vii) of the Act, FTS is defined to mean any payment in consideration of managerial, technical, or consultancy services.

Payment made for standby maintenance is a fixed annual charge payable for arranging standby maintenance arrangement which is required in a situation when undersea cable is being repaired. It is for keeping facility or infrastructure ready for rendering repair services, when required. Such charges are not for rendering of any services. Thus, receipt on account of standby maintenance charges is not FTS under the Act.

Facts 2:
The Taxpayer had sold certain cable capacity to various parties including I Co. The balance capacity remained with the taxpayer as its stock. The Taxpayer also entered into another agreement with certain telecom cable operators who carried telecommunication traffic for I CO. As per this agreement, the taxpayer was required to restore traffic to telecom cable operators’ customer (I Co) in the event of disruption in the traffic on their cable system by providing an alternative telecommunication link route through its own spare capacity in the cable. For these services, I Co directly made payments to the Taxpayer.

The Tax Authority contended that payment made by ICo to the Taxpayer for restoration services was in the nature of FTS under the Act. On appeal, First Appellate Authority held that income was not in the nature of FTS but it was in the nature of business income and treated 10% of the global receipts of the Taxpayer as income taxable in India. The Taxpayer contended that restoration services were not in the nature of managerial or consultancy services. They merely involved provision of standard facility of carrying telecommunication traffic and accordingly income from such services was in the nature of business income. Further, as no operations were carried on in India except for the fact that small part of the entire cable system, about 12 nautical miles from the shore, was laid down by the Taxpayer in territorial waters of India, the amount of income attributable only to such portion should be taxed in India.

Held 2:
Restoration services does not fall within the ambit of ‘managerial’ or ‘consultancy services’, in the absence of direction, regulation, administration or supervisory or advisory activities by the Taxpayer.

The Taxpayer has a cable system network in which it has spare capacity, which is being provided to I Co on behalf of telecom cable operators in case of disruption in their cable network. This amounts to provision of a standard facility for carrying telecommunication traffic to other telecom service providers. It does not involve transfer of technology or rendering of technical services.

Simple use of sophisticated technical equipment for providing the capacity in the cable to I CO ipso facto does not lead to any inference that any technical service is being provided by the Taxpayer to I Co. The Taxpayer earned business income.

Since part operations are carried on in India, only that income which is reasonably attributable to the proportion of the length of the cable in the territorial waters in India to the segments on which restoration have been provided should be taxed in India.

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TS-430-AAR-2015 Measurement Technology Limited Order dated: 29-06-2015

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Article 13 of India-UK DT AA – Amount received for rendering ‘managerial services’ and ‘procurement service’ not FTS – Routine managerial services cannot be classified as royalty if no intellectual property is created – Service PE not established as period of stay does not exceed the threshold

Facts:
Taxpayer, a company incorporated in the United Kingdom (UK), was engaged in the business of development and supply of intrinsic safety explosion protection devices, field bus and Industrial networks, lightning and surge protection and gas analysis equipment. Taxpayer had a subsidiary in India (I Co) which was engaged in the business of manufacturing industrial control equipment used for process control in hazardous environments.

Taxpayer entered into two service agreements with ICo. Under Agreement 1, Taxpayer was required to provide following services to I Co

  • Strategy and direction of business development of ICo;
  • Attendance in person or by phone at regular operational meetings to discuss progress of activities, both financial and operational;
  • Management of personnel including conducting staff interviews, setting individual targets and carrying out performance appraisals; and
  • Any other services related to the above.

The services under Agreement 1 were to be provided through one of the employees of Taxpayer who was designated as Group Operational Director (GD). GD provided services through telephone calls, e-mails and occasional visits to India. It was not disputed that the total presence of GD in India was less than 30 days. As part of its services GD also monitored financial and operational progress of I Co along with overseeing human resource matters of I Co and also undertook quality and design reviews for I Co.

Under the Agreement 2, the Taxpayer provided procurement services to I Co. The Taxpayer constituted a procurement team in UK to look into the global sourcing requirement of raw materials for all its group entities including I Co to consolidate the group’s purchase requirements resulting in cost savings for the group.

The Taxpayer contended that the services provided did not satisfy the make available condition and hence they did not constitute FTS under India-UK DTAA .

The Tax Authority contended that services rendered by the Taxpayer were in the nature of technical and consultancy services. Further, as the Taxpayer was required to provide report containing the technical details and plans to I Co, it would satisfy the make available condition. Additionally, services of the Taxpayer also partake the character of royalties for the use of plan, or for information concerning industrial, commercial or scientific experience under India-UK DTAA .

Held:
India-UK DTAA was amended to exclude “managerial services” from the definition of FTS and to include the make available condition in the DTAA for taxation of FTS. Thus post-amendment, managerial services are not covered in the definition of FTS and even the technical or consultancy services cannot be treated as FTS if they do not meet the criteria of ‘make available’.

Services provided under both the agreements are managerial in nature. The activities are routine managerial and procurement activities and cannot be classified as technical or consultancy services. Moreover, by providing such services, taxpayer was not making available any technical knowledge of enduring benefit in nature which would enable employees of ICO to apply them on their own in future.

Further, services provided under both the agreements were general and routine in nature and did not create any intellectual property. Thus payments made to the Taxpayer did not qualify as ‘royalty’ under the India- UK DTAA .

Since visits to India were not for more than 30 days in a year, ‘Service PE’ would not be constituted in India.

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TS-386-ITAT-2015 ABB Inc vs. DDIT(IT) A.Y: 2009-10 Order dated: 30-06-2015

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Article 12 of India-US DT AA – Business development, market services and other support service do not satisfy make available condition and hence, no Fees for Included Services (FIS) under the DT AA. Where a Permanent Establishment (PE) is created in respect of trading transactions only, income from rendition of services cannot be attributed to the PE

Facts
The Taxpayer, a US Company, was engaged in providing business development, marketing services and other support services to its Indian associated enterprise (AE). The Indian AE was also involved in purchase and sale of Taxpayers’ products in India.

Taxpayer claimed that services rendered to its AE do not satisfy “make available” condition and hence it could not be characterised as FIS under the India-USA DTAA . However, Tax Authority contended that technical services rendered by the Taxpayer to its AE satisfy “make available” condition and thus they are taxable in India.

On further appeal before the Dispute Resolution Panel (DRP), it was held that services constituted FIS under India-USA DTAA . Additionally, without prejudice to FIS taxation, DRP held that since the Indian AE to whom services were rendered was also involved in the purchase and sale of Taxpayer’s products in India, such AE’s would constitute a dependent agent Permanent establishment (DAPE) of the Taxpayer in India and the amounts received for services rendered to the AE (which constituted DAPE for the Taxpayer) would be attributable to the DAPE and is to be treated as profits and gains from business.

Held
Relying on the decision of Karnataka HC in the case of De Beers India (P) Ltd. (2012) 346 ITR 467 (Kar), it was held that consideration for services cannot be brought to tax under the India US DTAA as these services do not enable the recipient of the services to utilise the knowledge or know-how on his own in future without the aid of the service provider. Further the services do not involve transfer of technology. Thus the payment received by the Taxpayer from its AE does not constitute FIS under India-USA DTAA .

Under India-USA DTAA business profits are taxable in Source State but only so much of them as are attributable to (a) that PE (b) sales in the Source State of goods or merchandise of the same or similar kind as those sold through that PE or (c) other business activities carried on in the Source State of the same or similar kind as those effected through that PE. Thus, where a PE is constituted in respect of the trading transactions only, no part of the income earned from rendering of services by the Taxpayer can be attributed to the PE.

Further in the absence of any finding that the Indian AE was paid remuneration less than arm’s length, nothing can be attributed to DAPE of the Taxpayer in India.

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TS-429-AAR-2015 SkillSoft Ireland Limited Order dated: 20.07.2015

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Article 12 of India-Ireland Double Taxation Avoidance Agreement (DT AA) –Payment for E-learning products providing access to E-learning platform and the educational content embedded in the form of computer software is royalty under India-Ireland DT AA

Facts
Taxpayer, a Company resident of Ireland, was engaged in providing on-demand e-learning content, online information resources, online courses, flexible learning technologies and performance support solutions (E-Learning products).

The Taxpayer had entered into a reseller agreement with an Indian Company (I Co) for the sale of E-learning products in India. I Co purchased E-learning products on principal-to-principal basis and sold the product to end users/customers in India in its own name. It also entered into license agreement with end users.

As per the license agreement, end-users were granted non-exclusive, non-transferable license to access E-learning products which enabled the users to access the E-learning platform and the educational content embedded therein.

Taxpayer contended that the payment received by it from ICo was for a copyrighted article and not for the copyright and therefore, it was not royalty under the DTAA . Tax Authority contended that consideration for license to use confidential information embedded in licensed software amounts to royalty under India-Ireland DTAA .

Held
E-learning products of Taxpayer consists of two components. First is the course content and second is the software through which course content is delivered to end-customer who gains access to specially designed software for understanding the content. Such especially designed software was not available in public domain but was licensed to I Co who in turn sub-licensed to endcustomers. Merely because the license had been granted on non-transferable and non-exclusive basis, it did not take away the software out of the definition of copyright. Further, the present case was not similar to an e-library or on-line banking facility provided by a bank.

To constitute ‘royalty’ under DTAA , it is not necessary to transfer any exclusive right. What is necessary is that the consideration should be for the use of or right to use any copyright. Reliance in this regard was placed on Karnataka High Court (HC) decision in the case of Synopsis International Old Ltd (212 Taxman 454).

Reliance was placed on AAR decision in the case of Citrix Systems Asia Pacific (343 ITR 1) to conclude that distinction between copyright vs. copyrighted article is illusory as copyrighted article is nothing but an article which incorporates the copyright of the owner/licensee and the permission for using such an article is also for the copyright embedded therein. Software and computer databases would qualify as “literary work” under the definition of royalty provided under the DTAA.

Thus the right to use confidential information embedded in the form of computer software programme would constitute royalty under the DTAA .

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TS-327-ITAT-2015 (Hyd) Locuz Enterprise Solutions vs. DIT A.Ys: 2008-09 and 2009-10 Dated: 03.06.2015

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Section 9(1)(vi), 195 – Payment for purchase of computer software for reselling to ultimate users, does not amount to royalty under the Act.

Facts:
Taxpayer, an Indian Co, was engaged in the business of trading of software. Taxpayer made certain payments to a non-resident (“NR”) for the purchase of computer software without withholding taxes on such payments u/s. 195 of the Act. Tax Authority contended that the payments were towards obtaining user license in the computer software and hence they represented use of copyright and accordingly being in the nature of royalty, were chargeable to tax in India.

The Taxpayer contended that it is a distributor of NR’s software products and the payments were made merely for the purchase of software for distributing them to the ultimate customers (i.e., the actual users of the software) in the prescribed territory. Accordingly, payments did not represent payment for use the software nor for acquiring license for use of the software and hence, were not royalty.

Held:
Taxpayer is purely a trader in software and not the user of the software. NR has appointed Taxpayer as nonexclusive distributor/re-seller of the software products of the for the territory.

The end user of the software products is not the Taxpayer but the customers in India, to whom the Taxpayer has sold the products.

Based on the agreement between the Taxpayer and NR, it is evident that the Taxpayer is a registered reseller, who books orders with NR on behalf of customers, collects payments and delivers software to the end users or customers. Further most of the time, the delivery is actually made via e-mail or via internet download. Since no ownership rights in the patents, copyrights relating to the software have been transferred by the NR to the Taxpayer, payment does not amount to royalty under the Act and hence taxes are not required to be withheld.

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Outotec GmbH vs. DDIT [2015] 58 taxmann.com 232 (Kolkata – Trib.) A.Ys.: 2010-11, 2011-12, Dated: June 16, 2015

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Article 5, 7, 12 India-Germany DTAA – when the title in an equipment is transferred outside India, the sale of equipment cannot be taxed in India merely because tests for the installation of equipment are carried out in India.

Facts:
The taxpayer was a German Company, engaged in the business of providing specialised solutions to customers in metals and minerals processing industry. During the relevant tax year, the taxpayer supplied equipment to several Indian companies. The equipment supplied by the taxpayer was to be a part of the overall plant to be installed by customers. Additionally, in relation to certain projects undertaken in India, the taxpayer constituted a supervisory permanent establishment (PE), unrelated to the supply contract. The equipment was designed outside India and was sourced by the taxpayer from vendors outside India. The taxpayer was not involved in the manufacturing of equipment.

The equipment was sold, and title ownership to the customers was transferred, outside India. In case of non- fulfilment of the performance guarantee, customer was entitled only to liquidated damages.

The taxpayer also sold basic engineering designs and drawings for installation of the equipment/plant.

The tax authority contended that since portion of purchase price was payable only upon successful completion of acceptance tests in India, part of the sale price was taxable in India. It further regarded payment towards basic engineering designs as royalty for use rejecting the contention of the taxpayer that it was a sale of copyrighted article.

Held:

  • Since all the activities relating to designing, fabrication and manufacturing as also sale of equipment took place outside India and since title/ownership in the equipment stood also transferred outside India; such offshore transaction was not taxable in India.
  • The acceptance tests are part of normal commercial arrangements and partake the character of trade warranties. The balance payment of contract price, to be received by the taxpayer upon completion of such tests is a deferred payment in the nature of warranty and cannot be equated with transfer of goods in India.
  • Breach of warranty could result in payment of damages and does not by itself mean that the property/title in the goods did not pass to buyer outside India. The clause of acceptance tests and liquidated damages were also in the nature of warranty provision.
  • The basic engineering packages sold by the taxpayer are largely designed on the basis of standard technologies available with it and modified based on customer’s requirement.
  • Since Indian customers were not using designs and drawings for any commercial exploitation, it involved use of copyrighted article rather than use of a copyright to be regarded as royalty.
  • In absence of any connection between the supervisory PE of the taxpayer in India and the offshore supply activity, the consideration for offshore supply cannot be regarded as attributable to the PE in India.
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Kreuz Subsea Pte. Ltd. vs. DDIT [2015] 58 taxmann.com 371 (Mumbai – Trib.) A.Ys.: 2010-11, Dated: June 12, 2015

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Article 5(3), (6), India-Singapore DTAA –purely installation and construction activity undertaken by Singapore company in respect of certain projects in India, would be covered under Article 5(3) and not 5(6).

Facts:
The taxpayer was tax resident of Singapore. It had undertaken installation and construction activity in respect of certain projects. The DRP held that the presence of taxpayer in India in excess of 90 days constituted PE in India under Article 5(6) of India-Singapore DTAA .

According to the taxpayer, it was purely into installation and construction activity, which would clearly fall within Article 5(3) of treaty. Consequently, its activities would not constitute PE due to its presence in India for less than 183 days under Article 5(3) of DTAA .

Held:

  • Article 5(3) is a specific provision dealing with ‘Service PE’, on account of construction, installation or assembly project. Under this Article, service PE would be constituted if project continues for a period of more than 183 days in any fiscal year.
  • Article 5(6) provides that, if an enterprise is “furnishing services” in the contracting State through its employees for a period of 90 days or more, then it is deemed to have Service PE.
  • The threshold period under Article 5(6) is 90 days. If such activities are carried out for a related enterprise, then threshold period is 30 days. Article 5(6) explicitly provides that it applies to “services” other than those covered by Articles 5(4) and 5(5). However, it is silent as regards its relationship with Article 5(3). Thus, Article 5(6) covers various services which are not covered by paras 4 and 5 of article 5 and technical services as defined in Article 12.
  • In contradistinction, Article 5(3) is a specific provision. Therefore, such specific activities cannot be read into Article 5(6). There cannot be overlapping of activities carried out within the ambit of Article 5(3) and furnishing of services as stated in Article 5(6).
  • Both the Articles should be read independent of each other, or else there would be no requirement of making separate provisions. If the activities related to construction or installation are specifically covered under Article 5(3), then one need not to go to Article 5(6). Hence, purely installation services should be covered under Article 5(3) only and not under Article 5(6).
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ITO vs. Nokia India (P.) Ltd. [2015] 59 taxmann.com 120 (Delhi – Trib.) A.Ys.: 2006-07, Dated: July 8, 2015

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Article 5, 7, 13 of India-Finland DTAA – payments made to a Finland company for services performed outside India were not taxable in India as the services did not ‘make available’ any technical knowledge, skill, etc.

Facts:
The taxpayer was an Indian company (“ICo”). ICo was a member-company of a Finland based company (“FinCo”). ICo was setting up a plant in India. To ensure that the plant complied with global manufacturing facility standards of FinCo, ICo engaged another Finland company to review plans prepared by Indian consultants in respect of HVAC, electrical and fire protection systems. The services were to be performed only outside India. However, employees of Finland company intermittently visited India only for attending meetings with the taxpayer. According to the taxpayer, the payments were not taxable under India- Finland DTAA . Hence, it did not deduct tax from the same.

Held:

  • The scope of services of Finland company was review of systems description, diagrams, cost estimates, building designs, preliminary system design and quality control, equipment list/selection criteria , layout proposals, conducting inspections etc; and meetings in India and Finland, in connection therewith.
  • These services were not for imparting any technical knowledge or experience that could be used by the taxpayer independently in its business and without recourse to Finland company. Thus, they did not ‘make available’ any technical knowledge, skill or experience nor did they consist of development and transfer of a technical plan or technical design to the taxpayer. Accordingly, the payments did not qualify as FTS under India-Finland DTAA .
  • Further, as per India-Finland DTAA , if the services do not qualify as FTS, the taxability should be examined as per Article 7 (read with Article 5) of the India-Finland DTAA .
  • In terms of Article 7(1), ‘Business Profits’ earned by a Finland company is taxable in India only if it carries on business in India through a PE in India. If a Finland company does not have a PE in India, no portion of the income from services provided to a customer in India are taxable in India.
  • In the instant case, Finland comapny did not have any office/place of business in India; the services were performed primarily from outside India; and its employees made intermittent visits to India only for the purpose of attending meetings with the taxpayer. Accordingly, it did not have a PE in India.
  • Therefore, payments received by Finland company were not taxable in India in terms of India-Finland DTAA .
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Lloyd’s Register Asia (India Branch Office) vs. ACIT [2015] 58 taxmann.com 58 (Mumbai – Trib.) A.Ys.: 2005-06, Dated: June 10, 2015

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S/s. 44C, the Act – the scope of head office expenses u/s 44C does not include “license fees” or the “management charges”

Facts:
The taxpayer was an Indian branch of a UK Company (“UKCo”). The holding company of UKCo was engaged in the business of survey and inspection of ships, industrial inspection activity and drawing appraisal. In 2003, holding company entered into a license agreement with all its subsidiaries and granted license to use its brand in consideration of payment of royalty and the license fees. Further, it entered into a separate “Management Services Agreement” for providing certain services.

According to the tax authority, license fees and management charges were in nature of head office expenses u/s. 44C of the Act. However, as per the taxpayer, these payments were merely routed through head office but were not really head office expenses as the said section is only applicable to general and administration expenditure as referred to in Explanation (iv) to section 44C-that too in the nature of executive and general administration expenditure enumerated in clause (a) to (d).

Held:
The payment of ‘license fee’ is purely for using of brand/ trademark and other business intangibles, which are in the nature of intellectual property.

These are neither in the nature of rent, rates, taxes, repairs, insurance, salary, wages, bonus, commission, etc., or travelling by any employee. Thus, the entire payment of license fees do not fall within the ambit of section 44C as illustrated in clauses (a) to (c) of the Explanation.

Clause (d) of the Explanation mentions “such other matters connected with executive and general administration as may be prescribed”. CBDT has not yet prescribed any such expenditure. “Management charges” are specialised services under various heads. None of these services are in the nature of head office expenditure as illustrated in sub clause (a) to (d).

As neither the “license fees” nor the “management charges” falls within the ambit and purview of section 44C, no adjustment to the total income for the purpose of disallowance was required.

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TS-296-ITAT-2015 (Del) Mitsubishi Corporation India vs. DCIT. A.Y: 2010-11, Dated: 26.05.2015

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Section 40(a)(i), Article 9 and 24 of India-Japan Double Taxation Avoidance Agreement (DTAA) – Disallowance for failure to withhold tax at source being discriminatory, and independent of Transfer Pricing (TP) adjustment under Article 9, Taxpayer is entitled to invoke Article 24.

Facts
The Taxpayer, an Indian company, made purchases from its AEs in Japan. Taxpayer did not withhold taxes on payments made towards purchase of goods from the AE. The Taxpayer contended that it was entitled to the benefit of Non-discrimination clause in terms of Article 24(3) of the India – Japan DTAA due to which, for the purpose of computing the taxable profit of an Indian enterprise, the provisions of Act shall apply, as if it is a transaction with an Indian enterprise. This is because there is no provision for withholding tax at source on payments for purchases made from an Indian resident; whereas purchases from a Non-resident (NR) is liable for tax withholding under the Act, which leads to non-permissible discrimination.

Tax Authority had made certain transfer pricing (TP) adjustment, though unrelated to the purchase of goods. The Tax Authority contended that since TP adjustment was made, Article 9 was applicable. Hence, Taxpayer cannot avail of the benefits of non-discrimination clause enshrined in Article 24(3) of the DTAA.

Held:
The contention of the Tax Authority that application of Article 24(3) is not possible in view of operation of Article 9 is not correct. The overriding effect of Article 9 over Article 24(3) is limited to the extent provided in Article 9. It does not render Article 24(3) redundant in totality.

A conjoint reading of these two Articles brings out that if there is some discrimination in computing the taxable income as a result of TP adjustments, then, such discrimination will continue as such. The rest of the discriminations will be removed by Article 24(3) to the extent as provided.

In the instant case, Taxpayer had sought the benefit of article 24 qua the disallowance for non-withholding of taxes and not in respect of an unrelated TP adjustment. Thus, Taxpayer is entitled to rely on Article 24 of the DTAA and will not be liable to suffer disallowance in respect of value of purchases for failure to withhold taxes under provisions of the Act.

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[2015] 63 taxmann.com 43 (Bangalore – Trib.) Food World Supermarkets Ltd vs. DDIT A.Y.: 2008-09, Date of Order: 28-10-2015

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Section 9(1)(vii), the Act – reimbursement made for salaries of secondees was FTS since they were performing services based on their technical knowledge; matter remanded to examine the issue whether secondment constitutes service PE under the Act and consequently, is subject to section 44DA of the Act

Facts
The taxpayer was an Indian company engaged in the business of ownership and operation of supermarket chain in India. Taxpayer was in need of personnel to assist with its operations in India. For this purpose, it entered into a Secondment agreement with a Hong Kong based company (“HKCo”), which was engaged in identical business as that of the Taxpayer. Accordingly, HKCo deputed its five employees (“secondees”) to the taxpayer. As per the agreement, HKCo was to pay the salary to the secondees and the taxpayer was to reimburse the same to HKCo. The taxpayer withheld tax from the salary of the secondees u/s. 192 and paid the same to the Government. The taxpayer did not withhold tax from the reimbursement amount paid to HKCo.

According to the AO, the reimbursement amount was FTS and hence, the taxpayer was required to withhold tax therefrom. Concluding that there was no master-servant relationship between the taxpayer and the secondees, CIT upheld the order of the AO.

Held
Payment in nature of FTS u/s. 9(1)(vii) of the Act

It was evident from the agreement and the qualifications of the secondees that they were high level managers/ executives which showed that they were deputed for their expertise and managerial skills in the field.

The agreement was entered into between the taxpayer and HKCo and the secondees were not parties to the agreement. Further, secondees were assigned by HKCo and there was no contract of employment between the taxpayer and the secondees. Their deputation was for a short period and their employment with HKCo continued during the deputation period. Neither the taxpayer nor the secondees had any enforceable right or obligation against each other, including claim for salary. Thus, the secondees were performing their duties for and on behalf of HKCo.

Since the secondees were rendering managerial services requiring high expertise to the taxpayer as part of their duty to HKCo, the payment for such services was in the nature of FTS as defined in explanation 2 to section 9(1) (vii) of the Act.

In Centrica India Pvt. Ltd. vs. CIT 364 ITR 336 (Delhi)2, the High Court, considering an identical issue in the context of definition of FTS in Article 13(4) of India-UK DTAA which includes the expression “payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel)”, held that as the secondees were required to draw from their technical knowledge, their services fell within the scope of the term technical or consultancy services.

In case of section 9(1)(vii) of the Act, it is irrelevant whether the payment has any element or not. Accordingly, the gross payment is chargeable to tax.

Service PE
There is no tax treaty between India and Hong Kong. Also, there is no concept of a service PE under the Act.

While analysing the definition of PE u/s. 92F(iii) of the Act, in Morgan Stanley and Co Inc.3, the Supreme Court observed that the intention of the Parliament in adopting an inclusive definition of PE covers the service PE, agency PE, software PE, construction PE, etc.

Relying on the said decision, the taxpayer has raised alternative plea that deputation of secondees would constitute service PE and hence, the amount should be chargeable to tax as per the provision of section 44DA of the Act. Since this plea has been raised by the taxpayer for the first time before the Tribunal and since there is no tax treaty between India and Hong Kong, the concept of service PE requires proper examination of all the relevant facts and provisions on the point whether deputation of secondees constitutes service PE in India or not. Accordingly, the issue was remanded to the AO for adjudication.

[2015] 63 taxmann.com 11 (Ahmedabad – Trib.) ADIT vs. Adani Enterprise Ltd A.Y.: 2010-11, Date of Order: 2-9-2015

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Sections 5, 9, the Act – since funds raised by issue of FCCBs were utilised for investment in foreign subsidiary carrying on business outside India, interest paid to bond holders was covered under exclusion in section 9(1) (v)(b) of the Act

Facts
The taxpayer had raised funds from certain nonresident investors by issuing FCCBs to them. The funds were invested in a company which was incorporated outside and which was carrying on business outside India. The taxpayer remitted interest to the bond holders without withholding tax on the ground that interest was neither received by non-resident bond holders in India nor had it accrued in India. Even if it was deemed to have accrued in India, the same was eligible for source rule exclusion as the borrowed funds were utilised for the purpose of earning income from source outside India.

According to the AO, the interest accrued or arose to non-resident bond holders in India. Consequently, the income was primarily subject to section 5(2). Accordingly, resorting to section 9 was not permissible. Therefore, the AO held that the income was chargeable to tax under section 5(2) and exclusion u/s. 9(l)(v)(b) was not relevant.

Held
Identical issue was considered in case of the taxpayer in earlier year. The Tribunal had observed that funds raised by issue of FCCBs were invested in foreign subsidiary which was involved in financing of businesses abroad.

The term “business” is wide enough to include investment in subsidiaries or joint ventures which are further involved in business or commerce. Therefore, the AO’s observation that the taxpayer was not earning out of business carried on outside India was not correct. Exclusion clause will not have any purpose unless the income is covered within the provision to which exclusion clause applies. Hence, the presence of exclusion in section 9(1)(v)(b) proves that the income is falling within the ambit of deeming provision. Thus, it cannot be accepted that the same income can also fall within the ambit of income which has accrued and arisen in India.

Since nothing contrary was brought on record in the relevant tax year, following the order of the Tribunal in case of the taxpayer, interest earned by non-resident bond holders was not chargeable to tax in India.

[2015] 62 taxmann.com 319 (Rajkot – Trib.) ITO vs. MUR Shipping DMC Co., UAE A.Y.: 2009-10, Date of Order: 23-10-2015

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Articles 4, 8, 24, India-UAE DTAA – if a UAE company was managed and controlled wholly in UAE DTAA benefits could not be denied by invoking LOB clause even though entire share capital was owned by Swiss companies.

Facts
The taxpayer was a company incorporated in, and tax resident of, UAE. It was engaged in operation of ships in international traffic. Its entire share capital was held by two companies incorporated in Switzerland. The taxpayer had obtained a ship under a long-term time charter arrangement from a company incorporated in Marshall Islands. While the manager director of the taxpayer was residing in UAE, its two other directors also had permanent residential visa of UAE. The Board meetings and important decision were being taken at Dubai. The taxpayer had obtained tax residency certificate from UAE tax authority. The taxpayer claimed that having regard to the provisions of Article 8 of India-UAE DTAA, its profit from shipping activity was not taxable in India.

The AO concluded that the effective control and management of the taxpayer was not situated in UAE. Hence, it was not resident in UAE. Therefore, he invoked LOB provision in Article 29 on the ground that: (i) the ship was owned by an entity from a country with which India did not have DTAA ; and (ii) the taxpayer was owned by Swiss shareholders who would not have been entitled to DTAA benefit if they had directly carried on business. The AO held that the agent/freight beneficiary was not entitled to claim benefit under DTAA.

In appeal, the CIT held that the taxpayer was entitled to India-UAE DTAA benefit.

Held
In ADIT vs. Mediterranean Shipping Co. SA [(2013) 56 SOT 278 (Mum.)], it is held that effectively, the income from operations of ships in international traffic is not taxable in India, irrespective of whether it is earned by a Swiss tax resident or a UAE tax resident because Article 22(1) of India-Switzerland DTAA , and Article 8 of India- UAE DTAA respectively exempt the income from taxation in India.

As regards residential status under article 4(1), what is required is that it should be a “company which is incorporated in the UAE and which is managed and controlled wholly in UAE”. This was not disputed. The directors were resident in UAE. It is irrelevant that they were not UAE nationals.

The AO was not justified in invoking LOB clause in Article 29 and denying benefits under India-UAE DTAA because there was reasonable evidence to suggest that the affairs of the company were conducted from UAE, and further no material was brought on the record to establish that the company was not wholly controlled and managed in UAE.

[2015] 53 taxmann.com 102 (Bangalore – Trib.) A. Mohiuddin vs. ADIT A.Ys.:2012-13, Dated: 14.11.2014

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Sections – 195, 201 of the Act – since at the time of payment, the taxpayer was aware about exemption of capital gain in the hands of the non-resident payee, he was not required to withhold tax from payment.

Facts:
During the relevant tax year the taxpayer purchased a house property from a non-resident family member. The non-resident represented to the taxpayer that she had purchased residential house property about four months ago (i.e., within one year as required u/s. 54 of the Act) prior to the date of sale deed and that the consideration paid for the purchase was fully eligible for exemption u/s. 54 of the Act. Therefore, the taxpayer did not withhold tax from the payment.

Accordingly to the taxpayer, it was required to withhold tax u/s. 195(1) of the Act only if income chargeable to tax was embedded in the payment made by him and since no such income was embedded in the payment, he did not deduct tax.

The AO observed that the taxpayer had not followed the mechanism provided in section 195(2) and (3) for withholding lower or nil rate of tax. Accordingly, the AO held taxpayer as ‘assessee in default’ u/s. 201 and raised demand on him.

Held:

The ultimate levy of taxes is dependent upon exemption, deduction, etc. The seller was family member who had represented to the taxpayer at the time of payment of consideration that no tax was payable by her because of exemption u/s. 54.

These facts should be seen in the context of CBDT’s Instruction No. 02/2014, dated 26.02.2014 and particularly paragraph 3 thereof, which indicates that the AO is required to determine the appropriate proportion of sum chargeable to tax u/s. 195 (1) to ascertain the tax in respect of which the deductor should be deemed to be an ‘assessee in default’ u/s. 201.

Since, at the time of payment, the taxpayer was aware of the payment being not subject to tax because of exemption, he was not required to withhold tax.

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[2015] 53 taxmann.com 138 (Mumbai – Trib.) FedEx Express Transportation & Supply Chain Services India (P.) Ltd. vs. DCIT A.Y. 2009-10, Dated: 10.12.2014

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S/s.- 92C of the Act – payments made to third
party on behalf of AE for services provided by third party, which were
fully reimbursed by AE, could not be included in total costs for
determining profit margin for benchmarking ALP.

Facts:
The
taxpayer was an Indian company (“ICo”) and a 100% subsidiary of a
Foreign company (“FCo”). Indian aviation regulatory authority had
granted approval to FCo to operate all cargo air services to and from
India. The taxpayer was engaged in providing customs clearance services
to FCo, which was its AE, relating to high value packages and low value
packages. However, since the taxpayer had license for custom clearing of
only low value packages, it outsourced custom clearance of high value
packages to a third party and coordinated with the third party to
provide services to FCo.

The TPO observed that the payments made
to the third party were not reflected in the profit and loss account
but were routed through the balance sheet. Further, though the taxpayer
had selected Profit Level Indicator based on cost, it had excluded the
payments made to the third party while applying markup on cost. On
examination of the agreement between the taxpayer and the third party,
the TPO deduced that the taxpayer had direct control and monitoring of
day to day activities of third party and according to the TPO, the
taxpayer had not given proper reason for excluding the payments made to
the third party from the cost base for applying markup. Accordingly, the
TPO made adjustment in respect of payments made to third party for
custom clearance of high value packages that were coordinated with third
party.

Held:

The taxpayer did not have license to
provide high value packages custom clearance services and it was merely
coordinating with third party for such services. It was not directly
rendering the services to the AE.

The role of the taxpayer was confined to making payment to the third party.

Mere
monitoring of activities of third party cannot per se lead to the
inference that the taxpayer is directly providing the services to AE.

The
net profit margin realized from the AE was to be computed only with
reference to the costs directly incurred by the taxpayer and it could
not be imputed on the cost incurred by third party which was reimbursed
by the AE because there was no direct cost of such services to the
taxpayer.

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[TS-775-ITAT-2014] [MUM-Trib] Morgan Stanley International Incorporated vs. DIT A.Y.: 2005-06, Dated: 18.12.2014

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Article 12 of India-US DTAA – employees deputed by American company to Indian company for providing support services constituted service PE; salary reimbursed to American company was business profit (and not FIS) from which salary costs were deductible.

Facts:
The taxpayer was a resident of USA and 100% subsidiary of another American company. The primary activity of taxpayer was to provide support services to group companies located in various countries including India. During the relevant tax year, the taxpayer entered into agreement with an Indian group company for providing support services. The taxpayer deputed five employees to its Indian subsidiaries. The employees were to work under the supervision and control of the board of Directors of that Indian companies, were to be accountable to Indian companies and their day-to-day responsibility was to be managed by Indian companies.

The taxpayer paid salaries of the deputed employees and also withheld tax from their salaries u/s. 192 of the Act. The Indian subsidiaries reimbursed the salaries to the taxpayer since the taxpayer had paid them on behalf of the Indian subsidiaries and only for administrative convenience of the Indian subsidiaries. As per the taxpayer, the amount reimbursed was purely salary costs, it did not have any income element and hence, it was not taxable in India. However, on conservative basis, the Indian companies withheld tax @15% under Article 12 of India-USA DTAA from the reimbursed amount.

The tax authority concluded that the taxpayer received consideration for the services provided by the deputed employees and hence, the consideration was taxable as FTS u/s. 9(1)(vii) of the Act and as FIS under Article 12 of India- USA DTAA . CIT(A) upheld the order of the tax authority.

Before the Tribunal, the taxpayer contended as follows.

Amount received from Indian companies was reimbursement of salary costs without any income element and hence, question of taxability whether as FTS or FIS did not arise.

The deputed employees were under direct supervision and control of the Indian subsidiaries and hence, the ‘make available’ condition under India-USA DTAA was not fulfilled.

Even if deputed employees were considered to constitute service PE of the taxpayer, FIS provision would not be applicable. Consequently, relying on decision of the Supreme Court in DIT(IT) vs. Morgan Stanley & Co [2007] 292 ITR 416 (SC), the salary costs would have been deductible from the income, resulting in ‘nil’ income.

The tax authority contended that the business of the taxpayer was to provide support services through deputed employees who were highly qualified personnel having technical skills and experience. Hence, payment qualified as FIS under India-USA DTAA.

Held:
Relying on decision of theDelhi High Court in Centrica India Offshore (P) Ltd vs. CIT, [2014] 364 ITR 336 (Del) and decision of the Supreme Court in DIT(IT) vs. Morgan Stanley & Co [2007] 292 ITR 416 (SC), the Tribunal proceeded on the premise that the deputed employees were ‘real’ employees of the taxpayer who had come to India to render services and therefore, they constituted service PE of the taxpayer.

Once a service PE is created, FIS article will have no application since it excludes profits in connection with PE from its ambit. Hence, income should be taxed as business profits under Article 7.

While in Centrica’s case, Delhi High Court considered Article 12(6) of India-Canada DTAA , which embodies a similar provision, the issue of specific exclusion of PE profits from FIS article was not considered by Delhi High Court and hence, that decision cannot be applied.

For computing the business profits under Article 7, the reimbursement made by Indian companies has to be treated as revenue receipts and salary of the deputed employees paid by the taxpayer has to be allowed as deduction.

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[2015] 53 taxmann.com 1 (Jabalpur – Trib.) Birla Corporation Ltd. vs. ACIT A.Ys.: 2010-11 & 2011-12, Dated: 24.12.2014

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India-Austria DTAA , India-Belgium DTAA , India-
China DTAA , India-Germany DTAA , India- Switzerland DTAA , India-UK
DTAA and India- US DTAA ; section 5(2)(b), 9(1)(vii) the Act – Payments
made to non-resident suppliers of plant for installation/commissioning
services do not create an installation permanent establishment (PE),
since the activities did not exceed the threshold provided in the DTAA
s; FTS being a general Article and PE being a specific Article,
taxability of consideration should be confined to specific PE Article

Facts:
The
taxpayer is an Indian company engaged in manufacture and sale of
cement. During the relevant tax year, the taxpayer made payments to
certain non-resident suppliers for import of plant and machinery. The
suppliers were located in Austria, Belgium, China, Germany, Switzerland
UK and US. The suppliers also provided installation and commissioning
services and their technicians visited India for that purpose. The
taxpayer did not withhold tax in India on the ground that since the
plant and machinery were supplied from outside India, the payments for
the same were not chargeable to tax under the Act. The taxpayer
separately paid installation and commissioning fee and withheld tax @
10% thereon under the Act.

The tax authority concluded that:

the
contract was a “composite contact” or “works contracts”; ? taxpayer
paid the suppliers for supply of plant as well as installation and
commissioning services;

the consideration for provision of
installation and commissioning services was not paid separately but was
embedded in payments for supply of plant;

the taxpayer was
required to approach the tax authority for determination of chargeable
income and withholding tax thereon and in absence of that, was required
to withhold tax on the total payment.

Therefore, the tax
authority treated the taxpayer as “assessee in default” u/s. 195 read
with section 201 of the Act and held that the taxpayer should have
withheld tax @ 42.25% of the gross remittance amounts.

Held:
(i) As regards I. T. Act

Part
of the consideration for purchase of plant that can be attributable to
installation commissioning or assembly of the plant and equipment or any
supervision activity in connection thereto accrues and arises in India.

Hence, it is taxable u/s. 5(2)(b) of the Act since the related
economic activity is performed in India. Because income accrues or
arises in India, one need not look at deeming fiction u/s. 9(1)(vii) of
the Act. It is for that reason that definition of FTS in Explanation 2
to section 9(1)(vii) specifically excludes “consideration for any
construction, assembly. Mining or like project”.

The expression
installation, commissioning or erection of plant and equipment belongs
to the same genus as expression ‘assembly’. Thus, ‘assembly’ is excluded
from the scope of section 9(1)(vii) of the Act.

As regards DTAA

India
has entered into DTAA s with all the seven tax jurisdictions where the
suppliers are located. All these DTAA s provide minimum time threshold
under installation PE clause and the installation and commissioning work
by any supplier did not exceed the minimum time threshold under any of
the DTAA s.

Further, India-Belgium and India-UK DTAA
additionally provide that even when threshold time limit is not
exceeded, installation PE is constituted if the installation/
commissioning charges exceed 10% of the sale value of the plant. This
condition too was not fulfilled.

Accordingly, no installation PE
was constituted and even if a part of the consideration can be
attributed to installation/commissioning activities, it will not be
taxable in terms of Article 7 read with Article 5 of the relevant DTAA .

(iii) As regards FTS/FIS

Installation/commissioning activities are de facto in the nature of technical services.

While
FTS/FI S article dealing with technical services is a general
provision, Article dealing with installation PE is a specific provision.
In Union of India vs. India Fisheries (P) Ltd. [57 ITR 331 (1965)], the
Supreme Court has held that if there is an apparent conflict between
two independent provisions, the special provision must prevail over the
general provision. If, even when PE was not constituted, the income is
considered taxable under FTS Article, it would not only render PE
provisions meaningless but would also be contrary to the spirit of the
commentary on UN Model Convention.

Hence, if there are services
which are covered under a specific PE clause and also under FTS/FIS
provision, the taxability of consideration for such services must be
confined to that specific PE clause.

In case of India-UK and
India-USA DTAA , even if FTS/ FIS article applies, as the ‘make
available’ condition was not satisfied, the payment was not FTS/FIS.
Installation/ commissioning did not involve transfer of technology and
hence, such activities did not satisfy ‘make available’ condition.

As India-Belgium DTAA includes MFN clause, same tax position as India-UK/US DTAA applies.

Article
12(5)(a) of India-Switzerland DTAA specifically excludes “amounts paid
for … … services that are ancillary and subsidiary, as well as
inextricably and essentially linked, to the sale of a property” (i.e.,
plant in this case) from the scope of FIS. Accordingly installation/ commissioning charges were not FIS under India- Switzerland DTAA .

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TS-55-ITAT-2015(Mum) Swiss Re-insurance Company Ltd vs. DIT A.Y: 2010-2011, Dated: 13.02.2015

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Article 5 of India-Switzerland DTAA – Income from re-insurance business not taxable in India in the absence of a business connection or a PE in India; Subsidiary performing outsourced functions does not create a PE in India

Facts:
The Taxpayer, a Swiss company engaged in the reinsurance business, earned income from various cedents in India. Further, an Indian Company (I Co), wholly owned subsidiary of Taxpayer, entered into a service agreement with the Singapore branch of the Taxpayer, for obtaining risk assessment services, marketing of insurance and administrative support in India and was remunerated at cost plus basis.

The Taxpayer contended that in the absence of a PE, income from re-insurance business is not taxable in India. However, the Tax Authority contended that taxpayer had a business connection in India owing to its regular and continuous stream of income in India. Further since I Co renders core and technical reinsurance services to the Taxpayer, it would constitute a Dependent Agent PE (DAPE) for the Taxpayer in India. Alternatively as the Taxpayer remunerated ICo on cost plus basis, I Co’s employees were de-facto employees of the Taxpayer.

The tax authority’s contentions were upheld by the Dispute resolution Panel (DRP). Aggrieved, the Taxpayer appealed before the Tribunal.

Held:

Under the Act
A business connection is defined to include any business activity carried on by a NR through a person who habitually concludes contracts in India on behalf of the NR, maintains stock in India and regularly delivers goods on behalf of the NR or secures orders in India for the NR.

On the facts of the case, I Co does not carry on any such activity on behalf of the Taxpayer in India. Thus there is no business connection in India.

Under the DTAA
Establishing a subsidiary in the other treaty country would not, in itself, result in creating and establishing a PE of a foreign holding company in the said country. Reliance in this regard was placed on the Delhi High Court ruling in E-Funds IT Services (266 CTR 1)

Further, to create a Service PE in India, the Taxpayer has to furnish services through employees or other personnel in India. Additionally, such services must be furnished to third parties on behalf of the Taxpayer and not to the Taxpayer itself to create a Service PE. The employees of ICo are not rendering services as if they were employees of the Taxpayer and hence the above condition is also not satisfied.

Moreover, reinsurance is specifically excluded from the ambit of the PE definition under DTAA. Accordingly, the income from re-insurance service is not taxable in India.

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TS-38-ITAT-2015(Del) Aithent Technologies Pvt. Ltd vs. DCIT A.Y: 2005-06 and 2006-07, Dated: 03.02.2015

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Sections 92A, 92B(1) – Transactions between a branch and head office cannot be considered as “international transaction” under the Act.

Facts:
Taxpayer, an Indian Head office, rendered software development and consultancy services to its branch situated in Canada. The taxpayer contended that the transactions with branch office were not in the nature of transactions with associated enterprises (AEs) as branch cannot be treated as a separate entity and hence should not be treated as international transaction under the Act.

However the Tax authority treated this transaction as international transaction and proceeded to calculate the arm’s length price. Aggrieved the taxpayer appealed before the Tribunal.

Held:
Section 92B(1) of the Act provides that an International transaction means a transaction between two or more AEs. Thus for treating any transaction as an international transaction, it is sine qua non that there should be two or more separate AEs.

From a bare reading of section 92B(1) and section 92A of the Act which provides the meaning of AEs it clearly transpires that in order to describe a transaction as an ‘international transaction’, there must be two or more separate entities.

The Taxpayer has consolidated the financial results of the head office as well as the Canada branch and offered the aggregated income to tax. The fact that the office in Canada is Taxpayers branch office and not a distinct entity was specifically argued before the Tax Authority which was not negated by the Tax Authority. Thus it is clear that the branch office is not a separate entity.

As per the principle of mutuality, no person can transact with himself in common parlance. As such, one cannot earn any profit or suffer loss from oneself. Even if Tax authority’s contention that the Taxpayer has earned an income from his branch is accepted then such profit earned would constitute additional cost to the Branch. On the aggregation of the annual accounts of the HO and branch, such income of the head office would be set off with the equal amount of expense of the Branch, leaving thereby no separately identifiable income.

Inter se dealings between HO and branch cease to be commercial transactions in the primary sense. In such a case it cannot be contended that such transaction should be treated as an international transaction.

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[2015] 53 taxmann.com 367(Hyderabad-Trib) Anil Bhansali. vs. ITO A.Y: 2007-2008, Dated: 21.01.2015

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Section 5(1), 9(1)(ii) – Stock awards vesting to a person not ordinarily resident in India is taxable in India only to the extent it relates to services rendered in India

Facts:
Taxpayer, a resident but not ordinarily resident (RNOR) in India,, was currently employed by an Indian Co (ICo). Taxpayer had received certain stock awards for services rendered by him to his past employer, an USA company (FCo). The Taxpayer had rendered services to FCo both in USA as well as in India. During the relevant financial year, Taxpayer received transfer proceeds of Stock Options which were granted to him by FCo.

Taxpayer contended that out of the total stock awards vested in him, certain portion was attributable to services rendered in USA and certain portion was attributable to services rendered in India. Accordingly, he offered to tax only that portion of stock awarsds which related to services rendered in India.

Further, Taxpayer had sold the stocks to broker appointed by US Co in the year of grant and he received only the final instalment of stock award sale in the year under consideration. However, Tax Authority contended that the entire income from stock awards is taxable in India as the same was received in India.

On appeal the First Appellate Authority upheld the Tax Authority’s contentions. Aggrieved the Taxpayer appealed before the Tribunal.

Held:
It is not in dispute that u/s. 6(6) of the Act, Taxpayer qualifies as a person who is not ordinarily resident of India. Thus as per section 5(1) of the Act, income which accrues or arises outside India to a person who is not ordinarily resident in India shall not form part of his total income taxable in India, unless it is derived from a business controlled in or profession set up in India. Further, section 9(1)(ii) specifically provides that salaries shall be deemed to accrue or arise in India if it is earned in India towards services rendered in India. Article 16(1) of India-USA DTAA also provides that salary derived by a resident of USA in respect of an employment exercised in USA shall be taxable in USA.

Thus stock awards can be apportioned towards services rendered in India depending on number of days of stay in India and only that portion of stock award can form part of total income of the Taxpayer.

Merely because stock awards were treated as part of salary by I Co, it cannot be concluded that entire stock award is taxable in India.

I Co has clarified that the stock award which was received by Taxpayer in India was allotted to him when he was under employment by FCo and was sold by the Taxpayer in USA. What was received in India was only the last instalment of such sale. Therefore, without ascertaining the portion of stock awards which is attributable to services in India, the entire amount cannot be made taxable only because the money was received in India.

Thus the taxpayer being RNOR, only that portion of stock awards which is attributable to services in India can form part of total income.

As the above facts were not considered by the Tax Authority or by the First Appellate Authority, the matter was remitted to decide the taxability of stock awards in light of the above observations.

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TS-41-ITAT-2015(Mum) Flag Telecom Group Limited. vs. DCIT A.Y: 1998-99 to 2000-01, Dated: 06.02.2015

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Sections 9(1)(i), 9(1)(vii) – Transaction of
acquisition of full ownership rights and obligations in respect of
capacity purchased in the cable system is ‘sale’ and not ‘royalty’;
payment not taxable in the absence of business connection; fee for
standby facility, which does not involve actual rendering of services,
does not amount to FTS under the Act.

Facts:
Taxpayer,
a company incorporated, controlled and managed from Bermuda, was set up
to build a high capacity undersea cable for providing telecommunication
link between the UK and Japan. For this purpose, it had entered into an
memorandum of understanding (MOU) with 13 parties world over, including
an Indian Company (I Co), for planning and implementation of the said
telecommunication link cable system linking western Europe (starting
from the UK), Middle East, South Asia, South East Asia and Far East
(ending in Japan).

ICo accordingly entered into a Cable Sales
Agreement (CSA) and thereafter into a Construction and Maintenance
Agreement (C&MA) with the Taxpayer. Pursuant to these agreements,
ICo purchased certain capacity in the said cable system for a lump sum
consideration. The C&MA was for a period of 25 years, which
coincided with the life of the cable system.

Further, as per the
terms of C&MA, the Taxpayer had agreed to arrange for maintenance
to keep the cable system in proper working condition at all times. One
of the maintenance activity involved providing of standby cover, i.e.,
having the cable ships on standby to repair any breaks or damages in the
submarine cable.

The Taxpayer argued that the payment for
standby maintenance was not in the nature of FTS. The Taxpayer further
claimed that its receipt from ICo for cable capacity purchase is a sale
transaction that was executed outside India on a principal to principal
basis and, hence, was not taxable in India in absence of business
connection in India. The Tax Authority argued that the payment by ICo is
for “right to use” in the cable, hence, taxable as “Royalty” in India.

The
First Appellate Authority agreed with the Taxpayer that the payment for
cable capacity was a sale transaction. However, the payment for standby
maintenance was held to be FTS. Aggrieved, both the Taxpayer as well as
the Tax Authority appealed before the Tribunal.

Held:
Whether payment for telecom capacity is a transaction of ‘sale’ or ‘royalty’? Held that the transaction is a sale.

Transaction
of sale is a fact based exercise which can be only ascertained from the
intention of the parties concerned as evidenced by written agreements
between them in light of the facts and circumstances. For determining
whether the telecom capacity agreement is for provision of “right to
use” or “sale” of a capacity in the cable network, one needs to examine
whether the owner had retained ownership control and possession of the
property.

From the terms of the clauses given in CSA and
C&MA, it is clear that ICo has got all the ownership rights and
obligations in respect of the capacity purchased in the cable system.
Further, it was provided that the management committee which also
included ICo would make all decision on behalf of the signatories to
implement the purpose of the agreement. ICo, therefore, had unrestricted
right to transfer its assigned capacity, though such a transfer had to
be with the consent of each signatory/telecommunication entity to whom
such capacity was assigned.

It was also clear that the benefit
and burden of ownership had shifted from the seller (i.e. the Taxpayer)
to the buyer. ICo had all the risks and rewards attached to ownership;
ICo not only had the exclusive domain on the rights to use but also
right to resale or transfer its interest in the capacity in the cable
system. Thus under the C&MA, ICo satisfied the characteristic of an
“owner” and “ownership” in respect of the capacity in the cable system.
Further, ICO has treated the capacity as “Fixed Asset” in its books and
had claimed depreciation, indicating that it had treated the capacity
purchased as an asset owned by it. All these points lead to the
conclusion that the intention of the parties to the agreement was sale
and purchase of capacity. Accordingly, the payment is in the nature of
sale.

In case of a “royalty” agreement, the complete ownership
is never transferred to the other party. What is envisaged is that there
should be transfer of rights, or imparting of any information in
respect of various kinds of property, or use of rights to any equipment
etc. If the consideration has been received for transferring ownership
with all rights and obligations then such payment cannot be treated as a
“royalty” payment. In the present case, capacity has been transferred
to ICo along with complete ownership. Accordingly the payment is not in
the nature of royalty.

Is there a business connection? Held No.

The
term business connection connotes some type of establishment, agency or
subsidiary or dependent agent or the like. The connection in India must
be in the form of any concern in the nature of trade, commerce or
manufacture by which the NR earns income.

In the facts of the
present case, there is no asset of the Taxpayer that is situated in
India. The assets in India (landing station) belong to ICo. Further,
once the Taxpayer sells the capacity in the cable system, it also
belonged to ICo. The capacity thus sold, is no longer an asset that
belongs to the Taxpayer. Hence, there is no income accruing or arising
though or from asset of the Taxpayer in India.

The sale of
capacity in the cable system does not arise through or from business
connection in India, because sale has been made to ICo which is an
independent entity and on a principal to principal basis. Thus, there is
neither a business connection of the Taxpayer in India, nor is there
any asset or source of income of the Taxpayer in India. Therefore, the
Taxpayer is not taxable in India on the sale transaction.

Whether nature of payment for standby maintenance is FTS? Held No.

For
a payment to be classified as FTS there needs to be “rendition” of
services in the nature of “managerial”, “technical” or “consultancy”
Rendering services means actual performance of service. The standby
charges paid are not for performance of service. In case the Taxpayer is
providing some kind of repair services, it can be termed as “technical”
in nature and hence falling within the purview of FTS. However, if
there is no actual rendering of services, but mere collection of an
annual charge to recover the cost of standby facility, then it cannot be
said that the payment is for providing technical services. Therefore,
the payment for standby maintenance charges does not qualify as FTS and
hence is not taxable in India.

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TS-789-ITAT-2014(Bang) Vodafone South Ltd. vs. DDIT A.Ys: 2008-09 to 2012-13, Dated: 30.12.2014

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Section 9(1)(vi) – Payment towards interconnect usage charges and capacity transfer for provision of bandwidth amounts to “process royalty” under the Income-tax Act, 1961 (Act) and the relevant DTAA

Facts:
Taxpayer, an Indian company, was engaged in providing international long distance services to its subscribers. For such services Taxpayer availed the assistance of non-resident (NR) telecom operators (NTO ) located in different jurisdictions and payments were made to NTOs without withholding taxes on the same.

The Tax Authority contended that the payments made to NTO ’s are in the nature of royalty/Fee for Technical services (FTS) under the provisions of the Act as also the relevant Double Taxation Avoidance Agreement (DTAA ) and hence held the Taxpayer to be an assessee in default for failure to withhold taxes at source.

On appeal, the First Appellate Authority upheld the Tax Authorities contention. Aggrieved, the Taxpayer appealed before the Tribunal.

Held:

Under the Act
Under the Act, the term “royalty” includes any payment for the use of a process. The term process has also been defined under the Act to include transmission through cable, optic fibre etc., whether or not such process is secret. Further the Act provides that royalty shall include consideration in respect of a right or property whether or not the possession or control of the right is with the payer and whether or not the right or property is used directly by the payer.

On a combined reading of the above it can be understood that there is no requirement to ‘transfer’ a right to use. The condition of use or right to use would be satisfied even without having a direct control or a physical possession on the activity. Any other interpretation would lead to defeating the intention of the provision.

Thus in the present case, Taxpayer made payment to NTO for the use of a “process,” and hence, the payment qualifies as “process royalty” under the Act.

Under the DTAA
The “royalty” definition under the DTAAs includes use of, or the right to use, any copyright, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. However, the term “process” has not been defined under DTAAs.

The Madras HC in Verizon Singapore Pte Ltd1 dealt with an identical issue and held that the definition of the term “process” under the Act should be read into DTAA while evaluating royalty taxation under the provisions of DTAA . The facts in the case of Taxpayer are identical to the facts before the Madras HC. Various other decisions such as Viacom 18 Media (P) Ltd2 and Cognizant Technology Solution3 have followed the Madras HC ruling while dealing on a similar issue.

Thus, the decision of the Madras High Court is accordingly followed and any process, whether secret or not, falls under the ambit of royalty even under the DTAA . Therefore payment for inter connect charges amounts to royalty for the use of process.

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Agilisys IT Services India P. Ltd. vs. ITO TS-257-ITAT-2015 (Mum) A.Y.: 2003-04, Dated: 29.04.2015

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Sections. 10B, 92C, the Act – as legislative intent behind section 10B is to provide incentive to EOUs to bring foreign exchange into India, benefit cannot be allowed in case of suo moto transfer pricing adjustment since foreign exchange is not brought into India.

Facts:
The taxpayer was an Indian Company. The taxpayer was engaged in the business of development and export of software. It was registered as a 100% EOU eligible to claim tax holiday benefit u/s. 10B of the Act. While filing transfer pricing report in Form 3CEB, the taxpayer made suo moto transfer pricing adjustment in respect of its sale transactions with its associated enterprises (AEs). It did not make corresponding adjustment in books of account. Further, it also did not receive the adjusted amount from its AEs in foreign exchange. However, it claimed the tax holiday benefit u/s. 10B on the enhanced amount.

TPO accepted the adjustment made by the taxpayer. However, the AO did not allow tax holiday benefit on the suo moto adjustment amount.

Held:
The first proviso to section 92C(4) of the Act provides that, in case of enhancement of income consequent to determination of the arm’s length price by the Tax Authority, the tax holiday benefit is not to be allowed in respect of the enhanced income.

Though the Act is silent in respect of suo moto adjustment by the taxpayer, section 92C cannot be read in an isolated manner but must be read in consonance with the tax holiday provisions under consideration.

The legislative intent of section 10B is to give incentive to a 100% EOU. The tax holiday benefit is provided only when the convertible foreign exchange money is brought into India within stipulated period. If the tax holiday benefit were to be allowed to the taxpayer because there is no enhancement by the TPO, then every taxpayer would underprice sale with AEs, make suo moto adjustment and claim tax holiday benefit without bringing foreign exchange into India.

Having regard to the legislative intent, the taxpayer cannot be permitted to stretch the benevolent provision to avail the benefit which the Legislature never intended to provide.

On a harmonious reading of the provisions of the ITL and considering the intent of the Legislature, the Taxpayer is not entitled to claim deduction in respect of the amount of voluntary TP adjustment.

In I Gate Global Solutions Ltd [112 TTJ 1002 (2007)] the Bangalore Tribunal held that the relevant provision to disallow tax holiday benefit does not apply where the transfer pricing adjustment is made on suo moto basis by the taxpayer. However that decision had not considered the relevant tax holiday provision and the legislative intent and therefore, is distinguishable.

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Section 92C, 37(1), the Act – authority of TPO is limited to determination of ALP and not determination of actual provision of services; such determination and deductibility of expenditure u/s. 37(1) is in exclusive domain of the AO.

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Facts:
The taxpayer was an Indian Company. The taxpayer had made certain commission payment to its AEs and had benchmarked the transactions under TNMM. The TPO rejected application of TNMM. Considering the transaction as intra-group service, TPO proceeded to determine the ALP under CUP method. After seeking and considering the details from the taxpayer, the TPO concluded that the taxpayer failed to provide any evidence of an independent transaction between unrelated parties, failed to explain the functions performed by the AE, and failed to provide documentary evidence for necessity of payment of such commission. Accordingly, TPO determined the ALP as Nil. Accordingly, the AO added entire commission paid by the taxpayer to its AEs. The DRP confirmed the action of the AO.

Held:
The TPO computed ALP at Nil and the AO made the addition without independently examining the deductibility or otherwise of commission in terms of section 37(1).

In CIT vs. Cushman & Wakefield (India) (P.) Ltd. [2014] 367 ITR 730, the Delhi High Court has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services existed or benefits accrued to the taxpayer. Such determination is in exclusive domain of the AO.

Accordingly, assessment order was set aside and matter was remanded to the AO/TPO for deciding it in conformity with the law laid down by the jurisdictional High Court.

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DCIT vs. UPS Jetair Express (P.) Ltd. [2015] 56 taxmann.com 387 (Mumbai – Trib.) A.Y.: 2008-09, Dated: 27.02.2015

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Article 12, India-USA DTAA; Sections. 9(1)(vii), 40(a)(i), 195, the Act – amounts reimbursed to one US company in respect of services provided by another US company being not ‘fees for technical services’ under the Act nor ‘fees for included services’ under India-USA DTAA, were not subject to tax deduction u/s. 195; hence, payments could not be disallowed u/s. 40(a)(i).

Facts:
The taxpayer was an Indian Company. It was a joint venture between UPS International Forwarding Inc., USA and Jetair Private Limited. The taxpayer was engaged in the business of international express delivery services and international integrated transportation services and was having branches in several locations in India. UPS Worldwide Forwarding Inc. (“UPSWWF”) was a member-company of UPS group. UPS Group had a global arrangement with Receivables Management Services Inc. (“RMS”), USA for providing debt collection services. RMS provided these services to taxpayer outside India. As per the practice, UPSWWF would make payment to RMS and the taxpayer would then reimburse UPSWWF on cost-to-cost basis without any mark-up. During the year under consideration, the taxpayer made certain reimbursements to UPSWWF for services rendered by RMS.

In the course of assessment, the AO concluded that UPSWWF was merely a conduit or a facilitator and the taxpayer had obligation to deduct tax as per section 195 read with section 9(1)(vii) and Explanation to section 9(2) of the Act. Since the taxpayer had not deducted tax, invoking section 40(a)(i), the AO disallowed the payments.

The taxpayer relied on several decisions3 and contended that payment by way of reimbursement of expenses incurred on behalf of the payer is not income chargeable to tax in the hands of the payee and hence, it cannot be disallowed u/s. 40(a)(i).

The taxpayer further contended that since the services provided did not make available technical knowledge, skill, experience, know-how or process, the amounts paid were not taxable in India even in terms of Article 12 of India-USA DTAA .

Held:
Invoices raised by UPSWWF on taxpayer matched back-to-back with the invoices raised by the RMS. Thus, it was a clear case of reimbursement without any profit element.

In terms of Article 12 of India-USA DTAA , the services should make available technical knowledge skill, experience, know-how or process. If the taxpayer had directly paid RMS for debt collection services, it would not have been treated as Royalties or Fees for Technical/Included Services, either under the Act or under Article 12 of India-USA DTAA . Hence, provisions of section 195 were not attracted. Accordingly, payments could not be subjected to disallowance u/s. 40(a)(i) of the Act.

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Honda Motorcycle & Scooters India (P) Ltd. vs. ACIT [2015] 56 taxmann.com 238 (Del) A.Y.: 2010-11, Dated: 13.04.2015

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Sections. 40(a)(i), 195, the Act – additional payment pursuant to rupee depreciation is not subject to tax deduction because under section 195 point of time for deduction is earlier of, credit or payment; once deduction is made on credit, further deduction on payment is not required.

Facts:
The taxpayer was an Indian company. During the year under consideration, the taxpayer had acquired technical know-how in respect of certain automobile models. The taxpayer capitalised the amount of Rs 141.48 crore as ‘Intangible asset’ and claimed depreciation thereon. Between the date of credit of amount and the date of actual payment, on account of depreciation of rupee, the taxpayer suffered forex loss of Rs. 5.22 crore. Hence, the taxpayer stepped-up the cost of acquisition to Rs.146.70 crore.

The AO observed that the taxpayer deducted tax at source u/s 195 of the Act only on Rs.141.48 crore. The taxpayer contended that no tax at source was required to be deducted on liability arising from fluctuation in exchange rate. However, invoking section 40(a)(i) of the Act, the AO disallowed depreciation on forex loss of the Rs. 5.22 crore.

Held:
Juxtaposition of section 40(a)(i) and section 195 shows that: there should be income on which tax is deductible at source; and the taxpayer has failed to deduct tax on such income. Section 195 provides that tax should be deducted “at the time of credit of such income to the account of the payee or at the time of payment … …, whichever is earlier”. Thus, deduction of tax is contemplated at the earlier of credit or payment, but not at both the stages. If credit occurs first and tax is deducted at the time of credit, there is no question of again deducting tax at the time of payment, whether in full or in part. This position is also clear from Rule 26 of Income-tax Rules, 1962 which bears the heading ‘Rate of exchange for the purpose of deduction of tax at source on income payable in foreign currency’2.

If the contention of the Revenue is taken to its logical conclusion, every payment in convertible foreign exchange would require deduction of tax at source, firstly, at the time of credit and secondly, at the time when additional liability is fastened on it due to unfavourable rate of exchange.

Further, a peculiar situation would arise if exchange fluctuation results in forex gain for the taxpayer. As per the contention of the Revenue, Revenue would become liable to refund excess tax deducted at source at the time of credit.

In both the situations, i.e., whether there is a forex loss or gain, deduction of tax at source u/s 195 is contemplated only at the first stage, whether it is credit to the account of the payee or payment to the payee.

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