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Category: Tribunal News : PART B -International Taxation

Delta Air Lines Inc. vs. ADIT TS-239-ITAT-2015 (Mum) A.Y.: 2010-11, Dated: 29.04.2015

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Article 8, India-USA DTAA – code-sharing arrangement is neither chartering arrangement nor pooling arrangement; therefore, income derived therefrom does not qualify for exemption under Article 8 of India-USA DTAA.

Facts:
The taxpayer was a tax resident of USA. It was engaged in the business of carriage of cargo and passengers in its own aircraft and in third party aircrafts. The taxpayer had entered into ‘Interline Cargo Special Prorate Agreement’ with other airlines for carriage of cargo and ‘Code-Sharing Agreement’ with other airlines for carriage of passengers. The agreements respectively provided for space sharing for cargo and seat sharing for passengers at agreed rates. The agreements did not provide chartering of aircrafts.

The taxpayer filed its return of income for the relevant tax year claiming ‘nil’ income contending that its income qualified for exemption under Article 8 of India-USA DTAA. The AO, however, held that as the taxpayer itself was not involved in operation of aircrafts in international traffic, the requirement of Article 8(1) was not fulfilled and further, the arrangement of the taxpayer with other airlines was not akin to that of pooling/chartering contemplated under Article 8(2) and Article 8(4) of India-USA DTAA . Therefore, the AO rejected the claim of the taxpayer for exemption of income. The DRP confirmed the action of the AO.

Held:
There was nothing on record to suggest that the taxpayer had slot charter/space charter arrangement to qualify under Article 8(2). Unlike charter arrangement, the taxpayer did not have exclusive right to book flights under code-sharing arrangement. The role of the taxpayer in respect of bookings so made under codesharing arrangement was essentially that of booking agent and not charterer.

The taxpayer did not bring anything on record to support its contention that there was inextricable link between voyage from India to interim destinations (“hubs”) by third parties under code sharing arrangement and from hubs to final destination by taxpayer’s owned/ chartered/leased. Therefore, the decision in MISC Berhard vs. ADIT [2014] 47 taxmann.com 50 (Mumbai – Trib.) could not be applied.

A “pool” requires several persons coming together to contribute, share and combine their resources for a larger business. However, in the present case, the arrangement was only a bilateral arrangement. Nothing was brought on record to indicate that the common funds and resources were brought together in a pool which was shared by members of the pool. The taxpayer and third party both were not contributing aircraft in a pool shared by both. Rather, third party was contributing its aircraft and the taxpayer was merely booking seats. Thus, the arrangement did not meet principle of pool arrangement.

Accordingly, income derived by the taxpayer by booking of seat/space under code-sharing arrangement cannot be said to be income derived from operation of aircraft/ship in international traffic through owned/ leased/chartered aircraft/ship. Further, in absence of inextricable linkage of both legs of journeys, codesharing arrangement also cannot be said to be space/ slot charter. Therefore, receipts of code-sharing arrangement were not profits derived from operation in international traffic under Article 8 of India-USA DTAA.

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ADIT vs. Baker Hughes Singapore Pvt. Ltd. TS-214-ITAT-2015 (Del) A.Ys.: 2004-05, Dated: 20-04-2015

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Section 44BB – base erosion and profit shifting is a tax policy consideration relevant only for law making but not for judicial decision making

Facts:
The taxpayer was a non-resident company. It was engaged in the business of hiring of equipment and rendering of services to entities/contractors engaged in oil exploration work. The taxpayer offered its income to tax, in terms of section 44BB of the Act on presumptive basis1. The AO contended that the taxpayer has a PE in India and, hence, income from services rendered through the PE is taxable as royalty or FTS on net basis without applying presumptive taxation provisions of section 44BB. Relying on the decision in CGG Veritas Services SA vs. ADIT [2012] 18 taxmann.com 13 (Delhi), the CIT(A) accepted the contentions of the taxpayer and held that the income will be subject to presumptive taxation u/s. 44BB of the Act. The AO contended that allowing the benefit of presumptive taxation to the taxpayer would amount to Base Erosion and Profit Shifting (“BEPS”) from India.

The issue before the ITAT was whether, on facts, the provisions of section 44BB (i.e., presumptive taxation) will apply or those of section 44DA will apply to the facts of the case. Further issue was whether benefit of presumptive taxation can be denied on the ground that it leads to BEPS.

Held:
As regards presumptive taxation u/s. 44BB
The issue is directly covered by the decisions of the coordinate benches and there are no direct decisions on the issue by any higher forum. Hence, benefit of presumptive taxation is available.

As regards BEPS
BEPS is a tax policy consideration relevant only for the process of law making. but not for the process of judicial decision making. Taking BEPS into consideration would infringe the neutrality of judicial process. The judicial authority must not only be neutral vis-à-vis the party but also vis-à-vis competing ideologies.

The law has to be interpreted as it exists and not as it ought to be in the light of certain underlying value notions.

The issue being directly covered by the decisions of the coordinate benches, there is no reason to take any other view of the matter.

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Louis Dreyfus Armateures SAS vs. ADIT [2015] 54 taxmann.com 366 (Delhi – Trib.) A.Ys.: 2007-08, Dated: 17.2.2015

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Section 44BB , the Act – rental income earned by non-resident sub-contractor supplying plant and machinery on hire to the main contractor qualifies for taxation in accordance with Section 44BB of the Act since the provision does not distinguish between main contractor and sub-contractor.

Facts:
The taxpayer was a French company having seismic survey vessels. A Foreign Company (“FCo”) had entered into three contracts with ONGC for providing personnel and equipment, plan and execute acquisition of 3D seismic data and basic 3D seismic data processing. The taxpayer provided two seismic survey vessels on hire to FCo for carrying out the seismic operations offshore India. The taxpayer offered the rental income to tax u/s. 44BB of the Act.

As per the AO, the equipment rental received by the taxpayer was in the nature of ‘royalty’ taxable u/s. 9(1)(vi) of the Act and chargeable @ 25% of gross rental receipts.

The DRP, while giving its directions, concluded as follows.

(i) The term ‘used or to be used’ in section 44BB means that the hirer should use plant and machinery for ‘prospecting for, or extraction or production of, mineral oil’. Section 44BB was not applicable to the taxpayer since it was not engaged in the business of prospecting, extraction or production of mineral oils.

(ii) The exception in clause (iva) of Explanation 2 to section 9(1)(vi) of the Act applies only if income is covered u/s. 44BB.

(iii) R entals for leasing of vessels would constitute income by way of royalty u/s. 9(1)(vi) under the Act as well as under Article 13(3) of DTAA between India and France.

(iv) FCO is deemed to have a PE in India. Since the profits of FCO are charged on deemed income basis, and the plant and machinery is to be utilised by the PE, payments also would be deemed to have been deducted from profits of PE. In terms of Article 13(7) of India-France DTAA , royalty received by the taxpayer is taxable in India if FCo has PE in India and the royalty was borne by PE.

(v) Hence, rental receipts of sub-lessor were taxable in India as ‘royalty’ at the rate provided under India- France DTAA (i.e., 10%).

Held:
(i) T he provision clearly envisages that the non-resident should be in the business of hiring of plant and machinery. The only condition is that such plant and machinery should have been used or to be used in the prospecting for, extraction or production of mineral oils.

(ii) Perusal of various terms of the agreements and the purpose of chartering of the vessel clearly indicate that the vessel was hired for the specific purpose of carrying out geophysical prospection. Since the real intention of the parties as per the contract was to provide the vessel for carrying out geophysical prospection and not for any other purpose, agreements cannot be classified as time charter simplicitor.

(iii) Perusal of several judicial precedents1 shows that the conclusion of the AO and DRP is erroneous since section 44BB clearly envisages that the non-resident should be engaged in business of supplying plant and machinery on hire. The section does not distinguish between main contractor and sub-contractor. The fetter assumed by lower authorities is absent in section 44BB and there is nothing in the said provision to disentitle a sub-contractor. A judicial authority cannot read what is not said in the provision and add words to bring in a restricted interpretation since such interpretation will defeat the special provision.

(iv) If the legislative intent was to restrict the benefit only to the main contractor, the words after ‘the assessee engaged in the business of ‘supplying plant and machinery on hire’ or ‘providing services or facilities’ ought to have been omitted.

(v) The taxpayer satisfies the requirements in section 44BB and its income qualifies to be treated and tax accordingly

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Marriott International Inc. vs. DDIT [TS-4 ITAT 2015 (Mum)] A.Ys.: 2006-07 to 2009-10, Dated: 14.1.2015

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Article 12, India-USA DTAA – Payment towards re-imbursement of advertising/marketing expenses by franchisees were “royalty” under Article 12 of India-USA DTAA since the responsibility to maintain the brand is of the brand owner.

Facts:
The taxpayer, an American Company, was part of the Marriott Group which is engaged in operation of hotels worldwide under different brands. The Group also grants licenses to franchisees to operate hotels under its brands. A Group entity had granted licenses to an affiliate Group company to use certain brands. Pursuant to the licenses, the affiliate Group company granted sub-licenses to three Indian companies for use of these brands. The royalty received by the affiliate from the Indian companies was offered for tax in India. Separately, the taxpayer had entered into international sales and marketing agreement with the three Indian companies whereunder, the taxpayer had agreed to provide sales and marketing services outside India. Accordingly, the three Indian companies made payments for (i) international sales and marketing services, (ii) international sales and marketing fees and (iii) reimbursement of expenses. The taxpayer was to apportion the costs of these services on fair and reasonable basis amongst all the entities to which it was providing such services. Accordingly, the three participating Indian companies were required to pay the taxpayer for provision of these services. In the return of its income the taxpayer treated these receipts as taxable but later it revised the return of its income and claimed that since the expenses were in the nature of reimbursement of costs (without any mark-up), they were not taxable.

The issue before the Tribunal was: whether the payments made by Indian companies to the taxpayer towards reimbursement of international sales and marketing expenses were in the nature of royalty/FTS in terms of India-USA DTAA and whether instead of single payment, royalty was artificially separated into more than one component.

Held:
The contention of the taxpayer that the tax authorities were not entitled to take a different view, since the Government of India had accorded necessary permission to remit the payment under the specific heads, was not correct.

The responsibility to maintain the value of the brands is that of the brand owner. Normally it is done by continuous and sustained advertising/marketing activity. Since the taxpayer had collected charges from the hotels towards reimbursement of expenses for marketing/ popularizing the brand name, such receipts should be considered only as “royalty” because such activity is the responsibility of brand owner.

The agreements entered into between the three Indian companies and Marriott group showed that while the three Indian companies were considering them as agreements pertaining to a single transaction, they had agreed to pay the amount to different companies. Thus, it was seen that the Marriott group had planned to dissect the single transaction into more than one transaction and had ensured that each of the components was received by a different Group company.

The claim of the taxpayer that it was undertaking marketing work on cost-to-cost basis without any mark-up defies business logic or prudence since a commercial company will never work without profit. Hence, this fact itself proves that the taxpayer was an extended arm of the brand owner company and can be considered a façade of that company. This is a clear case of tax planning by adopting a colourable device and hence corporate veil should be lifted.

As all payments made by the Indian companies swelled the existing brands owned by the brand owner, the amounts received by the taxpayer should be examined form the point of view of the original brand owner and accordingly, be taxed as royalty in terms of Article 12 of India-USA DTAA .

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TS-683-ITAT-2014(Hyd) Dr. Reddy’s Research Foundation vs. DCIT A.Y: 2002-04, Dated: 12-11-2014

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Section 9(1)(vii) – Pre-clinical research payments held as FTS under the Act as well as India-UK and India-Netherlands DTAA.

Facts:
The Taxpayer, an Indian pharmaceutical research company, was carrying on drug discovery research. Taxpayer discovered a new chemical compound and applied for a patent. The Patent was granted for 20 years. After obtaining the patent, Taxpayer was required to conduct certain pre-clinical research before it could utilise the exclusive marketing rights granted under the Patent. In order to reduce the cost of research and maximise the time available to commercially exploit the patent before its expiry, appropriate parts of research were allocated to companies situated in the UK (UK Co) and Netherlands (N Co) and payments were made to them without withholding tax at source.

The Tax authority concluded that the payments made to UK Co and N Co for pre-clinical studies constituted FTS under the Act as well as under the India-UK and India- Netherlands DTAA . Since the Taxpayer had not withheld tax at source, the Tax Authority passed an order u/s. 201(1) of the Act.

The Taxpayer contended that the payments made to UK Co and N Co were not taxable in India as it did not constitute FTS under the relevant DTAA as the services did not satisfy the make available condition not warranting withholding of taxes. Thus the Taxpayer appealed before the First Appellate Authority against the orders passed by the Tax Authority.

On appeal, the First appellate Authority held that the pre-clinical research satisfies the make available condition and thus constitutes FTS under the relevant DTAA . A reference was made to the agreement between the Taxpayer and UK Co as well as with N Co and observed that the agreements clearly provided that all the intellectual property including rights to patents, which would be generated in the course of clinical research conducted by UK Co and N Co, would belong solely to the Taxpayer. The Taxpayer had complete control over the know-how, experience of the field trials and skills generated in the field trial. The Taxpayer had obtained the services from UK Co and N Co to speed up the “clinical research time” so that the time available for exclusive marketing rights could be maximised. Thus, the services of UK Co and N Co results in transfer of technical know-how and hence will constitute FTS under the relevant DTAA .

Aggrieved, the Taxpayer preferred an appeal before the Tribunal.

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TS-738-ITAT-2014(Pun) M/s Sandvik AB Ltd vs. DDIT A.Y: 2007-08, Dated: 28-11-2014

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Make available condition provided in India- Portugal DTAA can be imported into India- Sweden DTAA by virtue of Most Favoured Nations (MFN) clause; Consequently commercial management services rendered by a Sweden Co not regarded as Fees for Technical services (FTS) under the India – Sweden DTAA as it does not make available technical skills or knowledge.

Facts:
The Taxpayer, a Swedish Company, provided services in the nature of commercial, management, marketing and production services to its Indian subsidiaries (I Co). Further, the Taxpayer did not have a PE in India.

Under the Act, there was no dispute with respect to the legal position that the services do not constitute FTS u/s. 9(1)(vii). However, the Tax Authority contended that the fee received by the Taxpayer is in the nature of FTS under India-Sweden DTAA .

The Taxpayer claimed that the fee received from I Co is not FTS as provided in India-Sweden DTAA . Alternatively, by virtue of the Most Favoured Nation (MFN) clause in the protocol to India-Sweden DTAA, the definition of FTS as available in India-Portugal DTAA , which provides for an additional condition of “make available”, can be imported. Tax authority’s contention was upheld by Dispute Resolution Panel.

Aggrieved, the Taxpayer appealed before the Tribunal.

Held:
India-Sweden DTAA incorporates MFN clause, as per which, 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-Sweden DTAA , the same rate or scope shall apply under the India-Sweden DTAA also. India-Portugal DTAA provides a restricted definition of FTS, wherein services can be regarded to fall within the scope of FTS only if the same makes available technical knowledge, skill etc.

Accordingly, based on the MFN clause and importing the FTS definition from the India-Portugal DTAA, the services rendered by Taxpayer could not be regarded as FTS as the same do not make available technical knowledge/skill to I Co in India.

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(2014) 50 taxmann.com 378 (Cochin) Mathewsons Exports & Imports (P.) Ltd v ACIT A.Y: 2006-07, Dated: 21-10-2014

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Section 9(1)(vi) – Profits derived from hiring of vessels for operation in international traffic taxable as royalty u/s. 9(1)(vi); however, as per beneficial provisions of Article 8 of India-UAE DTAA such profits are not taxable in India.

Facts:
Taxpayer, an Indian Company, engaged in the business of import and export of merchandise goods, obtains goods from various persons for transporting the same to Maldives. For this purpose, Taxpayer hired a fully operational vessel with necessary permits and trained crew from a company incorporated in UAE (F Co) on the basis of a time charter agreement.

The Taxpayer made the payments to F Co without deducting taxes on the basis that the same was not taxable in India under India-UAE DTAA .

The Tax Authority disallowed the payments made to F Co considering that the hire charges paid by the taxpayer to F Co amounted to royalty under the Act as well as the India-UAE DTAA .

Held:
The hired vessel is an instrument/equipment; therefore, the payment made by the assessee for use or right to use such instrument/equipment would fall within the provisions of section 9(1)(vi) of the Act.

In view of section 90 of the Act, it is well settled that if the provisions of the DTAA are more beneficial to the Taxpayer, then they would prevail over the Act.

The India-UAE DTAA has a specific provision for taxation of royalty income (Article 12) and income from shipping business (Article 8). Based on the principle that specific provision overrides general provisions, in respect of shipping business, Article 8 will override Article 12 of the DTAA . Hence, only Article 8 of the DTAA would be applicable in respect of shipping business.

As per Article 8 of the India-UAE DTAA, profit derived by an enterprise of a contracting state from operation of ship in international traffic shall be taxed only in that contracting state. Further, Article 8(2) specifically provides that profit from operation of the ship in international traffic will also include the charter or rental of ships incidental to such transportation. Accordingly, hire charges paid by the taxpayer to F Co are taxable in UAE and not in India. Consequently, the taxpayer was not required to withhold tax from the payments..

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[2015] 54 taxmann.com 377 (Ahmedabad – Trib.) ITO vs. Heubach Colour Pvt. Ltd A.Y: 2007-08, Dated: 23.01.2015

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Sections 9(1)(vi), 195 – Outright purchase of know-how is not “royalty” under the Act

Facts:
The Taxpayer an Indian Company, engaged in the business of manufacture and sale of colour pigments and fine chemicals, purchased a particular line of business of a foreign company (NR Co) and certain payments were made towards knowhow.

The Taxpayer contended that the payments made to NR Co. were for outright purchase of capital assets.However, the Tax Authority contended that payments made by the Taxpayer were Royalty u/s. 9(1)(vi) of the Act, therefore treated the Taxpayer as assessee-in-default for failure to withhold taxes u/s. 195.

Held:
The agreement between the Taxpayer and NR Co indicates that the taxpayer had purchased knowhow, trademarks and goodwill from NR Co.

NR Co was the owner of manufacturing processes, formulae, trade secrets, technology, analytical techniques, testing procedures, processes and all documents and literature pertaining to manufacturing. NR Co sold, assigned conveyed and transferred to Taxpayer its entire right, title, interest and ownership in such rights. Thus, NR Co ceased to have right, title, interest and ownership in such rights from the date of transfer.
The Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (332 ITR 340) observed that royalty refers to transfer of “rights in respect of property” and not transfer of “right in the property”. The two transactions are distinct and have different legal effects. In the first category, the rights are purchased which enable use of those rights by the purchaser, while in the second category, no purchase is involved, only right to use has been granted.

The definition of term ‘royalty’ in respect of the copyright, literary, artistic or scientific work, patent, invention, process, etc. does not extend to outright purchase of right to use an asset.

Since nothing was brought on record by the tax authority to show that the payment was not for the purchase of technical knowhow, they were not in the nature of royalty.

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[2015] 54 taxmann.com 300 (Mumbai-Trib.) Mckinsey Business Consultants Sole Partner LLC vs. DDIT (IT) A.Y: 2011-12, Dated: 13.02.2015

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Article 3, 17 of India – Greece DTAA – Where DTAA does not have a specific article on FTS the services would be taxable as business profits and not as other income under the DTAA.

Facts:
The Taxpayer, a company incorporated in Greece entered into a transaction of providing certain services to an Indian branch of one of its associate entity. The Taxpayer did not offer to tax income received in respect of such services in India. The Taxpayer was of the view that income for services would fall under business income article of the DTAA . In absence of a PE in India, such business profits would not be liable to tax in India.

However, the Tax Authority contended that the services were in the nature of FTS under S. 9(1)(vi) of the Act as well as the DTAA .

On appeal before the dispute resolution panel (DRP), it was held that if DTAA is silent on certain source of income the same should be taxable as per the provisions of the Act. Aggrieved the taxpayer appealed before the Tribunal.

Held:
A bare reading of Article 17 (other income article) of India- Greece DTAA indicates that it deals with residual items of income which are not covered by any of the articles of the DTAA .

However, in this case the assessee has earned income by rendering the services in the course of its business and therefore, it is nothing but business profit which is covered under business profits article viz, Article 3 of the treaty. Admittedly the assessee does not have PE in India and hence, as per the express provision of Article 3 of the DTAA, business profit cannot be taxed in India.

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TS-70-ITAT-2015 (Del) Qualcomm incorporated vs. ADIT A.Y: 2005-09, Dated: 20.02.2015

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Section 9(1)(vi) – Royalty paid by one NR to another NR would be
taxable in India if it is paid in respect of patents used for the
purpose of carrying on business in India or for earning any income from a
source in India. On facts and in the context of CDMA technology , where
it can be shown that royalty is paid for license used in manufacturing
products specific to India, such license may be treated as used in
carrying on business in India.

Facts:
The
Taxpayer, a company incorporated in the US, was engaged in the business
of designing, developing, manufacturing and marketing digital wireless
communication products and services based on “Code Division Multiple
Access” (CDMA) technology. The Taxpayer owned certain patents pertaining
to CDMA technology.

The Taxpayer granted a non-transferable and
non-exclusive, worldwide patent licence to NR Original Equipment
manufacturers (OEMs) outside India to manufacture and sell CDMA
handsets/ infrastructure equipment (CDMA products).

For
exploitation of patent license, OEMs were required to pay a
non-refundable licence fee and an on-going royalty based on sale of CDMA
products. Royalties were to be computed as a percentage of the selling
price of the products manufactured by the OEMs. As per the agreement
between the taxpayer and OEM, royalty would become due as and when the
CDMA product was invoiced, shipped, sold, leased or put to use,
whichever was earlier.

OEMs manufactured CDMA products outside
India and sold them to telecom operators/service providers (SP)
worldwide, including India.

The issue before the Tribunal was
whether the royalty paid by NR OEMs to the Taxpayer (relating to
handsets /equipment sold/ used by OEMs in India) were taxable in India.
In other words, whether the royalty payment will be taxable in the
jurisdiction where the handsets/equipment are manufactured or in the
jurisdiction where they are used.

Held:
Under the Act

The
determining factor in royalty taxation is the place where the
intellectual property (IP) is used. i.e., the emphasis is on the situs
of use of the IP.

In connection with the patents, the event
triggering taxation is (i) granting of a right, licence or sub licence
in a patent, or (ii) sharing of information concerning use or working of
a patent. It is thus taxation of income of the person owning the
patents and it is taxation in the jurisdiction of end use of patents.

The emphasis is on the “situs of use” of the patent rather than “situs of the entity” making payment for the royalty.

If
a patent is used in a manufacturing process, royalty taxation should be
in the jurisdiction where manufacturing takes place. However, where
patent is used by the end consumer and the manufacturing is only a
conduit for collection of royalty for use from the end customer, it
should be taxable in end use jurisdiction.

As per the royalty
source rule u/s. 9(1)(vi), the situs is in India if the usage of patent
is for the purpose of (i) carrying on business or profession in India
(first limb) or (ii) earning income from a source in India (second
limb).

On carrying on a business or profession in India

Carrying
on business wholly in India or exclusively in India is not a sine qua
non for attracting taxability u/s. 9(1) (vi)(c). Even when business is
partly carried out in India but the royalties are payable in respect of
such part of the business as is carried on in India, it would be taxable
in India.

When an entity has a PE in a jurisdiction it would
imply that such an entity is carrying on business in the jurisdiction in
which such PE is situated.

Where the core manufacturing
activity with respect to CDMA products is carried out in one
jurisdiction but the sales and marketing activity in respect of the same
product is carried out in another jurisdiction (India), it cannot be
said that the business is not carried on in that other jurisdiction
(India).

Thus even where OEM do not manufacture CDMA products in
India, but makes India-specific products and carries out a part of his
business operation in India, it would be sufficient for section
9(1)(vii) to apply.

The principle that sale to customers in
India would amount to business with India and not business in India (as
observed in earlier ruling of ITAT ) would hold good only where there
was no material to suggest that any activity is carried on in India.
Thus by analogy even where NR has some operations in India, it can be
said to carry on business in India.

Thus, whether or not the OEMs carried on business in India would depend on two questions;

-Whether the CDMA handsets were made India specific and
-Whether OEM, as a part of his business, was carrying on any operations in India.

The
Andhra Pradesh High court (HC) in the case of Asifuddin [(2005)
Criminal Law Journal 4314 AP] had examined the working of the CDMA
technology and concluded that CDMA handsets are service provider
specific. However, it was argued by the Taxpayer that the CDMA handsets
sold in India were not service provider specific.

The issue was
remanded back to Tax Authority for a fresh examination on the aspects of
whether the OEMs made India specific products, whether OEMs had PE in
India.

On earning income from a source in India
The
expression ‘for the purpose of making or earning any income from any
source in India’ not only involves active earnings such as a business in
India but also a passive earning by exploiting an asset (both tangible
and intangible) in India.

The taxation of royalties for use of a
patented technology will have the situs where the technology is used.
Accordingly, when the royalty is for use of a technology in
manufacturing, it is to be taxed at the situs of manufacturing the
product, and, when the royalty is for use of technology in functioning
of the product so manufactured, it is to be taxed at the situs of use.

In
the present case, taxpayer owns the patent and royalty is for use of
patented technology, while the point of its collection, as a measure of
convenience and in consonance with the industry practice, is from
manufacturer when the patented product is put into use by sale.

Whether
or not patents are used in the manufacturing of the handset or for the
use of the patented technology embedded in the CDMA handsets is a highly
technical aspect requiring opinion of technical expert. The matter was
remitted back to Tax Authority for further examination.

Under the DTAA   

Article
12(7)(b) of the India-USA DTAA provides that royalty shall arise in
India if it relates to the use of or the right to use the right or
property in India.

Patents can be said to be used in India only
when royalty is paid for the use of patents in CDMA products sold in
India and not for the use of CDMA technology for the manufacture of CDMA
products outside India.

The Tribunal abstained from ruling on
Article 12(7)(b) as this issue was remanded back for consideration based
on opinion of technical expert.

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TS-147-ITAT-2015 (PAN) ACIT vs. Ajit Ramakant Phatarpekar and Neelam Ajit Phatarpekar A.Y: 2010-11, Dated: 16.03.2015

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Section 9 –For withholding of tax, law prevailing at the time of payment is applicable; hence, retrospective amendment does not create withholding default

Facts:
The Taxpayer, an Indian resident, made payments to nonresident (NR) parties for monitoring, supervision of discharged cargo, undertaking draft survey, joint sampling of such discharged cargo, photographs, sample preparation, sealing of samples, analysis of grade etc. The services were rendered outside India by the NR.

The Taxpayer did not withhold tax on payments made to NR in the belief that payments made to NR did not constitute FTS under the Act and further that income from services rendered outside India did not accrue or arise in India as NR did not have a Permanent establishment (PE) in India and services were rendered outside India.

Tax Authority contended that by virtue of retrospective amendment to Explanation to section. 9, income of NR is deemed to accrue or arise in India irrespective of whether NR has a place of business in India or whether services are rendered in India. Hence, such income is taxable in India under the Act.

Held:
The Tribunal did not analyse the nature of payments made by the Taxpayer and held that once the payment is in the nature of Fee for technical services (FTS), Explanation to section 9 becomes applicable. Explanation to section 9 introduced by the Finance Act, 2010 (retrospectively with effect from 1st June 1976) provides that FTS will be deemed to accrue and arise in India whether or not NR has residence or place of business or business connection in India or the NR has rendered services in India.

It is undisputed that NR does not have a place of business or business connection in India and neither does NR render services in India. Thus, income from services to Taxpayer accrues or arises outside India. However, by virtue of Explanation to section 9, the same is regarded as deemed to accrue or arise in India.

In the present facts, payments were made by the Taxpayer before the retrospective amendment to Explanation to section 9. Thus at the time of payment, there was no provision under the Act, deeming FTS to accrue or arise in India and hence, the Taxpayer was not liable to withhold taxes on payments made to NR. The Tribunal held that the law prevailing at the time of payment has to be kept in mind. Since at the time of payments, income was not regarded as accruing or arising in India, there was no need to withhold taxes at the time of making payments.

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TS-719-ITAT-2014(Chennai) ITO vs. M/s F.L Smidth Ltd. A.Y: 2004-05, Dated: 01-09-2014

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Section 9(1)(vi) – Payment for shrink wrap software license reimbursed under a cost sharing arrangement is “royalty” under the Income Tax Act (Act); on facts, India-Denmark Double Taxation Avoidance Agreement (DTAA) is not applicable as the Denmark Company was not beneficial owner but merely an agent of the software license provider.

Facts:
Taxpayer, an Indian company, was engaged in the business of consulting engineers and architects. A group concern of the Taxpayer based in Denmark (DCo) executed cost sharing agreements (CSA) with all its group concerns, including the Taxpayer, for sharing the cost of various software licenses such as the standardised Microsoft office software application. This was procured from M/s Microsoft Corporation USA (Microsoft) by way of a global indent.

In terms of the cost sharing formula in CSA, DCo raised an invoice on the Taxpayer for the proportionate cost of the software. During the relevant tax year, the Taxpayer made payment to DCo against the said invoice, without deducting tax at source u/s. 195 of the Act on the premise that the said payment represented merely reimbursement/ recharge of cost without any income component. Further, since payment was towards standardised copyrighted article, there was royalty element involved.

The Tax Authority was of the view that the impugned payment was for acquisition of a software license and hence, was in the nature of royalty taxable u/s. 9(1)(vi) of the Act. Rejecting the contention that there was no income element in the reimbursements the Tax Authority opined that DCo was acting as a distributor/agent of Microsoft and hence tax was required to be withheld on such taxable payment.

On appeal by the Taxpayer, the First Appellate Authority held that the payment under consideration was for a readymade off-the-shelf software for in-house use without authority to commercially exploit the same and hence, the payment was not in the nature of royalty. Rather, being a copyrighted programme, it was in the nature of sale of ‘goods’.

Aggrieved, the Tax Authority preferred an appeal before the Tribunal.

Held:

Under the Act
Granting of a license is included as a right in the definition of royalty under Explanation 2(i) and 2(v) to section 9(1)(vi) of the Act. This would also include license to use ‘shrink wrap software’, irrespective of the medium or mode of acquiring the licenced right. Hence, the fact that the licensed software was ‘shrink wrap software’ would not impact royalty taxation.

The ratio laid down by the Karnataka High Court in case of Samsung Electronics Co. Ltd.1 and Synopsis International Old Ltd.2 squarely applied to the case under consideration.

The decisions relied on by the Taxpayer stand distinguished since they were in the context of transaction undertaken on ‘principal to principal’ basis. In the present fact pattern, DCo acted as an agent of Microsoft US.

Delhi HC ruling in case of Ericsson AB and the Mumbai Tribunal ruling in case of ACIT vs. Sonata Information Tech. Ltd. did not pertain solely to ‘license’ transactions and hence are not applicable in the present issue. Further, the Supreme Court (SC) ruling in case of Tata Consultancy Services was not in the context of the Act and hence cannot be applied.

Invoice raised specifically quoted only licence and right of usage embedded therein. Therefore, the payment under consideration for acquiring a shrink wrap software licence from Microsoft answers the definition of royalty u/s. 9(1)(vi) of the Act, and is therefore liable to withholding tax in India.

CSA is immaterial in determining the character of transaction. Cost sharing formula or any other method is only an internal arrangement. Such arrangement does not impact the characterisation of an underlying transaction which is to be determined based on facts of the case and statutory provisions.

The exclusionary provision u/s. 9(1)(vi)(b) of the Act, dealing with payment for business or source of income outside India, is not applicable since the royalty payment made to DCo is for the purpose of business of the Taxpayer in India.

Under India-Denmark DTAA
DCo was only placing indent for all its group concerns for appropriate internal arrangement and convenience. Hence, DCo merely acted as an agent of Microsoft which is the beneficial owner of the payment under consideration. Since the beneficial owner is not a resident of Denmark, the benefit of treaty is not available under para 5 of Article 13.

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TS-660-ITAT-2014(DEL) Consulting Engineering Corporation vs. JDIT A.Y: 2003-05, Dated: 31-10-2014

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Articles 5 and 7 of India-USA DTAA – Branch engaged in preparation of drawings, designs and structural calculations by engaging highly technical and skilled professionals, which constitutes the core business of head office (HO), triggers PE of the HO in India.

Facts:
The Taxpayer, a US Company, has a branch in India (branch). The Indian branch provided engineering design and consultancy services to its HO, i.e, the Taxpayer. As part of these services, the branch prepared drawings and designs and also structural calculations by engaging highly technical and skilled professionals. For these services the branch was reimbursed at cost plus margin. The Tax Authority contended that the presence of Taxpayer in the form of fixed assets, number of employees etc., in India indicates that the activities carried out by the branch constituted main business of the Taxpayer and the cost reimbursed by the Taxpayer to the branch was not at arm’s length. Thus, the Taxpayer has a PE in India as per India-USA DTAA and the income attributable to the operation carried out by the PE shall be taxable in terms of Article 7 of the India US DTAA .

The Taxpayer contended that the activities of the branch were in the nature of preparatory and auxiliary services and hence the branch does not constitute a PE of the Taxpayer in India. Consequently, no income can be assessed in terms of Article 7 of the India-US DTAA .

Held:
The Branch was engaged in preparation of drawings, designs and doing structural calculations which require high technical and managerial skills. The branch was also doing research and development work for the Taxpayer which was the core business of the Taxpayer and the same cannot be considered to be of preparatory or auxiliary character. Accordingly, in terms of Article 5 of India-USA DTAA , the branch constituted PE of the Taxpayer in India.

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TS-435-ITAT-2014(Mum) Reuters Transaction Services Ltd vs. DDIT A.Ys: 2008-10, Dated: 18.07.2014

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Electronic deal matching services provided through equipment installed at customers’ location would constitute royalty under India-UK DTAA .

Facts:
The Taxpayer, a company incorporated in England and a Tax Resident of UK, is engaged in the business of providing an electronic deal matching systems services which enables authorised dealers in foreign exchange in India (customers), such as banks etc. to effect deals in spot foreign exchange with other foreign exchange dealers. The services are provided against certain monthly charges. Further, the server through which such services are provided is located outside India.

The electronic deal matching system services facilitates the customers to deal in the foreign exchange with the other counterparts who are ready for the transaction of purchase and sale of foreign currency.

In order to avail the above services, the customers entered into two contracts:

• Agreement to provide matching services with the Taxpayer
• Access agreement with an Indian company (I Co), a subsidiary of the Taxpayer, for obtaining equipment in order to avail the above matching services. The customers could avail the services of the Taxpayer only through the equipment and connectivity provided by the Taxpayer through I Co.

Separately, Taxpayer had entered into a marketing agreement with I Co.

The fee for providing the above services would be charged by the Taxpayer from the Indian subscribers and the Taxpayer in turn would remunerate I Co for the marketing and installation services provided by I Co to the customers.

Taxpayer contended that the fee received from its customers in India is in the nature of business profit which is not taxable in India in the absence of a PE as per Article 7 of the India-UK DTAA . Further, such fees did not constitute Royalty or FTS under the India-UK DTAA .

The Tax Authority contended that such fee was Royalty as well as FTS both under the Act as well as the DTAA . Alternatively, I Co constituted an Agency PE for the Taxpayer in India, and the equipment installed by I Co would also constitute a fixed place PE for the taxpayer in India and hence taxable as business profits.

Held:
The nature of service rendered by the Taxpayer includes the information concerning commercial use by the customer. The entire system along with the matching system and connectivity involves processing of customer’s business queries and orders and finding out the matching reply in the shape of counterpart demand or supply for execution of the transaction of purchase and sale of foreign exchange. This system of the Taxpayer is available only to the customers who have been given the access to the information concerning commercial as well as processing the orders placed by the customers.

As per the terms and conditions stipulated in the agreement the Indian customers accept the individual non-transferable and non-exclusive license to use the licensed software programme for the purpose of carrying out the purchase and sale of foreign exchange. The facts on hand is not a case of Payment for access to the portal by use of normal computer and internet facility but the access is given only by use of computer system and software system provided by the Taxpayer under license.

Customers make use of the copyright software along with computer system to have access to the requisite information and data available on the server of the Taxpayer.

Accordingly, by allowing the use of software and computer system to have access to the portal of the Taxpayer for finding relevant information and matching their request for purchase and sale of foreign exchange amount to imparting of information concerning technical, industrial, commercial or scientific equipment work and hence the payment made in this respect would constitute royalty.

Delhi HC decision in the case of Asia Satellite Telecommunications Co. Ltd (332 ITR 340) is distinguishable in the facts of this case. The Asia Sat’s case was based on the finding that the transponder capacity has only a media for uplinking and downlinking of signals of the broadcaster and TV operators to be transmitted to their customers without any manipulation for improvement, whereas in the case on hand, the Taxpayer is providing not only media but also allowed to use the information, store the information on server and even to manipulate and drive the data to anyone for their commercial purpose.

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TS-481-ITAT-2014(Mum) Cosmic Global Ltd vs. ACIT A.Y: 2009-2010, Dated: 30.07.2014

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Section 9(1)(vii) – Translation of a text from one language to another is not “technical” in nature, does not fall within the definition of FTS under the Act.

Facts:
The Taxpayer is an India company engaged in the business of providing translation services through the web. For this purpose the Taxpayer availed translation services from translators residing in India as well as outside India.

In respect of fee paid to translators in India, the Taxpayer withheld necessary taxes. However on fee paid to the nonresident (NR) translators the Taxpayer did not withhold tax at source.

The Tax Authority held that the fees paid to the NR translators are technical in nature as per section 9(1)(vii) of the Act and hence was liable to withholding of taxes. Thus the Tax Authority disallowed the payments made to NR translators in computing the business income of the Taxpayer, for failure to withhold the tax at source.

The order of the Tax Authority was upheld by the First appellate Authority. Aggrieved, the Taxpayer appealed before the Tribunal.

Held:
Fee for technical services under the Act is defined to mean any consideration for the rendering of any managerial, consultancy or technical services. The term “technical” is defined by dictionary to mean a service relating to a particular subject, art, craft, or its technique requiring special knowledge to be understood or services involving or concerned with applied and industrial sciences.

In the present case, the Taxpayer is getting the translation of the text from one language to another. The only requirement for translation from one language to the other is the proficiency of the translators in both the language.
Apart from the knowledge of the language, the translator is not expected to have the knowledge of applied sciences or the craft or techniques in respect of the text to be translated. The Translator is not required to contribute anything more to the text that is to be translated nor is he required to elaborate the meaning of the text.

A bare perusal of the definition of FTS under the Act and the dictionary meaning of the word “technical” makes it unambiguously clear that the translation services are not technical in nature. Thus fee paid to NR translators is not FTS u/s. 9(1)(vii) of the Act.

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TS-418-ITAT-2014(Mum) MISC Berhad vs. ADIT A.Ys: 2004-08 and 2009-2010, Dated: 16.07.2014

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Charter arrangement includes slot charter arrangement and covered within the ambit of Article 8, shipping income, of India-Malaysia DTAA ?Facts: Taxpayer, a tax resident of Malaysia, is engaged in the business of shipping in international traffic. The Taxpayer operates ships that are either owned by it or taken on lease. Insofar as the shipping business from India is concerned, the Taxpayer books cargo from shippers/customers in India up to the final destination port, with all risks and responsibility. The bill of lading is issued for the entire voyage.

The Taxpayer, under a slot charter arrangement, arranges for transport of cargo from the Indian port to the hub port, using the service of feeder vessels which are owned by a third party.

From the hub port, the Taxpayer’s containers are transhipped on the mother vessel, which are owned/ leased by the Taxpayer, and from the hub port it is carried to the final destination port.

The Taxpayer had claimed the benefit of Article 8 of the India-Malaysia DTAA on the entire freight income which comprised two components: (i) Transportation of cargo in international traffic by operating ships owned or pooled by the Taxpayer. (ii) Carriage of goods by feeder vessels belonging to another shipping line wherein the Taxpayer did not have any pool arrangements.

However, the Tax Authority allowed the benefit of Article 8 on the first component and denied the benefit of Article 8 on freight income on the second component. The Tax Authority contended that Article 8 of India-Malaysia DTAA applies only when the taxpayer is the owner, lessee or charterer of a ship.

Held:
Article 8(1) of the India – Malaysia DTAA provides that profits derived by an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in the State in which the ships are operated. The activity of “operation of ships” carried on by a person cannot be understood merely as a person who operates the ships. It has to be understood in the broader sense of carrying out shipping activity. Carrying out of shipping activity could be as an owner or as a lessee or as a charterer of a ship. Where the word “owner” has to be inferred as a person who owns a ship and the word “lessee” as one who owns a ship for a given lease period, the word ”charterer” has to be understood as a person who charters/hires a ship for a voyage.

Reliance was placed by the Tribunal on several definitions and Bombay HC decision in the case of Balaji Shipping UK Ltd. [253 CTR 460] to support the following:

• Operation of a ship can be done as a charterer who does not mean to own or control the ship, either as an owner or as a lessee.
• Charterer is a hirer of a ship under an agreement to acquire a right to use a vessel for transportation of goods on a determined voyage, either the whole/part of the ship in a charter party agreement.
• The word “charterer” includes a voyage charter of part of a ship/slot, since it is an arrangement to hire space in a ship owned and leased by other persons.

The concept “charterer of ships” under the Act includes slot charter arrangement. The facility of slot hire arrangement is not merely an auxiliary or incidental activity to the operation of ships, but is inextricably linked to such activity.

The risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting cargo of a person who has hired the ship. The risk of the Taxpayer is towards its customers with whom it has agreed to transport the cargo.

Transportation of cargo in the container belonging to the Taxpayer from the Indian port i.e., the port of booking to the hub port through feeder vessel by way of space charter/ slot charter arrangement falls within the ambit of the word “charterer”. This component cannot be segregated from the scope of “operation of ships” as defined in Article 8 of India- Malaysia DTAA .

The voyage between the Indian port to the hub port through feeder vessel and from the hub port to the final destination port through mother vessel owned/leased by the Taxpayer are inextricably linked and there is complete linkage of the voyage. Therefore, the entire profits derived from the transportation of goods carried on by the Taxpayer is to be treated as profits from operation of ships and, therefore, the benefit of Article 8 cannot be denied to the Taxpayer on the part of the freight from voyage by the feeder vessels.

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TS-309-ITAT-2014(Mum) Everest Kanto Cylinder Ltd vs.ADIT A.Y: 2008-09, Dated: 25.09.2014

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Payment of guarantee commission and recovery of the same from subsidiary is an international transaction; Bharti Airtel decision distinguished.

Facts:
The Taxpayer, an Indian company, set up subsidiary in Dubai (F Co) for expanding its business in Dubai region. F Co obtained term loan for its working capital requirements and for capital expenditure from the foreign branch of an Indian bank.

Taxpayer provided corporate guarantee to the bank in India in respect of such loans by way of deed of guarantee. In return 0.5% guarantee commission was charged by the Taxpayer from its F Co. Guarantee commission collected from F Co was held to be at arm’s length by the Tribunal in the Taxpayer’s own case for the immediately preceding year.

The Taxpayer had an independent sanction “letter of Credit arrangement” between the bank in India in respect of Inland and foreign letter of credit, where 0.6% guarantee commission was to be paid by the Taxpayer to the bank in India for the bank guarantee provided. The schematic presentation of the facts is as below.

The Tax Authority computed the arm’s length price of corporate guarantee @3% (as against 0.5% made by the Taxpayer) and made certain additions in this regard. Such addition was also affirmed by the dispute resolution panel (DRP).

Taxpayer alternatively contended that the transaction of giving corporate guarantee to bank on behalf of F Co, is not an international transaction, and even if it is regarded as an international transaction, since the Taxpayer has recovered from F Co the comparable cost of guarantee commission charged, the transaction is at arm’s length.

Held:
The decision of Delhi Tribunal in case of Bharti Airtel Ltd (ITA No.5816/DeI/2012) is distinguishable on facts as no guarantee commission was charged in that case. The Delhi Tribunal excluded the transaction of giving corporate guarantee from the purview of international transaction on the plea that transaction of such a nature was not having any bearing on the profits, income or loss or assets of the enterprise.

However, in the present case Taxpayer has incurred cost for providing bank guarantee and has also recovered guarantee commission from its subsidiary. Both these transactions, have impact on the income as well as expenditure of the Taxpayer. Thus the transaction of corporate guarantee is an international transaction subject to TP provisions.

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TS-482-ITAT-2014(Mum) GECF Asia Limited vs. DDIT A.Y: 2007-08, Dated: 06.08.2014

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Services such as accounting and legal support, sales and marketing, human resource services etc rendered from own knowledge and experience without imparting the know-how/experience to the other person does not constitute royalty under the India-Thailand Double Taxation Avoidance Agreement (DTAA ).

Facts:
The Taxpayer, a Thailand tax resident, entered into a master agreement with Indian company (I Co) to provide various services such as accounting and finance support, legal and compliance services, sales and marketing services, etc.

The Taxpayer filed NIL return for the relevant assessment year on the ground that the income accrued to him on account of above services qualifies as business income and the same cannot be taxed under Article 7 of India–Thailand DTAA in the absence of a Permanent Establishment (PE) in India.

The Tax Authority, in its draft order, held that the fee received by the taxpayer from I Co qualifies as fees for technical services (FTS) under the Income-tax Act, 1961 (Act) and alternatively such fee would also fall within the definition of “royalty” under the India – Thailand DTAA . Thus such income would be taxable in India.

Aggrieved, the Taxpayer filed its objections before the Dispute resolution panel (DRP). However, the DRP also concluded that the fee received by the Taxpayer is for providing industrial, commercial or scientific experience and, hence, the fee constituted “Royalty” under the DTAA , and hence it would be taxable in India. Aggrieved the Taxpayer appealed to the Tribunal.

Held:
Royalty is defined under India-Thailand DTAA to include payments of any kind received as a consideration for the use of, or the right to use, information concerning industrial, commercial or scientific experience. Consideration for information concerning industrial, commercial, scientific experience to be regarded as royalty should allude to the concept of knowhow. There should be an element of imparting of know-how to the other, so that the other person can use or has right to use such knowhow.

If services are being rendered simply as an advisory or consultancy, then it cannot be termed as “royalty”, because the advisor or consultant is not imparting his skill or experience to other, but rendering his services from his own knowhow and experience. All that he imparts is a conclusion or solution that draws from his own experience.

If there is no “alienation” or the “use of” or the “right to use of” any knowhow i.e., there is no imparting or transfer of any knowledge, experience or skill or knowhow, then it cannot be termed as “royalty”.

The services may have been rendered by a person from own knowledge and experience but such knowledge and experience has not been imparted to the other person as the person retains the experience and knowledge or knowhow with himself, which are required to perform the services to its clients. In principle, if the services have been rendered de– hors the imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of royalty.

Accordingly, the matter was restored back to Tax Authority to examine the nature of services based on the above principles.

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TS-211-ITAT-2014(Mum) Renoir Consulting limited vs. DIT A.Y: 1997-1998 and 1999-2000 Dated: 11-04-2014

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On the facts, premises of the client or the hotel where the employees stayed could be regarded as a fixed place permanent establishment (PE) through which the business of the Taxpayer was carried on.

Facts:
The Taxpayer (FCo) is a non-resident company registered in Mauritius. It entered into a contract with an Indian Company (ICo) for rendering services in relation to planning and implementing Performance Index Programme which would help in improving the management performance of ICO, by improving the work methods/services and providing efficient management control.

FCo deputed its employees comprising consultants and principal consultants to India. The duration of the contract was 50 weeks and it required 874 man days of consultants and 81 days of principal consultants’ time to be spent in India. There was no office available for these personnel to work in India.
FCo contended that the hotel rooms/accommodation used by its employees were only for stay, i.e., for residence and were not used as an office. Hence, it did not have any place of business in India.

It was also argued that employees in India were only carrying out preparatory and auxiliary services by only gathering and collating the data and transmitting the same to FCo and they worked as per directions of the Board of directors situated in Mauritius. Thus, the place of management of FCo was situated in Mauritius where the entire decision-making powers were located.

The Tax Authority contended that the hotel rooms where the FCo’s employees stayed in India from where they carried out their activities in India must be regarded as a Fixed Place PE of FCo in India and the income received from ICo should thus be taxed in India.

The finding of the Tax Authority was upheld by the First Appellate Authority. Aggrieved by the order of the First Appellate Authority on this issue, FCo appealed to the Tribunal.

Held
The right to use a fixed place of business may be owned, rented or otherwise acquired in any other manner. Further, a right which is not legal in its nature may, therefore, be of no adverse consequence. In the instant case, whether the hotel rooms could be legally or contractually used for business purposes was not ascertained. Even if such use was proscribed, but was factually used, it could be considered as a PE.

Also, in the present case there is no doubt that the use of hotel rooms and ICo’s premises is only for business purposes.

The modus operandi used by FCo for executing ICo’s contract clearly shows that it required extensive execution, continuous interaction with ICo and a detailed study followed by actual implementation in India. All this required FCo’s presence in India.

The claim of FCo that work performed in India was merely preparatory or auxiliary was incorrect and was inconsistent with facts where principal consultants came to India on frequent visits.

Further, the Fixed Place of business is not confined to a place where the top management of the company is located.

The contention that there is no Fixed Place because the personnel are operating from different places is without merit. The personnel are required to operate from different places due to the nature and requirement of the contract and is similar to a situation of a salesman.

It is for the FCo, to specify as to how and from where it has performed its work. If the employees have not performed their work from ICo’s premises, then there has to be some other place from where they had performed their activities during the time period that spans over 874 man-days for the consultants and 81 days for the principal consultants. One cannot perform activities in vacuum.

Thus, the fact that some place is at the disposal of the FCo or its employees during the entire period of their stay in India is manifest and eminent and follows from the work nature/profile and the modus operandi followed. Thus, the FCo had a Fixed Place PE in India.

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TS-327-ITAT-2014(Pun) Shaan Marine Services Private Limited vs. DIT A.Y: 2012-13 Dated: 27-05-2014

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“Effective management” of one-man shipping Company is situated in Cyprus as it is registered and headquartered in Cyprus; shipping income from transportation of cargo is not taxable in India as per India-Cyprus DTAA.

Facts:
Article 8 of the Cyprus DTAA governs taxation of income from shipping business and it provides that profits derived by an enterprise, registered and having headquarters (i.e., effective management) in Cyprus, from the operation of ships in international traffic shall be taxable only in Cyprus.

Place of effective management has been defined by OECD Model convention as the place where key management and commercial decisions that are necessary for the conduct of entity’s business as a whole are in substance made.

Ship Co, a company registered in and a tax resident of Cyprus, was engaged in the shipping business. Ship Co was a one-member company having no employees or a big office establishment as most of its work was outsourced to other entities. Ship Co was contracted by a client in the United Arab Emirates (UAE) to transport cargo from India to UAE. Ship Co chartered a ship from another company (Charter Co) for this purpose.

Ship Co engaged the Taxpayer, an Indian company (ICO), as its agent for handling, loading and other operations, obtaining necessary clearances from the court, customs, income tax, immigration etc., in India. It was argued on behalf of the taxpayer that as a business practice, Ship Co carried out its major business activities through outsourcing. Hence, the factor that there were no employees in India should not be given undue importance.

ICo, in the capacity of agent, filed the return of income (ROI) of Ship Co in India and declared NIL income relying upon Article 8 of the Cyprus DTAA which provides taxation right only to Cyprus.

The Tax Authority did not accept the above claim and contended that Ship Co was merely interposed as a charterer to conduct business on behalf of Charter Co and to take benefit of the Cyprus DTAA and the Tax Residency Certificate (TRC) furnished by Ship Co alone cannot be sufficient to conclude that the place of effective management was in Cyprus.

The First Appellate Authority also ruled against Ship Co and accordingly filed an appeal before the Tribunal.

Held:
All the documents indicate that Ship Co played a definite role in transporting cargo from India to the UAE.

• The UAE client has made a contract with Ship Co to transport cargo.
• The bill of lading is in the name of Ship Co and recognises it as the ship charterer.
• Ship Co’s annual report records all profits/revenues from the shipping business.

The Tax Authority has attempted to rewrite contracts, which is not permissible. It cannot be said that Ship Co was merely a “paper company” and did not play any role in transporting cargo.

If the Tax Authority’s contention is accepted that Ship Co is merely interposed to take benefit of the Cyprus DTAA by Charter Co, then, the freight income should be taxable in the hands of Charter Co and such income cannot be taxed in the hands of ICo who is the agent of Ship Co.

Ship Co did not have any establishment outside of Cyprus and, hence, its “effective management” is situated in Cyprus only.

Accordingly, Ship Co is entitled to benefits of the Cyprus DTAA and income of Ship Co from transportation of cargo is not taxable in India under the Cyprus DTAA .

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TS-343-ITAT-2014(Del) Karan Thapar vs. ACIT A.Ys: 2000-2001, 2002-2004, 2006-07, 2009-10 Dated: 09-05-2014

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Family pension received from the UK employer of deceased wife is duly covered under Article 23(3) of the India – UK DTAA; the phrase ‘may be taxed’ means that the income can be taxed only in source state.

Facts:
Taxpayer’s (Mr. A), wife was employed by a UK Co. On her demise, UK Co decided to pay family pension to Mr A as per UK Co’s family pension scheme. The family pension was to be paid to Mr. A until his death.

The Tax Authority contended that the family pension received by Mr. A was taxable in India under Article 23(1) of the DTAA between India and UK.

On Appeal the First Appellate Authority held that the family pension is not taxable in India in view of Article 23(3) of the India-UK DTAA which provided that the same ‘may be taxed’ in source state and hence country of residence had no right of taxation. Aggrieved the Tax Authority appealed before the Tribunal.

Held:
“Pension” is received from the ex-employer by the employee in his lifetime while “family pension” is received by the spouse or family members or legal dependent of the deceased employee from the employer of that deceased employee.

Article 20 of India-UK DTAA has no relevance in case of family pension which is generally received by the spouse or family members or legal dependent.

Article 23(1) of India-UK DTAA stipulates that the items of income beneficially owned by the residents of a contracting state (India) wherever arising shall be taxed in the resident state (India).

Article 23(2) is neither related to pension nor related to family pension. Article 23(3) covers items of income which are not included in the forgoing articles and arising in a contracting state (UK) “may be taxed in that other state”. The expression “may be taxed in that other state” mentioned in Article 23(3) authorises only the source state to tax such income and by necessary implication, the state of residence is precluded from taxing such income, especially when the tax has been deducted by the UK as source state.

Taxation by both residence as well as source state would render the object of double tax avoidance agreement infructuous and the provisions stipulated in the Indo-UK DTAA would be otiose.

Reliance was placed on Delhi ITAT decision in the case of Mideast India Ltd. (28 SOT 395) and Mumbai ITAT decision in the case of Ms. Pooja Bhatt (26 SOT 574).

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TS-317-ITAT-2014(Hyd) Pirelli Cavi E Sistemi vs. ACIT A.Y: 2000-2001, Dated: 28-05-2014

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Income from offshore supplies is taxable in India only to the extent of the profits attributable to the operations in India.

Facts:
The Taxpayer, an Italian Co (FCo), entered into three separate contracts with an Indian Co (ICo) for offshore supply, onshore supply and onsite services in relation to setting up a fiber optic system in India.

FCo obtained requisite permission for execution of onshore supply and service contract and for setting up a project office in India.

FCo filed its return of income and offered to tax income from the contracts relating to onshore supplies and services contract while maintaining that the income from offshore supplies was not taxable in India as the same was concluded outside India.

The Tax Authority contended that the three contracts are to be treated as a single composite contract and the offshore supplies are also taxable in India.

On Appeal, the First Appellate Authority held that the offshore supplies was taxable in India, because the activities relating to signing of the contract, installation and training of employees of ICo was undertaken by the project office in India.

Held:
There is no dispute with reference to the fact that income from the offshore contract is taxable only to the extent of profits attributable to the operations in India which are clearly defined in the Act as well as the DTAA between India and Italy. This position does not change even if all the three contracts signed by the parent company are treated to be single or composite contract.

The project office was set up after the contract for offshore supplies was entered into and hence there is no corelation between the signing of the contract in India and the Project office. Consequently, no income accrues or arises to the PE in India due to signing of contract in India.

The offshore contract was merely for supply of cables and not for providing the service of installation and hence no part of the income can be attributable to the PE in India.

Further training provided to ICo’s employees was claimed to be incidental to the offshore supplies though a separate amount was charged for such training from ICo. Alternatively, even if training fee needs to be considered as part of Project office, the training work was outsourced and fee paid for outsourcing was more than the amount received from ICo for such training. Hence, no income was earned by FCo in this regard.

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TS-594-ITAT-2014(Mum) The Bank of Tokyo Mitsubishi UFJ Ltd vs. ADIT A.Y: 2007-09, Dated: 19.09.2014

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• Interest paid by Indian branch (BO) to its foreign head office (HO) is to be allowed as deduction in terms of Article 7(2) and 7(3) of Double Taxation Avoidance Agreement (DTAA ) between India and Japan and such Interest received cannot be taxed in the hands of HO on the principle of mutuality.
• Interest received by BO for deposits placed with HO/other branches is taxable in India.

Facts:
Taxpayer (HO) is a banking company incorporated in Japan. HO was engaged in carrying on banking operations in India under license from Reserve Bank of India, through a branch in India (BO), which constituted Permanent establishment (PE) for HO in India.

During the relevant financial year
• HO received interest from its BO in India
• BO received interest from HO and other overseas branches of HO for the funds of BO lying with HO and other foreign branches.

In computation of income of BO, being the PE,
• Deduction was claimed for interest payments made by BO to HO.
• Interest received by BO was not offered to tax on the basis of principle of mutuality.

Tax Authority disallowed interest payments made by BO on the grounds that the BO failed to withhold taxes on interest payments made to HO and also taxed the interest income of HO in India. Additionally, interest received by BO was also taxed on the basis that the same was attributable to the PE in India.

Held:
On interest paid to HO by BO:
As per Article 7(2) and 7(3) of DTAA between India and Japan, the interest paid by BO (being the PE) to HO is to be allowed as deduction in computation of profits of the BO as BO and HO are to be treated as a distinct and separate enterprise. However, interest received by HO from the branch cannot be taxed in the hands of HO on the ground of mutuality as held by Special Bench in the case of Sumitomo Corporation (147 TTJ 649)(Mum).

On interest received by BO from HO:
Under the Act, specific deeming provision u/s. 9(1)(v) will override the concept of mutuality and hence interest income of BO would be taxable in India. As a result interest earned by Indian branch is taxable in India.

Under the DTAA, no exemption has been provided for taxation of interest income of BO. Once the interest received by BO is deemed to be income of BO and there is no bar in the DTAA on its taxability then it cannot be excluded from computation of income earned by virtue of Article 7. Thus interest accrued or received by BO on funds lying with HO and other foreign branches should be taxable in India.

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Boskalis International Dredging International CV vs. DDIT [2014] 47 taxmann.com 150 (Mumbai – Trib.) A.Y: 2002-03, Dated: 18-07-2014

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S. 92C, the Act; Rule 10A(d), the Rules – when the transactions are influenced by each other, particularly in determining price/ profit in the transactions, they are ‘closely linked transactions’; however, where taxpayer undertook transactions with different AEs, only transactions with each separate AE could not be clubbed.

Facts:
The taxpayer was a limited partnership established in Netherland to undertake international dredging contracts. It entered into a contract with Indian Oil Corporation for dredging and reclamation for a refinery project in India. For this purpose, it hired dredgers/vessels/equipment on lease from certain Associated Enterprises (“AEs”).

The taxpayer followed CUP method for benchmarking the international transactions of leasing of dredger/equipment using valuation certificates of an international firm that are normally used in the dredging industry for negotiating lease rentals. The said valuation certificates were accepted by TPO as suitable benchmark for computing the ALP. The taxpayer then clubbed all lease transactions with all AEs together and benchmarked the same on an aggregate basis by adopting average of all.

Referring to section 92C of the Act read with Rule 10A(d) of the rules, the taxpayer contended that all the transactions of lease of dredger and equipment being similar, were the same class of transactions. Further, dredgers and equipment were used for carrying out single project and they could not be used independently since their working was dependent on each other. The taxpayer also contended that the TPO should consider the average of all the payments (whether above the benchmark valuation certificates or below the benchmark valuation certificates) and since such average was lower than the benchmark, question of any adjustment will not arise.

The tax authority contended that the benchmark valuation certificates of the international firm constituted a scientific benchmark. Once a scientific benchmark is used as a basis, and as each vessel is a class by itself, no clubbing of transactions should be done.

The issue before Tribunal was whether for determining ALP, lease rentals paid to AEs should be considered by adopting ‘vessel-by-vessel’ approach or ‘class of transactions’ approach (i.e. clubbing) in respect of ‘closely linked transactions’.

Held:
The Tribunal held as follows.

If transactions are closely linked or continuous in nature, they can be considered as ‘closely linked transactions’ in terms of Rule 10A(d). When number of transactions are entered into between two parties, then portfolio approach (and not individual transaction approach) should be followed.

To examine whether the number of transactions are closely linked or continuous, it should be considered whether a transaction is, follow on of, and wholly or substantially dependent on, the earlier transaction. If the transactions are influenced by each other, particularly in determining the price/profit, they can be regarded ‘closely linked transactions’.

The taxpayer had taken dredger/equipment on hire from several AEs. The objective of transfer pricing provisions is to avoid base erosion and profit shifting from one tax jurisdiction to another tax jurisdiction. Therefore, for determining ALP, the clubbing of transactions can be only to the extent of the transactions with each AE. Transactions with different AEs cannot be clubbed as ‘closely linked transactions’ so as to influence the aggregate price or profit arising from the transactions because they cannot be termed as closely linked or continuous so as to influence the price in aggregate or the profit of the parties arising from these transactions.

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DCIT vs. Kothari Food and Fragrances (ITA No 92/LKW/2012) (Unreported) A.Ys: 2008-09, Dated: 05-09-2014

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Ss 40(a)(i), 195(1) – discount allowed by exporter to foreign buyer for pre-payment constitutes ‘credit’ in terms of section 195(1) and since tax was not withheld, the discount was disallowable u/s 40(a)(i).

Facts:
The taxpayer was an exporter of certain products. The products were exported to an overseas buyer on credit. The taxpayer offered discount to the buyer for making payment before the due date. The buyer was required to provide through its bank a guarantee or stand by letter of credit to the bank of the taxpayer for an amount equal to the provisional price and the interest. The contract did not mention pre-payment discount. However, in the invoice, the taxpayer allowed pre-payment discount and asked the buyer to pay the net amount after adjusting the advance payment from the invoice amount. Since the prepayment discount was adjusted in the invoice earlier from the contract price, effectively, the buyer paid the amount after deduction of pre-payment discount.

The AO held that credit of discount in the account of the foreign buyer of the taxpayer in its book of account was a ‘credit’, though not ‘payment’. Therefore, provisions of section 195(1) were attracted. Since the taxpayer had not withheld tax from such ‘credit’, the discount was disallowable in terms of section 40(a)(i) of the Act.

Held:
The Tribunal held as follows.

Whether payment of discount is made to the buyer or lesser amount is collected from the buyer (after adjusting the discount), the buyer receives the benefit. In Havells India Ltd. (ITA No 55/2012 and 57/2012), the Delhi High Court held that income in form of discount or interest is taxable in India and hence, ratio of decision of Supreme Court in GE India Technology Centre Pvt. Ltd. [2010] 327 ITR 456 (SC) was not applicable.

The pre-payment discount given by the taxpayer cannot be equated to quantity discount since quantity discount is reduction in sale price. The pre-payment discount was effectively in the nature of interest because it was in consideration of the taxpayer receiving advance payment and to compensate the buyer for making the payment in advance before the sale of goods. Mere nomenclature will not change its character.

Section 195 of the Act required the taxpayer to deduct tax from any sum paid to a non-resident which was chargeable under the Act.

The pre-payment discount allowed by the taxpayer was a ‘credit of income’ to the account of the buyer. As the taxpayer had not withheld the tax on the credit of such discount, the discount amount was disallowable u/s. 40(a) (i) of the Act.

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ITO vs. Antrax Technologies (P.) Ltd. [2014] 49 taxmann.com 275 (Bangalore – Trib.) A.Ys.: 2007-08 Dated: 10-07-2013

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Ss 9(1)(vi), 9(1)(vii) and 40(a)(i), the Act – payments for import of operations and service manuals relating to equipment being for purchase of copyrighted products, were neither FTS nor royalty and hence withholding of tax was not required.

Facts:
The taxpayer was an Indian Company. The taxpayer was engaged in the business of import and sale of certain visual equipment, such as, projectors, projector lamps, etc. During the relevant previous year, the taxpayer imported manuals and software containing operating and servicing instructions for use of the equipment and separately made payments to the supplier for the same.

Before the AO, the taxpayer contented that manuals and software were copyrighted products and the payments was made for use and sale of copyrighted products and not for acquiring copyrights. Therefore, payments for the services manuals were neither in the nature of FTS nor in the nature of royalty which were subject to withholding of tax. However, the AO concluded that in light of the decisions of Karnataka High Court in Samsung Electronics Company Ltd (ITA No 2988 of 2005) and Sonata Information Technology Ltd (ITA No 3076 of 2005), payment for purchase of software were to be treated as royalty and were subject to withholding of tax. As the taxpayer had not withheld tax from the payments, the AO applied the provisions of section 40 (a)(i)1 of the Act and disallowed the payments.

Held:
The Tribunal held as follows. Service manuals were books containing guidance and instructions for operation, use and after-sale service of equipment and thus were part of the equipment imported by the taxpayer.

While software requires user license, the manuals were copyrighted products that could be used by any person purchasing the equipment. There is a clear distinction between the copyrighted article and equipment which comes with a copyright or license to use the copyright.

In case of Samsung Electronics Company Ltd and Sonata Information Technology Ltd, Karnataka High Court dealt with import of software which required license to use copyright and hence, the Court held the payment was in the nature of royalty. However, the service manuals are not products but they merely provide guidance in using the product. Also, the equipment imported by the taxpayer is not protected by license or copyright and can be used by anyone who purchases them without any restriction on either its transfer or its usage. Therefore, the payment was not subject to withholding of tax.

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AMD Research & Development Center India Private Limited vs. DCIT (Unreported) ITA No 692 to 695/Hyd/14 A.Ys.:2007-08 to 2010-11, Dated: 22.10.2014

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Article 12, India-Canada DTAA – On facts, ‘reimbursement’ by Indian subsidiary to parent company held FIS since Indian company was not the exclusive beneficiary of the services procured by parent company from third party.

Facts:
The taxpayer was an Indian company, which was a subsidiary of a Canadian company (“Canada Co”). The taxpayer was set-up as an R & D Design Centre for providing captive services to its parent. The services provided mainly included design, development and support for software and hardware solutions. During the relevant tax years, the taxpayer had made certain payments to the parent company towards software and engineering services without withholding any tax. According to the taxpayer, an Indian third party had provided engineering services to the taxpayer and the payment for the same was made by the parent company. Thus, the payment made by the taxpayer to the parent company was merely reimbursement of that payment and since there was no element of profit, no tax was required to be withheld.

After further examination and noting his findings, the AO concluded that payments to the parent company were “income from other sources” under the Act and under Article 21(3) of India-Canada DTAA and the taxpayer was required to withhold tax from the payments.

Held:
No agreement was entered into either between the taxpayer and the Indian third party or between the taxpayer and the parent company. The taxpayer was to render chip designing and software development services. Since the taxpayer did not have requisite skill set, the parent company was to provide the required portion of the services by procuring from third parties. Master Transfer Pricing Agreement entered into between the taxpayer and parent company clearly provided that services contracted by one party from a third party were also meant for the benefit of other member of the group. Findings of Commissioner of Service Tax showed that benefit of services rendered by Indian third party was availed by the taxpayer. These findings were not disputed by the tax authority. Since the services procured by the parent company from the Indian third party were for the benefit of the taxpayer, the amount paid by the taxpayer to the parent company was not extra profit/cash.

However, as the benefit of services contracted from third parties was to be available to all group companies and not only the taxpayer, it cannot be said that it was a case of pure reimbursement. Thus, the parent company had also substantially benefited from the services. Further, under Contractor Services Agreement, the Indian third party had agreed that all innovations and contract work product resulting from its services will be sole and exclusive property of the parent company and had assigned all rights in favour of the parent company.

Accordingly, the payment made by the taxpayer to the parent company was neither a gratuitous payment nor reimbursement of actual expenses without any element of profit. Therefore, the payment was in nature of FIS in terms of India-Canada DTAA. Consequently, the taxpayer had defaulted by not withholding tax.

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ITO vs. Bennet Coleman & Co. Ltd. (Unreported) ITA No 57/Mum/2009 & ITA No 7315/Mum/2008 A.Y. 2007-08, Dated: 12.11.2014

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Article 12, 14, India-Switzerland DTAA; Section 9(1)(vii), the Act – Installation and commissioning of plant and machinery being “assembly”, consideration therefor is excluded under Explanation 2 to section 9(1)(vii) of the Act. While the payment for classroom training would be FTS under Article 12, that for shop floor training would not be covered by Article 12.

Facts:
The taxpayer was an Indian company engaged in the business of printing and publishing of newspapers. The taxpayer entered into two contracts with a Swiss company (“Swiss Co”) – one contract was for supply of plant and machinery and second contract was for installation and commissioning of the plant and machinery and operational training of the staff. The taxpayer did not withhold tax from the payments made to Swiss Co under both the contracts.

According to the AO, the payments made under the second contract were in the nature of FTS and therefore, the taxpayer was required to withhold tax on the same. In appeal, CIT(A) concluded that 75% of the payments under the second contract were towards installation and commissioning, which was in the nature of “assembly” and therefore, was excluded in terms of Explanation 2 to section 9(1)(vii) of the Act and the balance 25% being towards training of employees, was FTS.

Held:
Installation and commissioning of plant

The plant and machinery comprised of various components/ units, which had to be put together and aligned in a manner that they would function optimally. Such activity would qualify as “assembly”. Accordingly, the consideration paid to Swiss Co towards installation and commissioning will not be FTS in terms of the definition in Explanation 2 to section 9(1)(vii) of the Act. ? As regards India-Switzerland DTAA, though the consideration would be FTS in terms of Article 12(4), Article 12(5)(b), inter alia, excludes services covered by Article 14 which deals with “Independent Personal Service”. Since the engineers deputed by Swiss Co had stayed in India for less than 183 days, in terms of Article 14, the consideration was taxable only in Switzerland.

As regards the issue whether Article 14 applies also to a non-individual, it may be noted that in Christiani & Nielsen Copenhagan vs. ITO [1991] 39 ITD 355 (Bom), the Tribunal had held that Article dealing with “Independent Personal services” applied only in case of individuals was in the context of India-Denmark DTAA, which specifically mentioned “individual” whereas India- Switzerland DTAA mentions “resident”, which term also includes non-individuals. However, in MSEB vs. DCIT [2004] 90 ITD 793 (Mum), in the context of India- UK DTAA, the Tribunal has held that “Independent Personal services” Article applies to all the residents. Accordingly, Swiss Co was qualified for benefit under Article 14.

Training of staff
Training services include both class room training and shop floor training (i.e., training on the machine). While the payment for classroom training would be FTS under Article 12 that for shop floor training would not be covered under Article 12.

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[2014] 51 taxmann.com 256 (Delhi – Trib.) DCIT vs. Exxon Mobil Gas (India) (P.) Ltd. A.Y.: 2004-05, Dated: 13.11.2014

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To compute net operating profit under TNMM for determining PLI of comparable company, non-operating incomes and non-operating expenses should be excluded.

Facts:
The taxpayer was a tax resident of India and a membercompany of Exxon Mobil Group engaged in oil and gas industry globally. The taxpayer was engaged in the activity of conducting market survey and performing related advisory services to its AEs. In respect of the relevant tax year, the taxpayer had reported four international transactions out of which one of the transactions pertaining to ‘conducting market survey activities and related advisory services’ was disputed by the TPO. To demonstrate the ALP of this transaction, the taxpayer had adopted TNMM as the most appropriate method and Operating Profit to Total Cost (OP/TC) as the Profit Level Indicator (PLI) and had selected twelve companies as comparable. By adopting multiple year data of these companies, the taxpayer computed average OP margin at 4.46% and showed its international transaction was at ALP.
The TPO rejected use of multiple year data and used only current year data. Since current year data for four companies was not available, TPO used only eight companies and computed OP/TC margin at 17.96%.

In respect of one of the companies, the profit margin was 37.14% whereas, according to the taxpayer, the correct OP/TC margin was 6.98% after excluding “other income”.

Held:
Major component of other income of the comparable company was interest income. TNMM contemplates using OP to a suitable base and to determine OP items of non-operating income should be excluded.
If non-operating income is to be excluded, non-operating expenses should also be excluded. Hence, the tribunal remanded the matter to AO/TPO for correct determination of OP/TC of the comparable company after excluding non-operating income as well as nonoperating expenses.

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[2014] 50 taxmann.com 379 (Delhi – Trib.) Mitsubishi Corporation India (P.) Ltd. vs. DCIT A.Y.: 2007-08, Dated: 21.10.2014

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Article 24, India-Japan DTAA; sections 40(a)
(i), (ia), the Act – the exclusion in section 40(a) (ia), and its
retrospective effect, should be read into section 40(a)(i) to achieve
deduction neutrality envisaged in Article 24(3) of India- Japan DTAA.

Facts:
The
taxpayer was a wholly owned subsidiary of a Japanese company engaged in
general import and export trading of diverse range of products (known
as ‘sogo shosha’ in Japanese). During the relevant tax year the taxpayer
made payments to certain Associated Enterprises (‘AEs’) which included
Japanese entities, towards import of goods. The taxpayer did not
withhold tax from such payments. However in case where the recipient
entity had PE in India, the recipient had furnished its return of income
including the payments received from taxpayer and had also paid taxes
on such income.

As the taxpayer had not withheld tax from the
payments made to the non-resident entities, the tax authority disallowed
the payments.

The taxpayer contended that Article 24 of
India-Japan DTAA provides protection against discrimination vis-à-vis
resident taxpayers. The taxpayer contended that since the provisions of
section 40(a)(ia) of the Act read with section 201(1) of the Act,
exclude payments made to a resident payee without withholding tax if
certain conditions are fulfilled, the payments made to non-residents too
cannot be disallowed in view of non-discrimination provision in
India-Japan DTAA.

However, the tax authority contended that the
taxpayer being an Indian resident was not entitled to access
nondiscrimination provision under India-Japan DTAA.

Before proceeding with its ruling, the Tribunal segregated the payments into three broad categories.

Category
(a): where the tax authority’s claim of recipients having a PE in India
was negated by the judicial authorities (i.e., the recipients were
found to have no PE in India).
Category (b): where there was no
material on record with the tax authority that recipients had a PE and
the same was also not in dispute before any judicial authority.
Category (c): where the recipient entity had a PE in India.

Held:
Analysis of payments

Category
(a): in absence of PE there was no income chargeable to tax in India
and accordingly, there was no liability to withhold taxes1 .
Consequently, no disallowance can be made.

Category (b): the
onus is on the tax authority to establish that the non-resident entity
had PE in India and such onus was not discharged. Accordingly, there was
no failure by the taxpayer in not withholding tax from payments made to
such entity. Consequently, disallowance u/s 40(a)(i) cannot be made.

Category
(c): the taxpayer had made payment to a Japanese entity which had a PE
in India. That entity had accepted tax liability in respect of the
payments received from the taxpayer. In this case the taxpayer had
invoked the non-discrimination provision in India- Japan DTAA and had
contended that disallowance could not be made.

Indian resident accessing deduction non-discrimination Article under DTAA
In
Daimler Chrysler India Pvt Ltd vs. DCIT (29 SOT 202) (Pune), it was
held that being resident of a treaty country is not a pre-condition to
seek non-discrimination protection under DTAA and payment to a
nonresident who is a resident of a treaty country would be adequate to
invoke non-discrimination provision.

Since the payment was made
by the taxpayer to a Japanese tax resident, the non-discrimination claim
under India-Japan DTAA was tenable2.

Scope of non-discrimination Article under India-Japan DTAA
Deduction
neutrality provision in the non-discrimination article is designed to
primarily seek parity in eligibility for deduction between payments made
to residents and those made to non-residents.
UN Model convention
commentary on Article 24(4), which is similar to Article 24(3) of
India-Japan DTAA, mentions that the relevant paragraph is designed to
end deduction discrimination where unrestricted deductions are allowed
in respect of payments made by residents to other residents but such
payments to nonresidents are restricted or prohibited.
Thus, there
cannot be discrimination regarding deductibility of expenses in respect
of payments made to Japanese residents and on which no tax has been
withheld if there is no corresponding pre-condition visà- vis payments
made to Indian residents.

Differentiation simplicitor also results in discrimination
In
Automated Securities Clearance Inc. 118 TTJ 619, the Pune Tribunal had
held that, in order to establish discrimination, the taxpayer has to
demonstrate that it has been subjected to different treatment vis-à-vis
other taxpayers, which is unreasonable, arbitrary or irrelevant.
However, since the above decision was in the context of the India-US
DTAA, it cannot be automatically applied to any other DTAA.
In
Rajeev Sureshbhai Gajwani vs. ACIT [8 ITR (Trib) 616], Special Bench of
the Tribunal has held that differentiation simplicitor in deductibility
of payment is enough to invoke non-discrimination provision.

Impact on disallowance if tax paid by recipient nonresident
Though
the exclusion in second proviso to section 40(a)(ia) is in effect from
1st April 2013, several Tribunal decisions3 have held that the amendment
is retrospectively effective from 1st April 2005 when the disallowance
provision was introduced for payments made to residents. In Bharati
Shipyard4, Special Bench of Mumbai Tribunal had observed that an
amendment of a substantive provision aimed at removing unintended
consequences to make the provision workable has to be treated as
retrospective in application.
Since section 40(a)(i) does not have
exclusion clause similar to the second proviso to section 40(a)(ia),
payments made to non-residents in similar circumstances will be
disallowable. Thus, in terms of Article 24(3) of India-Japan DTAA, it
will be discrimination. Accordingly, the exclusion in section 40(a)(ia),
and its retrospective effect, should be read into section 40(a) (i) to
achieve deduction neutrality envisaged in Article 24(3) of India-Japan
DTAA.
Therefore, payments made by Indian tax residents to Japanese
tax residents without deduction of tax cannot be disallowed u/s.
40(a)(i) if the Japanese tax residents have furnished their return of
income, accounted such payments for computing income and have paid tax
due on their declared income.

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[2014] 148 ITD 129 (Mumbai – Trib.) Johnson & Johnson Ltd vs. Assistant Commissioner of Income-tax A.Y. 2002-03 Order dated- 28th August 2013

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Section 92C
A. Where the assessee entered into a royalty payment agreement with its AE and made the payment of the same after taking approval from the RBI, then the payment of the said royalty made by the assessee in such circumstances is to be allowed and it cannot be said that the RBI’s approval cannot be considered as an arm’s length benchmark.
B. When taxes on royalty paid is to be borne by the assessee, on account of a commercial arrangement, the said taxes borne by the assessee should not be questioned while calculating arm’s length price.

Facts I:
The assessee, ‘J&J India’, had entered into international transactions with its AE, ‘J&J US’. It had paid the brand name royalty and the trademark royalty net of taxes at the rate of 1% of net sales to ‘J&J US’ for the use of brands and trademarks as per the terms of the brand usage agreement and also paid technical know-how royalty at the rate of 2% to ‘J&J US’ for the technical/marketing know-how provided to the assessee as per the terms of the know-how agreement entered into between the assessee and ‘J&J US’.

The assessee adopted the Transactional Net Margin Method (TNMM) for determining the arm’s length price (ALP) of its international transactions.

TPO made the following disallowances
1. A s per the agreement entered into by the assessee with ‘J&J US’, the assessee was not required to bear the tax liability of ‘J&J US’ arising out of payment of trademark/brand name royalty. Thus, the taxes borne by the assessee on the trademark/brand name royalty paid to ‘J&J US’ was disallowed by the TPO.

2. T he TPO was of the opinion that royalty on sales of traded finished goods was already part of the brand royalty and no royalty was required to be paid for the traded products and hence disallowed the same.

3. T he TPO restricted the technical know-how royalty paid at the rate of 2% to 1%.

4. T he TPO disallowed corresponding taxes and Research & Development Cess on technical knowhow royalty.

On appeal, the CIT(A) confirmed the disallowance of taxes paid by assessee on payment of trademark/ brand name royalty to ‘J&J US’ whereas deleted the other disallowance made by the TPO.

The cross appeals by the assessee and the Revenue were directed against the order of the Ld. CIT(A). Also on second appeal, the assessee submitted that the royalty payments had been approved by RBI.

Held I:
1 T axes paid by assessee on trademark/brand name royalty
The application made by the assessee to RBI for brand usage agreement specifically mentions that the royalty is to be remitted net of taxes. Further, the approval was received from the RBI to remit the royalty on brand usage by the assessee at the rate of 1% net of taxes. Considering the brand usage agreement vis-à-vis the approval granted by RBI, it can be safely inferred that the taxes were liability of the assessee under the terms of agreement. The assessee has entered into a commercial arrangement with ‘J&J US’ and it has been so arranged that the payment of taxes have to be borne by the assessee being a commercial arrangement, the same should not be questioned while calculating arm’s length price. Considering the entire facts in totality in the light of the brand usage agreement and the approval of the RBI, the findings of the CIT(A) is set aside and the AO is directed to delete the addition of the said taxes paid by assessee on trademark/brand name royalty.

2. Royalty payment on sales of traded finished goods
It is already held that the agreements between the assessee and ‘J&J USA’ for payment of royalty have to be considered in the light of the approval of the RBI. There is no substance in the findings of the TPO that there is no need for paying royalty on sales of traded finished goods. There is also no force in the findings of the TPO that this royalty is deemed to be included in the Brand royalty. Therefore, findings of the Ld. CIT(A) were not interfered with.

[The contention of the assessee before CIT(A), on the basis of which CIT(A) had deleted the addition made by TPO of royalty on sales of traded finished goods, was as follows-

Even if the products under consideration are old that does not debar the assessee from paying the royalty now. It was further contended that the assessee continues to get new products from time to time and also gets updates on existing products. The assessee pointed out that the allegation of the TPO that the royalty is covered by Brand Royalty does not hold any water as there is no co-relation between the two. It was claimed that Brand Royalty is paid for the use of the brand names owned by ‘J&J USA’ whereas the royalty for sales of traded finished goods is paid, apart from manufacturing rights; on the know how relating to sale, distribution and marketing. Therefore, it is incorrect to say that this royalty is included in brand royalty.]

3. T echnical know-how royalty

It is already held that the payment of royalty has to be considered in the light of the agreement between the assessee and ‘J&J USA’, for the same reasons. There is no reason to interfere with the findings of the CIT(A).

4. Corresponding taxes and research and development (R&D) cess on technical know-how royalty
The Ld. CIT(A) has confirmed the decision of the TPO holding that withholding tax and R&D Cess can be allowed only to the extent they are payable on allowable royalty. As it is already held elsewhere that royalty payments have been approved by the RBI and therefore, deserves to be allowed. Accordingly as the payments have been made in the light of the agreement with J&J US and as per the approval/guidelines of the RBI, there is no reason to disallow the tax and R&D Cess paid on technical royalty, and accordingly the AO is directed to delete the addition made on this account.

Section 92C read with Section 37(1)
Where, the assessee, who carries on a business finds that it is commercially expedient to incur certain expenditure directly or indirectly, it would be open to such an assessee to do so notwithstanding the fact that a formal deed does not precede the incurring of such expenditure.

Facts II:
The assessee had entered into a brand usage royalty agreement with its AE on 14-03-2002.

The TPO had held that the brand usage royalty paid by assessee was at arm’s length price.

However, the CIT(A) disallowed the brand royalty paid during the period 01-07-2001 to 14-03-2002 on the ground that there was no agreement in place during the said period indicating the intention to pay royalty with effect from 01-07-2001.

On appeal before the Tribunal, it was mentioned that the assessee had submitted a draft agreement alongwith the application to RBI on 10.8.2001 and thus the royalty was paid as per the guidelines issued by the RBI,

Held II:
The agreement for payment of brand usage royalty was entered into only on 14-03-2002. However, at the same time, the CIT(A) has erred in ignoring the copy of draft brand usage royalty agreement which was submitted by the assessee alongwith application to the RBI on 10-08-2001. The assessee received approval from the RBI on 20-11- 2001 and after receiving the approval from the RBI, the assessee entered into brand usage royalty agreement with ‘J&J US’ by which it was agreed to pay the royalty from 01-07-2001. The date being the same, as agreed in the draft agreement filed with the application made to the RBI, therefore, the observations made by the CIT(A) that there was no tacit agreement does not hold any water.

Assuming, yet not accepting, that there was no agreement, the payments made having regard to the commercial expediency need not necessarily have their origin in contractual obligations. If the assessee, which carries on a business finds that it is commercially expedient to incur certain expenditure directly or indirectly, it would be open to such an assessee to do so notwithstanding the fact that a formal deed does not precede the incurring of such expenditure.

Considering the facts in totality there is no merit in the enhancement made by the CIT(A). The findings of the CIT(A) are set aside. The AO is directed to delete the addition made by the CIT(A).

TS-400-ITAT-2014 (Del) GE Energy Parts Inc. vs. ADIT A.Ys.: 2001-02, Decided on: 04-07-2014

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The Tribunal admits Linkedin profiles of expatriate employees as additional evidence to determine the existence of PE in India.

Facts:
The
tax authority had conducted a survey at the premises of Liaison Office
(“LO”) of GE International Operations Company Inc. In the course of
survey, the tax authority obtained certain documents, recorded
statements of various persons and inquired about income-generating
activities of GE group, employees working from LO and their roles and
responsibilities, etc.

It was found that generally the business
heads were expatriates appointed to head Indian operations and the
support staff being provided by GE India Industrial Private Limited and
other third parties. While the expatriates were on the payroll of GE
International Inc., they worked for various GE group businesses.

The
tax authority sought information in respect of expatriate employees
such as nature of job, duties and responsibilities, terms, conditions
and duration of employment, entity for which they were working,
emoluments and basis of incentives/bonuses, self-appraisal of work done
in India, etc. The tax authority received only part response mentioning
that the employees were merely acting as communication channel for the
overseas entity.

Hence, in absence of necessary facts, the tax
authority furnished additional evidence in the form of Linkedin profile
of the employees and contended that since these were available in public
domain, they should be admitted as additional evidence. The additional
evidence was provided to disprove the claim that these employees were
merely acting as a communication channel. This evidence was never
refuted.

Held:
• Linkedin profiles are not hearsay
because it is the employee himself who has given the details relating to
him and no third party is involved in creating the profiles. The data
is in public domain.

• In terms of section 60 of the Evidence
Act, oral evidence must be direct. It is well-settled law that admission
though not conclusive is binding and decisive unless it is withdrawn or
proved to be erroneous. Linkedin profiles are in the nature of
admission of the person whose profile it is.

• It is up to the taxpayer to rebut the information contained in Linkedin profiles by bringing on record contrary facts.

•
The evidence sought to be filed by the tax authority was only
supporting in nature and it would assist in appreciating the facts in
judicial manner.

Accordingly, the Tribunal admitted Linkedin
profiles as additional evidence. However, in the interim order, the
Tribunal did not conclude on the existence of PE.

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TS-355-ITAT-2014(Del) Nortel Networks India International Inc. vs. DDIT A.Ys.: 2003-04, 2004-05 & 2005-06, Decided on: 13-06-014

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Article 5, 7 India-USA DTAA – On facts, having regard to the activities performed in India, the Indian group company was PE of the USA company and 50% of profit was attributable to the PE.

Facts:
The taxpayer was a company incorporated in USA and member-company of Nortel group. Nortel group was a leading supplier of hardware and software products for GSM cellular radio telephone system.

Nortel group also had an Indian company (“ICo”), which had entered into a composite contract with an Indian telecom company (“TelCo”) for supply of equipment. Immediately after signing the contract, ICo assigned it in favour of the taxpayer without any consideration.

The equipment to be supplied under the contract was acquired by the taxpayer from its group company in Canada. The Canadian company had a Liaison Office (“LO”) in India. Employees of various Group companies visited India for facilitating execution of the contract and worked from the premises of the LO or ICo.

The performance under the contract was guaranteed by Nortel group.

The AO was of the view that the taxpayer was merely a “paper company” created to avoid taxes in India by assignment of the contract by ICo and the overall execution/ work was done through ICo only. The Taxpayer thus triggered a Permanent establishment (PE) in India by virtue of activities done by ICo, the LO and the services provided by employees of Group companies visiting India.

Held:
• The contract was indivisible turnkey contract for supply, installation, testing, commissioning, etc. Responsibility for negotiating, securing and executing the contract as well as installation and commissioning were undertaken by ICo. Accordingly, ICo was a fixed place of business and dependent agent PE of the taxpayer.
• The LO of Canadian company was rendering all kinds of services to all group companies including the taxpayer. Hence, it constituted fixed place PE of the taxpayer.
• The taxpayer approached the customer, negotiated the contract; installed and tested the equipment. All these activities were undertaken through ICo and LO. Experts of group companies visited India in connection with the project and carried out business of the taxpayer through the premises of the LO and ICo. The contract did not merely require loading the equipment in ship but a number of other activities which were carried out in India and remuneration for these activities was included in consideration payable for the contract. Though represented as sale consideration for the equipment, the amount represented payment for works contract under which entire installation and customisation were carried out in India.

• The activities of the taxpayer in India through ICo, LO and employees of Group companies constituted its PE under Article 5 of India-USA DTAA . These activities were core activities of the taxpayer and hence, they were not preparatory and auxiliary activities.

• The accounts furnished by taxpayer, being not audited, had no sanctity. The only explanation for the trading loss in an intra-group transaction could be avoidance of tax. Hence, the group accounts should be examined to have correct picture. Computation of income of PE depends on the facts of each case and in the present case, after allowing expenses relatable to PE, selling, general marketing and R&D expenses, attribution of 50% of the profits to PE would be reasonable.

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TS-341-ITAT-2014(Del) Jyotinder Singh Randhawa vs. ACIT A.Y. 2009-10, Decided on: 16-06-2014

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Section 6, the Act – Benefit u/s. 6 to Indian citizens leaving India ‘for the purposes of employment outside India’ also applies to selfemployed professionals going abroad for business or profession.

Facts:
The taxpayer was an Indian citizen. He was a professional golfer. During the relevant tax year his stay in India was 167 days. While filing his tax return, the taxpayer claimed his residential status as non-resident.

According to the AO, the contention of the taxpayer that he had left India for the purpose of employment and therefore, should be entitled to the benefit under Explanation to section 6(1) of the Act was not valid. Hence, the AO concluded that the taxpayer could be treated as non-resident only if he was in India for less than 365 days during the 4 years preceding the relevant tax year, and was in India for less than 60 days during the relevant tax year. Since the taxpayer could not prove this, the AO treated him as resident during the tax year and accordingly, added the income which had accrued to, and received by, the taxpayer outside India .

Held:
The taxpayer is a professional golfer and a self-employed professional sports person who participates in Golf tournaments conducted in various countries. Relying on the decision of Kerala High Court in CIT vs. Abdul Razak [2011] 337 ITR 350 (Ker), the Tribunal held that to determine residential status under the Act, the term ‘leaves India for the purposes of employment outside India’ also means going abroad in the course of self-employment for own business or profession and accordingly, treated him as non-resident.

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TS-383-ITAT-2014(HYD) GFA Anlagenbau Gmbh vs. ACIT A.Ys.: 2005-06, 2006-07, 2007-08, 2008-09, 2009- 10, Decided on: 02-07-2014

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Section 9(1)(vii) of the Act; Article 5, 12, India-
Germany DTAA – in absence of a building or construction site owned or
operated by German company, mere rendition of supervisory services will
not constitute supervisory PE; the payment for such services should be
taxable as Fee For Technical Services (FTS).

Facts:
The
taxpayer was a company incorporated in Germany. It was engaged in
supervision, erection and commissioning of plant and machinery for steel
and allied plants in India. During the relevant tax year, it had
rendered technical and supervisory services to several Indian companies
by engaging experienced foreign technicians at the work sites and other
locations in India to carryout technical and supervisory services. The
taxpayer categorized the receipts for such services as FTS u/s.
9(1)(vii) of Act, as also under Article 12 of India-Germany DTAA .

The
total stay of technicians for one of the project in India exceeded 183
days. The AO contended that PE of the taxpayer was constituted in India
in terms of Article 5(2)(i) of India-Germany DTAA as the activities of
the taxpayer in India continued for a period exceeding 6 months.

Further,
since the activities were effectively connected with the PE, in terms
of Article 12(5) read with Article 7, receipts from the services was
taxable as business profits and consequently, in terms of section 44DA
was chargeable to tax @40%.

Held:
As regards the Act
Relying
on the decision of Andhra Pradesh High Court in Clouth Gummiwerke
Aktiengesellschaft vs. CIT [1999] 238 ITR 861 (AP), the Tribunal held
that payments received for the supervisory activities carried out in
India were taxable in terms of section 9(1)(vii) of the Act as FTS.

Further,
as the taxpayer had rendered the services at the project sites of its
clients and since it did not own and operate such sites independently,
they did not constitute the fixed place PEs under the Act.

As regards India-Germany DTAA
Relying
on the decision of Special Bench of the Tribunal in Motorola Inc vs.
DCIT [2005] 95 ITD 269 (Delhi)(SB) and the decision of Mumbai Tribunal
in Airlines Rotables Ltd vs. JDIT [2011] 131 TTJ 385 (Mum), the Tribunal
held that the taxpayer did not have a fixed place PE in India under
Article 5(1).

Supervisory activities by themselves cannot
constitute PE under Article 5(2)(i) if they were not in connection with
building, construction or assembly activities of the taxpayer. In the
present case, since the taxpayer was merely providing supervisory
services, without having a building or construction site or fixed place
at its disposal,it did not constitute a PE.

Thus, the activities
being technical in nature, they were clearly covered under the FTS
definition of the India- Germany DTAA and the same were not ‘effectively
connected’ to a PE as the taxpayer did not have a fixed place of
business through which its activities were carried out.

Relying
on Valentine Maritime (Gulf) LLC vs. ADIT [2011] 45 SOT 359 (Mum), the
Tribunal also observed that unless the contracts are otherwise linked
with each other they should be considered individually for the duration
test.

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(Unreported) [ITA No 80/Del/2013] JC Bamford Investments vs. DDIT A.Y.: 2008-09, Decided on: 04-07-2014

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Article 13(2), India-UK DTAA – though recipient of royalty was not beneficial owner, DTAA benefit cannot be denied since the beneficial owner as well as recipient of income was resident of UK.

Facts:
The taxpayer was a company incorporated in, and tax resident of, the UK. The taxpayer was a member of a group of companies. Another UK company (“UKCo”), also a member-company of the group, had entered into a Technology Transfer Agreement (“Agreement”) with a third group company incorporated in, and a tax resident of, India (“IndCo”) for grant of license to certain intellectual property (“IP”).

Subsequently, UKCo, IndCo and the taxpayer entered into a tripartite agreement under which UKCo sub-licensed IP to the taxpayer in consideration of the payment of royalty by the taxpayer to UKCo. Hence, IndCo was required to pay royalty to the taxpayer. The taxpayer, in turn, paid 99.5% of the royalty to UKCo and retained merely 0.5% with it.

According to the taxpayer, the payment received by it was subject to concessional tax rate of 15% in terms of Article 13(2) of India-UK DTAA . According to the tax authority, Article 13(2) applied only if the recipient of royalty was “beneficial owner” of the royalty whereas the taxpayer was merely a conduit between UKCo and IndCo and not a “beneficial owner” and hence, the normal tax rate of 20% was applicable.

Held:
In terms of section 90(2) of the Act, between the provisions of the Act and DTAA, whichever is more beneficial should apply. In case of the taxpayer, since provisions of DTAA are more beneficial, they should apply. However, the relevant DTAA provision is subject to the condition that the recipient of the royalty should be “beneficial owner”.
The phrase “beneficial owner” is not defined under the Act or DTAA. In common parlance, a “beneficial owner” is one who is entitled to income in his own right. Also, “Beneficial owner” is one who is free to decide: (a) whether or not the capital or other assets should be used or made available for use by others; or (b) on how the yields there from be used; or (c) both. Sometimes, a “beneficial owner” may turn out to be a person different from the immediate recipient or formal owner or recipient of the income.

The benefits of DTAA are meant to be given only to the resident of either State and not to a resident of a third State. Benefit of lower rate under Article 13(2) should not be given if the “beneficial owner” is not a resident of UK. However, the benefit is not lost merely because the formal recipient, a resident of UK, is not the beneficial owner. The underlying intention is to give benefit only to a resident of UK. In the present case, since the recipient as well as the beneficial owner were both resident of UK, benefit of lower rate of tax under DTAA cannot be denied.

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TS-263-ITAT-2014(Mum) PMP Auto Components vs. DCIT A.Y: 2009-10, Dated: 22.08.2014

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Section 92B – Advancing loans to subsidiary is an international transaction; interest to be imputed as per transfer pricing provisions. Article 11 of India-Mauritius DTAA does not dilute this as the Article is applicable only in cases where interest actually arises in a contracting state and accrues to the resident of another contracting state and not in respect of notional income taxed under TP.

Facts:
The Taxpayer advanced loans to its subsidiary in Mauritius (FCo) without charging any interest. Tax Authority imputed notional interest on loan provided to F Co by determining the arm’s length interest. The Taxpayer contended that when no interest was charged by the Taxpayer no notional interest can be added under Transfer pricing (TP) adjustment. Alternatively, as the interest was not ‘paid’ by F Co to the Taxpayer, it would not be taxable in India as per the provisions of Article 11 of India-Mauritius DTAA

Held:
Transaction of loan given to the AE is an international transaction as per the provisions of section 92B; hence the arm’s length price has to be determined as per the transfer pricing provisions of the Act.

Article 11 of India-Mauritius DTAA applies to a case where interest actually arises in a contracting state and is paid to the resident of another contracting state. It is contemplated under Article 11 that payment is a pre-condition for taxing interest only in the circumstances when interest is arising in the contracting state and accrued to the resident of another contracting state. In other words, the provision of Article 11 defers the taxability of the interest arising but not received and, therefore, it is taxed only when it is received. In the case on hand, when the Taxpayer has not even admitted that the interest has arisen and accrued to it on the loan given to the AE, provisions of Article 11 of India-Mauritius treaty cannot be pressed into service and the same is hence taxable as per the TP provisions.

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TS-367-ITAT-2014(Mum) IATA BSP India vs. DDIT A.Y: NA Dated: 11-06-2014

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Restricted scope of India – USA and India-Portugal DTAA, can be read into the India-France DTAA; Services which does not satisfy ‘make available’ condition do not trigger FTS taxation under India-France DTAA.

Facts:
The Taxpayer is a Branch office (BO) of a Canadian Company (CCo) which is the trade association for the world’s airlines. The BO was established as per the permission of Reserve bank of India for the purpose of undertaking certain commercial activities on no profit basis.

CCo, entered into an agreement through its administrative office in Geneva, with French Company (FCo) for developing certain system (BSP Link). BSP Link enabled the manual operations such as issue of debit notes/credit notes, issue of refund, billing statement and all the information relating to tickets to be carried out electronically for agents as well as airlines which participated in the BSP link to provide information in relation to the booking of tickets and facilitate billing for the tickets.

The BSP link services were provided to the agents and airlines operating in India for which invoices were initially raised by FCo on Geneva Office of CCo which in turn raised the invoices on BO.
BO made an application u/s. 195(2) to the Tax Authority, to make payments to its Geneva office without withholding taxes at source on the ground that no services were being rendered by the Geneva Office. Further it was contended that no tax was deductible on such payments as the branch office and its head office are not separate entities as per the Income-tax Act.

However, the Tax authority contended that, in substance the transactions involved the payments on account of BSP link services provided by FCo in France and as the said services were technical in nature taxes are required to be withheld under the India – France DTAA .

On Appeal, the First Appellate Authority held that the fee for services is not taxable by virtue of MFN clause of the DTAA which incorporates ‘make available’ condition in India France DTAA .

Aggrieved, the Tax Authority appealed to the Tribunal.

Held:
India-France DTAA protocol contained the MFN clause, by virtue of which if India enters into a DTAA or protocol post 01-09-1989 under which it limits its right to tax FTS to a rate lower or scope more restricted than the rate or scope prevalent in the India-France DTAA , the same rate and scope would also apply to India-France DTAA .

India entered into a DTAA with USA and Portugal post 01- 09-1989. The India-USA DTAA and India-Portugal DTAA have provided a narrower scope for taxation of FTS by inserting a ‘make available’ condition.

Thus the restricted scope of India – USA and India-Portugal DTAA , can be read into the India-France DTAA . As there was nothing to show that the BSP Link services make available any technical knowledge, experience, skill, know-how, or processes, it does not trigger FTS taxation under the India-France DTAA .

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TS-285-AAR-2014 Steria (India) Limited A.Y: NA Dated: 02-05-2014

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Restriction in the Most Favoured Nations (MFN) Clause of the India-France DTAA is in relation to rates of taxes, the “make available” condition, as available in the India-UK DTAA, is not included within its purview.

Facts:
The Applicant, a public company in India (ICo), was engaged in providing information technology driven services. ICo entered into a management service agreement with Steria France (FCO), a resident of France, for various management services, such as general management, corporate communications, internal audit, finance-related services etc., with a view to rationalise and standardise the business conducted by ICo in India in accordance with international best practices.

FCO provided services offshore through electronic media (telephone, fax, email etc.) and no personnel visited India for provision of the services.

As per the France DTAA fees for technical services (FTS) is defined to mean consideration for any technical, managerial or consultancy services. Though “FTS” is broadly defined in the France DTAA, vide the Protocol to the France DTAA , an Indian resident making a payment to a French resident may apply the MFN Clause to, inter alia, take privilege of a more restricted scope of source taxation or rate of tax present in any subsequent DTAA entered into force by India with an OECD member. As per the France DTAA , FTS was taxable at 20% on gross basis.

Pursuant to the MFN Clause, a Notification1 (France Notification) was issued by the GOI giving effect to the MFN clause which provided for a lower rate of taxation viz., 10%. The France Notification makes no reference to the restricted scope of meaning of FTS.

In a similar notification, in the context of the India-Netherlands DTAA, the MFN benefit has been provided with respect to lower rate, as well as the narrow scope of FTS definition i.e., incorporating ‘make available’ condition.

ICo relied on the India-UK DTAA to import the ‘make available’ condition for taxation of FTS. ICO contended that on an application of the MFN Clause in the Protocol to the France DTAA, the narrower scope of the definition of FTS, as available in the India-UK DTAA , may be applied. Accordingly, since the services do not make available technical knowledge, experience, skill etc., the services rendered should not be regarded as taxable in India.

The Tax Authority, on the other hand, contended that the services are FTS in nature and the ‘make available’ concept is not applicable. In any case, technical knowledge, skill etc., are made available through employee interaction and, hence, the same is taxable in India.

Held:
A Protocol cannot be treated at par with provisions contained in a DTAA itself, though it is an integral part of the DTAA .

The restriction in the MFN clause of the France DTAA is in relation to rates of taxes and the “make available” Clause cannot be read into the Protocol.

Furthermore, the France Notification issued pursuant to the Protocol giving effect to the MFN Clause provides only for a reduced rate of tax and does not include anything about the ‘make available’ clause. Had the intention been so, the same would have been mentioned in the France Notification, comparable to what has been done in the India-Netherlands DTAA . The changes in the France DTAA on the basis of the Protocol were given effect by the France Notification only.

The ‘make available’ Clause cannot be imported in the DTAA to change the complexion of the DTAA provision. A Protocol or Memorandum of Association can be made use of for interpreting the provisions of a DTAA but it is not correct to import words, phrases or clauses not available into a DTAA on the basis of DTAA s with other countries. At the most, India is under obligation, as per the terms of the Protocol, to limit its tax rate or scope as was done in the France Notification, but such type of an action was not within the purview of the AAR.

Since the services rendered by FCo were technical services under the Indian Tax Laws, as also under the France DTAA , the payments fell within the purview of FTS and, hence, were chargeable to tax in India and, accordingly, taxes are required to be withheld.

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(Unreported) [ITA No. 1407 & 1405/Ahd/2009] ITO vs. Dholera Port Ltd. and ITO vs. Adani Port-Infrastructure Pvt. Ltd. A.Ys.: 2008-09, Decided on: 30-05-2014

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Article 13 India-UK DTAA – where the services provided by UK Company did not “make available” technical knowledge, skill etc., the payment was not taxable as FTS under Article 13 of India-UK DTAA.

Facts:
The taxpayer was an Indian company. The taxpayer had engaged a British company (“UKCo”) for conducting navigation studies to evaluate the economic feasibility of the port. For the services rendered, the taxpayer made payment to UKCo. According to the taxpayer, technical knowledge, skill or know-how was not “made available” by UKCo and hence, in terms of Article 13(4)(c) of India- UK DTAA , the payment was not FTS.1

Held:
• The agreement between taxpayer and UKCo stipulated that the report to be provided by UKCo was confidential, the taxpayer was not only prohibited from transferring the report to a third person but also prohibited from using the knowhow in performing services for any other client in future. The taxpayer was also prohibited from sub-licensing any of the rights granted.
• Based on the case law explaining the expression “make available,” the technology can be said to be “made available” only if the fruits of the services were transferred to the services recipient.
• Having regard to the facts and circumstances of the present case, the payment for the services provided was not made for “making available” technical knowledge, experience, knowhow to the taxpayer and therefore, it was not taxable as FTS under India-UK DTAA .

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TS-100-ITAT-2014(PAN) V.M. Salgaocar & Bro. Pvt. Ltd. vs. ACIT A.Y: 2006-07 and 2007-08, Dated: 23.12.2013

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Sections. 9(1)(vi), 9(1)(vii) – Payment for sales and Marketing services does not amount to Royalty or fees for technical services (FTS) under the Act. Services do not satisfy “make available” condition under the India-USA DTAA , hence do not constitute fees for includes services (FIS)

Facts:
The Taxpayer carrying on hotel business entered into international sales and marketing agreement with a foreign company (F Co). These services included international sales and marketing services, special chain services, reservation system and special advertisement costs. F Co provided such services from outside India.

During the relevant financial year taxpayer paid sales and marketing fees and reimbursed certain expenses, without deducting taxes thereon. The Tax Authority disallowed the expenses on the ground that the Taxpayer was liable to withhold taxes on payments made to a non-resident.

Held:
Sales and Marketing services is not covered within Explanation 2 to section 9(1)(vi) and hence outside the scope of royalty taxation under the Act.

The services rendered by F Co does not involve rendering of any managerial, technical or consultancy services rendered in India and therefore it cannot be regarded to be FTS u/s. 9(1)(vii) of the Act. In view of this, the income received by taxpayer cannot be deemed to accrue and arise in India.

Under the India-US DTAA, on interpretation of ‘make available’ as per Article 12, reliance was placed on Bombay Tribunal decision in Raymond Ltd (86 ITD 791) which interpreted the term “make available” to mean that the person utilising the services must be able to make use of the technical knowledge etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. In the facts as the services provided by F Co did not make available the sales and marketing services to the Taxpayer the same was outside the ambit of FIS taxation.

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[2013] 40 taxmann.com 180 (Mumbai – Trib.) Platinum Asset Management Ltd vs. DDIT Asst Year: 2006-07, Dated: 4th December 2013

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Section 115AD of the Act – loss arising to a FII from index derivative transactions, is a capital loss and can be set-off against capital gains from sale of shares.

Facts:
The taxpayer was a Foreign Institutional Investor (“FII”). In respect of its two sub-accounts, the taxpayer had furnished the return of income declaring short-term capital loss. The loss had arisen from index derivative transactions. Hence, the AO concluded that it was a business loss assessable under the head ‘income from business and profession’ and not short-term capital loss as claimed by the taxpayer. The set off was denied as the taxpayer had no PE in India. In appeal, CIT(A) confirmed the order.

The issues before the Tribunal were:

• Whether the loss arising from index derivative transactions was business loss or capital loss? Whether the loss arising from index derivative transaction can be set-off against capital gains arising from sale of shares?

Held:
In terms of section 115AD of the Act, a FII is an ‘investor’ and further, income from transfer of securities is chargeable under the head ‘capital gains’ (long-term or short-term) and not business loss, and eligible for set off against capital gains.

SEBI (FII) Regulations and section 115 AD of the Act show that in case of FIIs the government has not contemplated that the tax authority should distinguish between the securities as those constituting capital asset or shock-in-trade. If a FII receives income in respect of securities or from transfer of securities, such income should be considered only u/s. 115AD(1).

Though in common parlance, shares and debentures are distinct from derivatives, such distinction is obliterated by mentioning the term ‘securities’ as defined in section 2(h) of Securities Contract (Regulation) Act, 19561 .

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[2013] 39 taxmann.com 26 (Agra) Metro & Metro Vs ACIT A.Ys.: 2008-09, Dated: 1 November 2013

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Section 9(1)(vii), 40(a)(i) of I T Act – Article 12 of India-Germany DTAA – (i) if no human intervention is involved in any services, they will not be considered “technical” services; (ii) source of income can be said to be outside India only if manufacturing facilities are outside India and the customers are also outside India; (iii) as, on facts, withholding of tax was not applicable at the time when charges were paid, section 40(a)(i) cannot be invoked.

Facts:
The taxpayer was a 100% EOU partnership firm engaged in the business of manufacture and export of leather goods. During the relevant assessment year, the taxpayer made certain payments to a German company (“FCo”) towards leather testing charges without withholding tax from the payments. Before the AO, the taxpayer contended that since FCo had not carried out any testing operations in India, income could not be said to accrue or arise in India and hence, the taxpayer was not liable to withhold tax from the payments.

According to the AO, the payments constituted fees for technical services in terms of Explanation to section 9(1)(vii) of the Act and hence, the taxpayer was liable to withhold tax from the payments. Since the taxpayer had not withheld tax, applying section 40(a)(i), the AO disallowed the payments. CIT(A) confirmed the order of the AO.

Before the Tribunal, the taxpayer contended that: the entire testing process was automated; since it was a 100% EOU, the source of income was outside India; and hence, the payment did not fall within the ambit of section 9(1)(vii).

Held:
(i) Taxability u/s. 9(1)(vii) and under Article 12(4) of India-Germany DTAA

As per the taxpayer, the entire testing process was automated though this aspect was not examined by the authorities below. Since the terms “managerial” and “consultancy”, which respectively precede and succeed the term “technical” in Explanation 2 to section 9(1)(vii), the term “technical” would also be construed to involve human element. It is well settled that when no human intervention is involved in any services, they will not fall within the ambit of section 9(1)(vii). The question is not of more or less of human involvement but of presence or absence of human involvement.

(ii) Services utilised for income from source outside India

Even if the business is being carried on by a 100% EOU, it is a business carried on in India, and hence, it is not covered by the exception in section 9(1)(vii)(b) “where the fees are payable in respect of services utilized for the purpose of making or earning any income from any source outside India”. That exception will not apply merely because the user of services is a 100% EOU but only if the manufacturing facilities are outside India and the customers are also outside India.

(iii) Disallowance u/s. 40(a)(i)

Though the retrospective amendment is termed merely clarificatory, in view of Supreme Court’s judgment in Ishikwajima Harima Heavy Industries Ltd. vs. DIT (288 ITR 708) and in view of the fact that services were rendered outside India even if utilised in India, leather testing fees were not taxable in India in the light of the legal position as it prevailed at that point of time. Hence, at the time when the taxpayer made payments, it was not required to withhold tax and it became taxable in India only as a result of the retrospective amendment in section 9(1), the said payment cannot be disallowed by invoking section 40(a)(i). Hence, on facts, disallowance u/s. 40(a)(i) cannot be invoked.

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[2013] 40 taxmann.com 340 (AAR – New Delhi) Endemol India (P.) Ltd., In re Dated: 13 December 2013

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Section 9(1)(vii), 194C of I T Act; CBDT’s Circular No. 715, dated 08-08-1995 – services by non-resident for production of programmes for the purpose of broadcasting and telecasting are ‘work’ u/s. 194C and hence, income received would be business income, which in absence of PE in India, would not be taxable

Facts
The applicant was engaged in the business of production of television programmes for broadcasting and telecasting. Inter alia, the applicant produced a reality show (“the show”) for which the shooting took place in Argentina. For the purpose of the show, it engaged an Argentinian company for providing line production services in Argentina.

The issue raised by the applicant before the AAR was: whether the amount paid to the Argentinian company would constitute Fees for Technical Services [u/s 9(1)(vii)] or Royalty [u/s. 9(1)(vi)] or business income [u/s 9(1)(i)] and at what rate tax should be withheld from the payments?

Held
• The agreement with the Argentinian company is for composite services (mainly comprising technical crew, production crew and technical equipment) for a limited period of time and neither equipment nor local technical crew is separately provided.

• In CIT vs. Prasar Bharati, [2007] 158 Taxman 470 (Delhi) it was held that broadcasting and telecasting, including production of programmes for such broadcasting and telecasting, do not fall under the provision of section 194J as they are specifically covered by definition of ‘work’ in section 194C.

• CBDT’s circular No.715 dated 08-08-1995 states that payments made to advertising agencies for production of programmes which are to be broadcasted/telecasted would be subject to withholding tax u/s. 194C.

• Since the payments made by the applicant to the Argentinian company were for production of programmes for the purpose of broadcasting and telecasting, the services rendered would be specifically characterised as ‘work’ u/s. 194C.

• If a particular item is specifically characterized in a particular section of the Act, it will override the provision in the general section. Since the services are characterised as ‘contact work’ u/s. 194C, the income received would be necessarily treated as business income and not FTS.

• In absence of PE of the Argentinian company in India, its income would not be taxable in India.

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Section 9(1)(i) of the Act – no income arises to a LO of a non-resident whose activities are confined to sourcing of goods for export.

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Section 9(1)(i) of the Act – no income arises to a LO of a non-resident whose activities are confined to sourcing of goods for export.

Facts:
HKCo was a company incorporated in Hong Kong and a member of an international Group of companies. HKCo acted as a sourcing channel for the entire Group. It sourced products internationally at competitive prices and of quality standard prescribed by the Group and resold goods to the affiliates. HKCo had established a Liaison Office (“LO”) in India for acting as a communication channel between HKCo and apparels manufacturers in India. Indian suppliers raised invoice on HKCo and HKCo, in turn, raised invoice on the buyer entities without any mark up. HKCo charged 5% commission to the buyer on the invoice value. LO also monitored the progress, quality, etc., at the manufacturing facilities and also the time schedule.

The AO concluded that the activities of LO pertained to supply chain management activities of HKCo. Hence, the exclusion in Explanation 1(b) to section 9(1)(i) of the Act did not apply and passed draft assessment order accordingly. Relying on the decision in Columbia Sportswear Company, In re, [2011] 12 taxmann.com 349 (AAR), the DRP accepted the conclusion of the AO and directed him to make the assessment.

Held:
The LO was engaged in (i) identification of the vendors in India; (ii) communication of the requirements with regard to design and specifications to the vendors; (iii) receipt of the prototype from the vendor; (iv) quality check for the products before production of goods; and (v) tracking the production and delivery including forecasting and scheduling of the order.

Considering the activities carried on by the LO of HKCo, the activities squarely fall within the ambit of explanation 1(b) to section 9(1)(i) of the Act. Further, there is no evidence to suggest that LO had indulged in commercial activities. In arriving at the conclusion of non taxability, strong reliance is placed on the decision of the Karnataka High Court in Nike Inc. (34 taxmann. com 170).

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[2013] 40 taxmann.com 345 (AAR) Endemol India (P.) Ltd., In re Dated: 6th December 2013

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Section 9(1)(vii) of the Act; Article 12 of India- Netherlands DTAA – while in terms of the Act, the consideration paid for the services was FTS, since the recipient was not enabled to independently apply the technology, knowledge or expertise, the payment was not FTS under India-Netherlands DTAA, which in absence of PE in India, was not taxable in India.

Facts:
The Applicant was an Indian tax resident company and a member of an international group of companies. The Applicant was engaged in the business of providing and distributing television programmes and it mainly produced reality shows and recently, also soap operas. DutchCo was also a member company of the Group. The Applicant entered into Consultancy Agreement with DutchCo under which DutchCo was to provide certain services such as, General Management, International Operations, Legal and Tax Advisory, Controlling and Accounting, Corporate Communications, Human Resources, Corporate Development, Mergers & Acquisitions, etc. These services were provided by DutchCo outside India. According to the Applicant these were administrative services.

The Applicant approached the AAR for its ruling on the following issues.

(i) Whether the payments made by the Applicant to DutchCo for administrative services would be in the nature of FTS under Article 12 of India- Netherlands DTAA?

(ii) If the payments were not FTS, would they be Business Income, which in absence of PE of DutchCo in India, would not be chargeable to tax in India?

(iii) If the payments were not FTS, would they be subject to withholding under section 195 of the Act?

Held:
As regards the Act The services rendered by DutchCo require technical knowledge, experience, skill, know-how or processes and hence, cannot be termed merely as administrative and support services as tried to be made out by the Applicant.

As per The consultancy agreement, DutchCo was to render its ‘considerable experience, knowledge and expertise’ and the payments were to be made therefor.

The definition of FTS in Explanation 2 to section 9(1)(vii) of the Act, includes managerial, technical or consultancy services. Hence, the consideration paid for the services rendered by DutchCo were covered by the said definition of FTS.

As regards India-Netherlands DTAA

Definition of FTS in Article 12(5) of India-Netherlands DTAA, contains ‘make available’ clause, which would require that the Applicant should be enabled to independently apply the technology, knowledge or expertise. The Applicant merely took assistance of DutchCo in its business activities and there was nothing to suggest that it was enabled to independently apply the technology, knowledge or expertise and thus, ‘make available’ requirement was not satisfied.

DutchCo did not have any PE in India. Hence, the consideration paid for the services rendered was not taxable in India.

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[2014] 41 taxmann.com 207 (AAR) Aircom International Ltd., United Kingdom, In re Dated: 10th January 2014

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Section 245R(2) of the Act – where scrutiny notice u/s. 143(2) of the Act is issued after the date of filing of application before the AAR, bar in section 245R(2) is not attracted.

Facts:
The Applicant was a company incorporated in the UK. The Applicant had a wholly owned subsidiary in India (“ICo”) that was engaged in the business of software, sales and consultancy in the area of tele-communications. The Applicant entered into Management Services Agreement (“MSA”) with ICo. ICo had made certain payments under the MSA to the Applicant.

The Applicant applied to the AAR for its ruling on the assessibility of the payments received from ICo.

While ICo had filed the return of its income before the application was made by the Applicant to the AAR, the AO of ICo had issued the notice u/s. 143(2) of the Act to ICo after the application was filed before the AAR.

Held:
Following the ruling in Hyosung Corporation Korea, In re, [2013] 36 taxmann.com 150 (AAR), the AAR held that mere filing of the return of income does not attract the bar on the admission of the application as provided in section 245R(2) of the Act. The question raised in the application can be considered as pending for adjudication before the tax authority only when issues are referred to in the return and notice u/s 143(2) is issued.

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TS-76-ITAT-2014(Del) Bharti Airtel vs. ACIT A.Y: 2008-2009, Dated: 11-03-2014

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10. TS-76-ITAT-2014(Del) Bharti Airtel vs. ACIT A.Y: 2008-2009, Dated: 11-03-2014

Section 92 – Notwithstanding the amendment to the ITA, issuance of corporate guarantee that does not have a bearing on the profits or losses or assets of enterprise does not amount to “international transaction” for transfer pricing provisions.

Facts:
The Taxpayer is an Indian company engaged in the provision of telecommunication services. The Taxpayer had during the financial year issued a corporate guarantee on behalf of its associated enterprise (AE) and also contributed to the share capital in its foreign subsidiaries.

With respect to the corporate guarantee issued by the Taxpayer on behalf of its AE guaranteeing the repayment of a working capital facility advanced by a bank, the Taxpayer contended that it had not incurred any costs or expenses on account of issue of such guarantee and the guarantee was issued as a part of the shareholder activity. Accordingly, there was no requirement to charge a guarantee fee under the TP provisions.

The Taxpayer, however, in its TP documentation study determined an arm’s length (AL) guarantee fee and offered this income to tax.

During the Transfer Pricing Audit, the Tax Authority observed that by issuing the corporate guarantee, the AE’s credit rating benefited from association to the Taxpayer and the Taxpayer, was therefore, required to receive AL consideration and accordingly estimated the AL fee and a TP adjustment was made with respect to the differential guarantee fee.

For the contribution to the share capital of its foreign subsidiaries, the Taxpayer did not benchmark the said transaction as the payments were in the nature of capital contributions. However, during the course of the audit proceedings, the Tax Authority noted there was a significant delay in the allotment of shares to the Taxpayer and treated the contributions as interest free loans for the period between the date of payment and the date on which shares were actually allotted and imputed an AL interest on the amounts deemed as an interest free loan.

The issue before the Tribunal was whether a corporate guarantee issued without a charge is to be considered as “international transaction” and whether transfer pricing provisions apply to such transaction. Further the Tribunal was required to decide on whether the share application money can be treated as interest free loan to AE’s

Held:
On issue of corporate guarantee to its AE

Reviewing the definition of the term “international transaction”, the Tribunal held that in order for the transaction to be an “international transaction” subject to TP, the transaction should be such as to have a bearing on profits, income, losses or assets of such enterprise.

Accordingly, the Tribunal held that a corporate guarantee issued without a charge is outside the ambit of ‘international transaction’ and transfer pricing provisions do not apply to such arrangements, even after the amendment introduced by the Finance Act, 2012.

On Capital contribution to AEs

The Tribunal held that the characterisation of the payment made by the Taxpayer to its AEs as capital contribution was not in dispute and were in the nature of payments for share application money.

The Tribunal noted there was no provision enabling deeming fiction under the Indian transfer pricing regulations to regard share application money as interest free loan.

Further, the Tribunal observed there is no finding about what is the reasonable and permissible time period for allotment of shares. Even if one was to assume there was an unreasonable delay in the allotment of shares, the capital contribution could have, at best, been treated as an interest free loan only for such period of “inordinate delay” and not the entire period from the date of making the payment to date of allotment of shares.

This aspect of the matter is determined by the relevant statute, which is different than that of an interest free loan on a commercial basis between the share applicant and the company to which the capital contribution is being made.

Since the Tax Authority did not bring any evidence on the payment of interest to an unrelated share applicant for the period between making the share application payment and allotment of shares, the Tribunal held it was unreasonable and inappropriate to treat the transaction as partly in the nature of an interest free loan to the AE.

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S-179-ITAT-2014(Mum) Huawei Technologies Co. Ltd. vs. ADIT A.Ys: 2005-2009, Dated: 21-03-2014

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9. S-179-ITAT-2014(Mum) Huawei Technologies Co. Ltd. vs. ADIT A.Ys: 2005-2009, Dated: 21-03-2014

Premises of Indian subsidiary used by parent company to perform core sales activities constitutes fixed place PE for the parent company in India.

The employees of Indian subsidiary securing orders on behalf of the parent company constitutes dependent agent PE for the parent company.

Facts 1:
The Taxpayer, a company incorporated in China, was engaged in supplying telecommunications network equipment. The Taxpayer had not filed any return of income in India.

Taxpayer had a wholly owned subsidiary in India (ICo). A survey was undertaken by the Tax Authorities at the ICo’s premises. On the basis of the documents found at the time of survey, the Tax Authority concluded that the Taxpayer has a PE in India and the income that has accrued from the supply of telecommunications network equipment during the previous year is taxable in India.

Held 1:
The Tribunal observed that the business of the Taxpayer was carried on India through the active involvement of the employees of the ICo. The employees of the ICo and the Taxpayer had jointly prepared bidding contracts, as well as negotiated and concluded the contract on behalf of the Taxpayer with its Indian customers from ICo’s premises.

Since the premises of the ICo was used to carry out core selling activities of the Taxpayer, the Taxpayer had a fixed place PE in India in the form of office premises of the ICo.

The employees of the ICo were part of the sales team of the Taxpayer, who habitually secured orders in India wholly or almost wholly for the Taxpayer in India. Further, the ICo was economically and financially dependent on the Taxpayer. Thus the ICo also created a Dependent Agency PE as per the India- China DTAA as well as a business connection as per the ITA for the Taxpayer in India

Software embedded in equipment necessary for the operation and control of the equipment does not constitute Royalty

Facts 2:
The Taxpayer was engaged in the supply of telecommunications network equipment. The Tax Authority artificially allocated the revenue from such supply between the Hardware and Software, although there was one consolidated price for the supply.

In respect of the Hardware portion, the Tax Authority computed the operating profits and allocated a part of it to the PE in India. In respect of the Software portion, the Tax Authority contended that it amounted to Royalty as per the India-China DTAA.

The Taxpayer contended that there was no separate supply of software and the software was embedded with the hardware/equipment. Thus, the entire receipt must be taxed as Business Income. Reference in this regard was made to the Delhi High court decision in the case of Ericsson A.B. (2012)(204 Taxman 192) and Nokia Networks OY (2013)(212 Taxman 68).

Held 2:
From the agreement with the Indian customers it is clear that the Software is a set of programmes embedded in the equipment and is necessary for control, operation and performance of the equipment.

The buyers were granted non-exclusive, nontransferable and non-sub-licensable licence to use the software. No ownership rights or interests are transferred to the buyer.

Hence following the decision in the case of Ericsson A.B (supra) it was held that the entire income is to be taxed as business income in India.

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TS-179-ITAT-2014(Mum) Viacom 18 Media Pvt. Ltd vs. ADIT A.Y: 2009-2012, Dated: 28-03-2014

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8. TS-179-ITAT-2014(Mum) Viacom 18 Media Pvt. Ltd vs. ADIT A.Y: 2009-2012, Dated: 28-03-2014

Section 9(1)(vi): As the term “process” is not defined under the DTAA, in terms of Article 3(2) of DTAA, it will have the same meaning as provided under the ITA; payments made for the transponder service amounts to “royalty” as per the India-USA DTAA.

Facts:
The Taxpayer, an Indian Company, was engaged in broadcasting television channels from India, marketing of advertising airtime on these channels, distribution of the channels, marketing and distribution of films through its film division ‘Studio 18’ and production of program content/television software.

The Taxpayer had entered into an agreement with an US Company (US Co) for availing 24 hour satellite signal reception and retransmission service (‘transponder service’). In consideration of the transponder service, the Taxpayer was required to pay transponder service fee (‘fee’)

Relying on the Delhi High court’s decision in the case of Asia Satellite communications Co. Ltd. (332 ITR 340), the Taxpayer contended that the payments made to US Co. were not taxable under the ITA. Further reference was made to the decision in the case of WNS North America (152 TTJ 145) and Siemens Aktiengesellschaft (310 ITR 320) to contend that the retrospective amendment in the ITA will not affect the benefit available under the DTAA and since the payments are not in the nature of Royalty and fee for included service (FIS) under the India-USA DTAA they are not taxable in India in the absence of a permanent establishment (PE), accordingly approached the Tax Authority requesting Nil withholding order for such payments.

The Tax Authority contended that the payments are taxable as royalty in light of amended provisions of 9(1)(vi) of the ITA and also under Article 12 of the India-USA DTAA and consequently subject to tax withholding.

On Appeal, the First Appellate Authority upheld the Tax Authority’s contention. Aggrieved, the taxpayer appealed to the Tribunal.

Held:
It is well settled that the Taxpayer will be governed either by the provisions of DTAA or the ITA, whichever is more beneficial.

The term “Royalty” is defined in the DTAA, therefore, any amendment in the definition of “Royalty” adversely affecting a Taxpayer covered by the DTAA would be inconsequential due to the protection of the DTAA.

Article 3(2) of the India-US DTAA provides that a term not defined in the DTAA, shall, unless the context requires otherwise, have the meaning which it has under the laws of the contracting state. The term “process” is not defined in the DTAA. Therefore, the meaning of such term under the ITA has to be applied.

However, Explanation 6 was inserted to clarify the meaning of the term “process” in the context of transmission by satellite and it does not in any way modify the definition of the term “royalty”. Thus this amendment cannot be considered as overriding the DTAA.

The use of transponder by the Taxpayer for telecasting/broadcasting the programme involves the transmission by the satellite (including uplinking, amplification, conversion for downlinking of signals) and hence falls within the definition of the term “Process” as per Explanation 6 of section 9(1)(vi). This meaning will also be applicable for interpreting the term “process” existing in the DTAA in terms of Article 3(2). Hence, the payments made for use/ right to use of process would fall in the ambit of the expression “royalty” as per the DTAA as well as the provisions of the ITA.

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TS-161-ITAT-2014(Del) JC Bamford Excavators Limited. vs. DDIT A.Y: 2006-2007, Dated: 14-03-2014

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7. TS-161-ITAT-2014(Del) JC Bamford Excavators Limited. vs. DDIT A.Y: 2006-2007, Dated: 14-03-2014

Consideration for the use of IPRs includes occasional onsite support. Such visitors perform stewardship activities and do not give rise to service PE.

Employees of parent company visiting the premises of an Indian Company for quality inspection to ensure that the licensed products meet the global quality standards perform stewardship activities and do not trigger service PE. Performance of technical services by employees on behalf of the Taxpayer results in a Service PE for the Taxpayer as per India-UK DTAA.

Effective connection is to be seen between the PE and the “contract, right or property” from which royalty or FTS arise.

Facts:
The Taxpayer, a UK company, was engaged in the business of manufacture, assembly, research, design and sale of material-handling equipment. The Taxpayer entered into a Technology Transfer Agreement (TTA) with its wholly-owned Indian subsidiary (ICo).

As per the terms of the TTA, the Taxpayer was required to perform the following activities for a consideration:

• Grant license to manufacture, permit the ICo to use know-how, trademark, inventions and any confidential information (IPRs) belonging to the Taxpayer.

• Provide technical assistance to the ICo’s personnel through its technical consultants to enable the licensed products to be manufactured as per the quality standards.

• Conduct random testing and inspection of licensed products manufactured by the ICo to ascertain if they meet the quality standards. For this purpose, employees of the Taxpayer occasionally visited the premises of the ICo.

For the technical assistance as stated under the TTA, the Taxpayer deputed eight employees to work with the ICo. The cost of such employees was recovered from the ICo. Such personnel occupied key managerial positions and were engaged in managing overall operations of the ICo.

The Tax Authority contended that the employees deputed for more than 90 days constituted a Service PE and the payments from the ICO being effectively connected to the PE need to be considered as business profits under the DTAA.

However, the Taxpayer contended that it did not have a PE in India as:

• Occasional visits of the Taxpayer’s employees for inspection and quality check were an integral part of royalty. Hence, the entire consideration for IPR under the TTA (embedded with the cost of occasional visit of employees) was taxable as royalty/fees for technical services (FTS) under Article 13 of the DTAA, as well as ITA.

• Personnel deputed under the IPAA ceased to be employees of the Taxpayer and they became the employees of the ICo. Accordingly, the presence of such personnel did not constitute a PE of the Taxpayer in India and reimbursement of salary of such employees under the IPAA was not taxable in India.

On appeal, the CIT(A) upheld the position adopted by the Taxpayer. Aggrieved, the Tax Authority filed an appeal with the Tribunal.

Held:
On constitution of Service PE

Based on the facts, the following factors supported the view that the assignees continued to be the employees of the Taxpayer:

• Assignment of employees to the ICo was pursuant to the license of IPRs to the ICo, for which, the Taxpayer committed to provide technical assistance to the ICo from time to time at the ICo’s request and subject to the availability of specialists or engineers.

• No employment contract between the ICo and the Assignees/appointment letter/terms and conditions of deputation were placed on record before the Tribunal.

• Assignees retained lien on their employment with the Taxpayer such that, after completion of assignment, the Assignees would resume employment with the Taxpayer at a level no less favourable than that which they left prior to the deputation.

• Agreements clearly mentioned that the Assignees would be subject to the rules and regulations of the ICo but would not be considered as employees of the ICo.

• The Taxpayer had full responsibility to remunerate the Assignees. Recovery of cost from the ICo is nothing but consideration for supply of the Assignees.

• The Assignees have no legal recourse to the ICo for any grievances or disciplinary actions.

It is quite natural that persons deputed with the ICo for a consideration will work under the direction of the ICo and could not have worked for the benefit of the Taxpayer. Since all the conditions of Service PE were satisfied, it was held that Taxpayer constituted a Service PE on account of assignees.

On account of service integral to a royalty arrangement under the TTA, the Tribunal held that occasional visitors undertook activities in India in terms of the obligation integral to the TTA i.e., testing and inspections, which were carried out to ensure that the licensed products adhered to the global standards of quality. Such activities were required by and in the interest of the Taxpayer and it amounted to stewardship activities which cannot be considered for constituting a PE in India. Reliance in this regard was placed on the SC decision in the case of Morgan Stanley (supra).

On Taxability under Article 7 on business profits visà- vis Article 13 on royalty and FTS

Consideration for granting the IPRs in relation to the technical know-how, patent rights and confidential information for the manufacture and sale of licensed products falls within the scope of royalty as defined under the DTAA, as well as the ITA.

Consideration received for the provision of services of personnel was for the application/enjoyment of IPRs and it qualified as FTS under the DTAA, as well as the ITA.

Effectively connected with PE

In terms of the DTAA, where a right or property or contract for which the royalty or FTS is paid is effectively connected with a PE through which the beneficial owner of the income carries on business in the source state, (i.e., India in the present case), then such royalty/FTS would be taxed as “business profits” under Article 7 and Article 13 on royalty and FTS would cease to apply.

For applicability of Article 7, effective connection should exist between the PE on the one hand and right, property or contract on the other, and not royalties or FTS flowing from such right, property or contract.

The words “effectively connected” are akin to “really connected”. In the context of royalties, it is in the nature of something more than the mere possession of the property or right by the PE but equal to or a little less than the legal ownership of such property or right. But, in no case, remote connection between the PE and property or right can be categorised as effectively connected.

It is of significance to note that an effective connection is required to be seen between the PE and the “contract” from which such fees resulted and not such FTS per se. The mere fact that such fee is effectively connected with the PE is not sufficient to bring the amount within the purview of business profits.

Taxation of various streams

For the different set of considerations, it was concluded:

• For royalty income from IPRs embedded with the salary of Occasional Visitors:

Royalty income cannot be said to be effectively connected with Service PE and the same would be taxable as Royalty on gross basis under the DTAA, as well as the ITA..

• For Service PE:

Service PE is represented by the Assignees deputed to the ICo. Thus, the contract, by virtue of which the Assignees were sent to India, is effectively connected with the Service PE and FTS arising out of such contract would be taxable as business profits under Article 7 of the DTAA.

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TS-150-ITAT-2014(Mum) Antwerp Diamond Bank NV vs ADIT A.Y: 2004-2005, Dated: 14.03.2014

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6. TS-150-ITAT-2014(Mum) Antwerp Diamond Bank NV vs ADIT A.Y: 2004-2005, Dated: 14.03.2014

On facts, payments made by Indian Branch office
for accessing the software installed in the server belonging to the head
office is in the nature of reimbursement of expenses and not royalty
under the India-Belgium Double Taxation avoidance agreement (DTAA).
Definition of Royalty as widened in Income-tax Act (ITA) is not relevant
for the purpose of DTAA.

Facts:
The Taxpayer, a tax resident of Belgium, was operating in India through a Branch office (BO).

The
Taxpayer (HO) acquired a banking application software named as
“Flexcube” (Software) from an Indian software company. The software was
installed in the server at Belgium and was apparently used for banking
purposes by the HO all over the world. The said software license was
also amended to allow the Indian BO to use it by making it accessible
through a server located in Belgium.

The cost to get data processed was reimbursed by the BO, on a pro-rata basis to the HO.

The
Tax Authority disallowed the above payment on the basis that the
payment constituted ‘royalty’ on which no taxes were withheld at source.

The Taxpayer submitted that:

• The payment was in the nature of reimbursement;
•
Also, it did not satisfy the requirement of payment made for ‘use of’
or ‘right to use’ any copyright for it to be treated as ‘royalty’ under
the India – Belgium DTAA.

On appeal, the CIT(A) agreed with the
Taxpayer and held that the data processing cost paid by the Indian BO
does not amount to ‘royalty’.

Aggrieved, the Tax Authority appealed before the Tribunal.

Held:
The
BO sends data to the HO for getting it processed as per the requirement
of banking operations. As per the terms of the agreement between the HO
and the third party, the HO has non-transferable rights to use software
and the HO cannot assign, sub-license or otherwise transfer the
software. The HO allocates expenditure of the I.T. resources on a
pro-rata basis.

Insofar as the BO is concerned, it is only
reimbursing the cost of processing of its business data to the HO, which
has been allocated to it on a pro-rata basis. Such reimbursement does
not fall within the ambit of the definition of “royalty” under the DTAA.

In
the present case, the payment made by the BO is not for ‘use of’ or
‘right to use’ software. The BO does not have any independent right to
use or control over the main frame of the computer software installed in
Belgium. To qualify as ‘royalty’ under the DTAA, the payment should be
qua the use or the right to use the software exclusively by the BO. The
BO should have exclusive and independent use or right to use the
software and for such usage, payment should be made.

It is also
not the case of the Tax Authority that the HO has provided any copyright
of the software or copyrighted article developed by the HO for the
exclusive use of the BO for which the BO is making royalty payment along
with a mark-up exclusively for royalty.

The definition of
‘royalty’ under the DTAA is exhaustive and not inclusive. Therefore, it
has to be given the meaning as contained in the DTAA itself and the
widened definition of royalty after its retroactive amendment by the
Finance Act 2012 should not be looked into.

Reimbursement of
data processing cost to the HO does not fall within the ambit of
definition of ‘royalty’ under the DTAA and accordingly, there is no tax
withholding obligation for the BO.

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[2014] 45 taxmann.com 282 (AAR – New Delhi) Oxford University Press., In re Dated: 30-04-14

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Article 14, India-Sri Lanka DTAA; section 9(1) (vii) the Act – payments for sales promotion services rendered by a Sri Lanka resident were not FTS under the Act and were also not taxable in terms of Article 14.

Facts:
The Applicant was the Indian branch of Oxford University press, which is a department of Oxford University, UK. The Applicant was engaged in publishing, printing and reprinting of educational books. The Applicant appointed an individual resident of Sri Lanka as Resident Executive for promotion of sale in Sri Lanka of books published by the Applicant. The Applicant paid certain remuneration to the Resident Executive by remitting it to her bank account in Sri Lanka. The Applicant approached AAR for its ruling on the taxability of such remuneration.

Ruling:

• On examining the scope of duties and responsibilities of Resident Executive, the services rendered by Resident Executives were promotion of brand name and sale of publications of the Applicant. The job description indicates that recipient is more a marketing executive.

• India-Sri Lanka DTAA does not define technical services and hence, definition thereof under the Act should be referred. The services rendered by Resident Executive were not covered within ‘managerial, technical or consultancy services’ mentioned in Explanation (2) to section 9(1)(vii) of the Act. Hence, the payment was not FTS, either under the Act or under India-Sri Lanka DTAA .

• The payment will be covered under Article 14 of India- Sri Lanka DTAA but is not taxable even under that provision.

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[2014] 44 taxmann.com 1 (Mumbai – Trib.) Viacom 18 Media (P) Ltd vs. ADIT A.Y: 2009-10 to 2011-12, Dated: 28-03-14

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Article 12, India-USA DTAA; section 9(1)(vi),
the Act – transponder service will be ‘process’ under Article 12 and
hence payment therefor will be ‘royalty’ under India-USA DTAA as well as
the Act.

Facts:
The taxpayer was engaged in
broadcasting of television channels from India and marketing advertising
airtime on these channels. The taxpayer had obtained round-theclock
satellite signal reception and retransmission service (‘transponder
service’) from an American company (“USCo”). USCo was a tax resident of
USA in terms of Article 4 of India-USA DTAA . The taxpayer had paid
transponder service fee to USCo during the relevant assessment years.

The
taxpayer approached the AO u/s. 195(2) for nil withholding tax
certificate in respect of transponder service fee. The AO did not issue
the certificate since, in his view, the payment was ‘royalty’ in terms
of Article 12 of India-USA DTAA , read with amended provisions of
section 9(1)(vi)

Held:
• The definition of “royalties”
in Article 12(3)(a) includes payments for “process”. The term “process”
is not defined in India-USA DTAA. Hence, its definition in explanation 6
to section 9(1)(vi) of the Act will apply. The use of transponder by
the taxpayer for telecasting/ broadcasting the programs involves
transmission by satellite, including uplinking, amplification,
conversion by downlinking of signals and is covered within the
definition of “process”.

• Hence, payments made for use/right to use of “process” is “royalty” in terms of India-USA DTAA as well as the Act.

•
The decision of Delhi High Court in Asia Satellite Telecommunications
Co. Ltd. vs. DIT [2011] 332 ITR 340 (Delhi) is not applicable since it
was rendered prior to the insertion of the explanation 6 to section
9(1)(vi) and explanation below section 9(2).

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ITA.No.276 /Hyd/2010 and ITA.No. 277/ Hyd/2010 DDIT vs. DQ Entertainment (International) P. Ltd (Unreported) A.Y: 2005-06 to 2007-08, Dated: 28-03-2014

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Section 9, 195 of the Act – on facts, as the source of income was outside India, exception carved in section 9(1)(vii)(b) of the Act applied and the payments made for services was not chargeable.

Facts:
The taxpayer was engaged in the production of 2D and 3D animation films for various clients. During the relevant years, the taxpayer entered into ‘Outsourcing Facilities Agreement’ for outsourcing some episodes or part of episodes to two sub-contractors – a Hong Kong entity and a Chinese entity. Under the agreement, both the entities were to provide production work/Production material to taxpayer by availing the necessary production premises, facilities, personnel, materials, services and expertise.

According to the taxpayer: the payment was made to the sub-contractors in the course of business; the subcontractors did not have any ‘business connection’ or PE in India; the income did not arise under the deeming provision of section 9(1)(vii) of the Act; and hence the payments were not taxable in India.

According to the AO since the production material was specifically created by sub-contractors for the taxpayer, the substance of contract was not supply of goods but was provisioning of services. Hence, the payments were FTS u/s. 9(1)(vii) of the Act and therefore, the taxpayer should have withheld the tax.

Held:
The production of animation films or part of certain episodes did not have any element of technical services. Delhi Tribunal3 as also Delhi HC4 held that utilisation of knowledge, information and expertise of party undertaking a job of another party is no reason to treat the services rendered as technical or consultancy services

• Section 9(1)(vii)(b) of the Act carves out an exception in case of resident utilising services in business carried on outside India or earning income from a source outside India. As per decision of Supreme Court5, contract is to be considered the source of income and since, as per the contract with the overseas clients, the jurisdiction was of the courts/arbitration at the place where overseas client was located (subjecting the taxpayer to foreign laws), ‘source of income’ was outside India. The viewership of the animation films was also located outside India.

• Thus, there was a direct nexus between the payments and earning of income from source outside India. Therefore, exception in section 9(1)(vii)(b) will be applicable and there was no liability to withhold tax u/s. 195.

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[2014] 43 taxmann.com 425 (Chennai – Trib.) DCIT vs. Velti India (P.) Ltd A.Y: 2009-10, Dated: 27-02-2014

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Article 12, India-South Africa DTAA; section 9, 40(a)(i), the Act – payments made to nonresident for transmission of bulk SMS were not FTS and hence withholding tax obligation did not arise.

Facts:
The taxpayer was an Indian company. The taxpayer availed services of a telecom carrier in South Africa (“SACo”) to transmit bulk SMS. For this service, the taxpayer made certain payments to SACo. The taxpayer did not withhold tax from such payments.

In the course of assessment of income, the AO concluded that the payments made by the taxpayer to SACo were FTS and accordingly, the taxpayer should have withheld tax from the said payments. Since the taxpayer had not withheld tax from the said payments, invoking provisions of section 40(a)(i) of the Act, the AO disallowed the payments.

Held:
• As per Article 12 of India-South Africa DTAA, FTS “means payments of any kind received as a consideration for services of a managerial, technical or consultancy nature”.

• The service provided by SACo was only transmission of bulk SMS, which was mere transmission of data and did not require any technical knowledge or skill. Delhi High Court has held1 that such services do not involve human intervention and therefore the payments cannot be regarded as FTS. Also, Madras High Court has held2 that collection of fees for usage of standard facility does not result in payment for providing technical services.

• The services were rendered outside India.

• Section 195 should be read along with sections 4, 5 and 9 as well as the tax treaties and unless the income is chargeable to tax in India, withholding tax obligation does not arise.

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I. T. A. No. 700/ Mum/ 2009 [Unreported] Valentine Maritime (Gulf ) LLC vs ADIT A.Ys.: 2005-06, Dated: 27 November 2013 Counsel for assessee: Hero Rai; Counsel for revenue: Ajay Srivastava

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Section 44BB of the Act – laying/installation of pipes for offshore oil exploration being ‘business of providing services and facilities in connection with extraction of mineral oils’, the payments assessable u/s. 44BB.

Facts:
The taxpayer was a non-resident company engaged in the business of providing technical/engineering services. During the relevant assessment year the taxpayer executed a contract with an Indian company (“ICo”) for laying/installation of pipes for three pipeline projects for offshore oil exploration (“the Contract”). The taxpayer contended that it was a company incorporated in UAE and accordingly, was entitled to qualify as tax resident under India UAE DTAA.

During the relevant assessment year, the taxpayer had received payments under the Contract towards materials, mobilisation, installation, etc. The taxpayer had contended that since it was engaged in the business of providing services and facilities in connection with prospecting, extraction or production of mineral oils, the payments received by it were assessable in terms of section 44BB of the Act. The AO concluded that the taxpayer did not qualify to claim benefits under India-UAE DTAA. The AO considered the payments received by the taxpayer in light of the Contract as well as original bidding documents and observed that having regard to the various clauses of the Contract pertaining to the scope of services performed by it, the taxpayer was also providing technical services. The AO further observed that in terms of the decision in Sedco Forex International Inc vs. CIT [2008] 170 Taxman 459 (Uttarkhand), deduction in respect of mobilization, demobilisation expenses was not available. The AO bifurcated the payments received by the taxpayer for assessability under two heads, namely, as deemed income section u/s. 44BB and as FTS. The CIT(A), however, concluded that the entire amount was assessable u/s. 44BB of the Act.

The issue before the Tribunal was: whether part of the payment received by the taxpayer can be assessed as FTS and whether the other part could be assessed u/s. 44BB of the Act.

Held:
the taxpayer was given a turnkey project for laying and installation of pip lines. It is a settled proposition of law that when a contract consists of a number of terms and conditions each condition does not form separate contract. The contract has to be read as a whole as laid down by the Supreme Court in case of Chaturbuj Vallabhdas [AIR 1954(SC) 236].

Perusal of various decisions cited by the taxpayer shows that works/services performed by the taxpayer do not come within the purview of section 9(i)(vii) of the Act (i.e. FTS). The AO grossly erred in considering part

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[2013] 40 taxmann.com 91 (Mumbai) Antwerp Diamond Bank NV vs. ADIT A.Y. 2005-06, Dated: 4 September 2013

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Article 7, 11 of India-Belgium DTAA – (i) interest paid by Indian branch of foreign bank deductible for computing profit attributable to PE; (ii) interest paid by branch to HO being payment to self, no taxable income in hands of HO.

Facts:
The taxpayer was Indian branch of a Belgian bank. During the relevant assessment year, the taxpayer had made payments to its Head Office (“HO”) towards interest on subordinate debts and term borrowing and had claimed the interest as an expense of the branch. The said interest was offered for taxation in the hands of the HO in terms of Article 11 of India-Belgium DTTA.

Relying on the decision in ABN AMRO Bank NV vs. ADIT [2005] 97 ITD 89, the AO disallowed interest paid to the HO. CIT(A) confirmed the order of the AO.

Held:
The decision relied on by the AO and CIT(A) has been reversed in Sumitomo Mitsui Banking Corpn. vs. DDIT [2012] 136 ITD 66 (Mum.) (SB), which was in the context of India-Japan DTAA. The Tribunal in Sumitomo case held that although interest paid to the HO by Indian branch (which constitutes PE in India) is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the taxable profit attributable to the PE in India in terms of DTAA. As per the domestic law, the said interest, being payment to self, cannot give rise to taxable income in India in the hands of HO. The same position also applies to payment of Interest by Indian branch of a foreign bank to its sister branch offices abroad.

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Arvind Singh Chauhan vs. ITO [2014] 42 taxmann.com 285 (Agra – Trib.) A.Ys.: 2008-09 and 2009-10, Dated: 14 February 2014

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S/s.- 6 – (i) Salary earned outside India cannot be said to accrue in India merely because employment letter is issued in India, or salary is received in India; (ii) ‘non-resident’ cannot be deemed ‘resident’ by applying section 6(5) since it has become redundant since 1989-90.

Facts:
The taxpayer was employed by a Singapore company (“SIngCo”) for working on merchant vessels and tankers plying on international routes. Apart from salary income, he received pension and bank interest. During the relevant year, his stay in India was less than 182 days, and he was a ‘non-resident’, which was not disputed. The taxpayer did not offer the salary received from SingCo for tax since salary income in respect of ship crew is accruing and arising outside India.

The AO noted that the taxpayer got right to receive the salary by receiving the appointment letter and details of salary to be paid; appointment letter was issued by foreign employer’s agent in India; the salary was deposited in bank account in India in US dollars; and hence, the salary was deemed to accrue in India. The AO further referred to section 6(5) and noted that if a taxpayer is resident for one of the sources of income, he is deemed to be resident for all the sources of income. Since the taxpayer was ‘resident’ for pension and interest, his status was ‘resident’ for all sources.

Held:
The Tribunal held as follows.

• An employee has to render the services to get a right to receive the salary and not merely by receiving appointment letter. Salary accrues at the place where services are rendered or performed
• It is wholly incorrect to assume that an employee gets right to receive the salary just by getting the appointment letter.
• If non-resident offers income accruing in India to tax, it cannot be said that he has accepted residential status of a ‘resident’.
• Salary earned abroad cannot be taxed in hands of a non-resident by invoking section 6(5) as section 6(5) has become redundant since 1989-90.
• Receipt of income in India refers to the first occasion when the taxpayer gets money in his control, whether real or constructive.
• Where salary accrued outside India and thereafter, by an arrangement, amount is remitted to India, it will not constitute first receipt in India so as to trigger receipt based taxation u/s. 5(2)(a) of the Act.

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Smita Anand, China, In re [2014] 42 taxmann.com 366 (AAR – New Delhi) A.A.R. No. 1091 of 2011, Dated: 19 February 2014

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S/s.- Explanation (b) to section 6(1) of the Act – person returning to India after leaving overseas job could not be said to be on “visit” to India and hence, Explanation (b) to section 6(1) was not applicable.

Facts:
The Applicant was working with a Chinese company (“ChinaCo”). The applicant left India in September 2007 and her employment with ChinaCo commenced on 1st October, 2007. While employed in China, she had visited India but her stay in India in a particular year never exceeded 182 days. She resigned from her employment in China with effect from 31st January, 2011 and returned to India on 12th February, 2011. During financial year 2010-11 (being the relevant year), her total stay in India was 119 days.

The Applicant contended that she was only on “visit” to India, and accordingly, in terms of Explanation (b) to section 9(1), she was a non-resident because:

• her employer card was valid upto 31-03-2012;
• she was considerably exploring possibility of job outside India;
• her residential house was let out till June, 2011;
• she visited her friends and relatives in different parts of India and also travelled to different locations on holidays;
• her children continued to stay abroad, etc.

Held:
The AAR held as follows.

• There was no information whether after resigning her employment and coming to India, the applicant again left India for any employment.
• The activities mentioned by the Applicant need not be proof of a “visit” since even a person staying permanently in India also does those activities.
• Since the Applicant returned to India after resigning from her employment in China, the reason does not seem to be only for a “visit”.
• On facts and circumstances of the case, Explanation (b) to section 6(1) is not applicable to the Applicant’s case.

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K. Sambasiva Rao vs. ITO [2014] 42 taxmann.com 115 (Hyderabad – Trib.) A.Y. 2002-03, Dated: 22 January 2014

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S/s.- Explanation (a) to section 6(1) of the Act – ‘leaves India for the purposes of employment’ in Explanation (a) to section 6(1) would include travelling abroad to take up any employment or travelling abroad on business visa for any business carried outside India.

Facts:
The taxpayer was engaged to provide technical services for setting-up a hospital in Saudi Arabia. During the relevant year, he had earned consultancy income for such services. He claimed that during the year he was not a resident within the meaning of section 6(1) and hence, the income was not taxable.

On examination, the AO found that taxpayer was not regularly employed abroad, but worked as a consultant for a foreign company and he continued to render technical services in India and also earned income in India. He held that the amount was taxable as:

• The taxpayer was resident of India and was not entitled to benefit of extended stay of 180 days in terms of Explanation (a) to section 6(1) as he did not leave India ‘for the purposes of employment’. The term ‘for the purposes of employment’ should be interpreted in the context of employeremployee relationship and should be given a restrictive meaning. After considering the terms of the offer letter, the AO concluded that there was no employer-employee relationship between the taxpayer and the foreign company and accordingly, Explanation (a) to section 6(1) was not applicable in case of the taxpayer and therefore, the taxpayer was a resident chargeable to tax in respect of global income.
• In any case, the income was earned in India. While the taxpayer claimed that he travelled abroad to provide services, the taxpayer did not establish the nexus between his travels abroad and the consultancy services rendered by him.

Held:
The Tribunal held as follows.
• Section 6 does not require that taxpayer should leave India permanently. Hence, the argument that taxpayer did not permanently leave and was not stationed outside India is not material. Even if the taxpayer had visit outside India such that he was in India for a period or periods of 181 days or less, the condition specified in section 6(1) is satisfied.
• In CBDT vs. Aditya V. Birla [1988] 170 ITR 137, Supreme Court has held that employment does not mean salaried employment but also includes self-employment/professional work. Therefore, the taxpayer’s earning from foreign enterprise and visit abroad for rendering consultation could be considered for the purpose of examining whether he was resident or not.
• Going abroad for the purpose of employment only means that the visit and stay abroad should not be for purpose other than employment or any vocation. The AO can verify the same by examining the visas as also correlating the foreign exchange drawn by the taxpayer and reimbursed by the foreign company. Accordingly, the matter was remanded to the AO.

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DCIT vs. Virola International [2014] 42 taxmann.com 286 (Agra – Trib.) A.Y.: 2008-09, Dated: 14 February 2014

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S/s. 40(a)(i), 195 of the Act – retrospective amendment to law cannot result in tax deduction default and consequent disallowance u/s. 40(a)(i) as section 40(a)(i) is attracted only to payments subject to tax deduction at the time of payment.

Facts:
The taxpayer was an exporter. During the relevant year, it had made payments to certain non-residents for ‘design and development expenses’ without deducting tax u/s. 195 of the Act. According to the taxpayer, the payments were not in nature of FTS, either u/s. 9(1)(vii) or under the relevant DTAAs. Further, none of the payees had a PE in India. Hence, there was no obligation on the taxpayer to deduct tax. However, invoking section 40(a)(i) of the Act, the AO disallowed the payments.

Held:
The Tribunal held as follows.

• Under Article 141 of the Constitution of India, the law laid down by Supreme Court, in Ishikawajma- Harima Heavy Industries Ltd. vs. DIT was binding. Accordingly, unless the technical services were rendered in India, the fees for such services could not be taxed u/s. 9(1)(vii).

• Tax withholding obligation depends on the law existing at the point of time when payments subject to withholding obligation are made. At the time when the taxpayer made the payments to nonresidents and till 8th May 2010, the law laid down by Supreme Court was binding.

• Disallowance u/s. 40(a)(i) is attracted not per se to payments made to non-residents but for payments which are subject to tax deduction but tax has not been deducted4 .

• There was no material to establish that the services, for which payments were made, were rendered in India. Therefore, there was no obligation on taxpayer to deduct tax u/s. 195 r.w.s. 9(1)(vii).

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Sumitomo Corporation vs. DCIT [2014] 43 taxmann.com 2 (Delhi – Trib.) A.Ys.: 1992-93 to 1996-97, Dated: 27 February 2014

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Article 5(4), 7, 12 of India-Japan DTAA; S/s. 115A of the Act – On facts, supervision fee was not effectively connected with LO or other PEs. Also, minimum period for service PE was not met; and hence, supervision fee was taxable as FTS under Article 12 and not as business profit under Article 7.

Facts:
The taxpayer was a Japanese company. The taxpayer had established a Liaison Office (“LO”) in India to facilitate1 imports for certain projects that it has undertaken in India. The taxpayer established three project offices (“POs”) in connection with its three projects in India. The contracts for these projects were secured by the Head Office (“HO”) of the taxpayer. One of the projects was for Maruti Udyog Ltd (“MUL”). While in some of the contracts the taxpayer was to supply and install the equipment, under other contracts, MUL was to install the equipment and the taxpayer was merely to supervise the installation. For such supervision, it received supervision fee for supervising installation of equipment supplied by it.

According to the taxpayer, it did not have PE in India and hence, supervision fee could not be taxed as business profit under Article 7 of India-Japan DTAA but was taxable as FTS under Article 12(2).

However, according to the AO, LO and POs of the taxpayer constituted its PE; it was not necessary to have different PE for each project; and supervision period for all projects was to be aggregated to count the threshold period for a PE. The AO concluded that supervision fee received by taxpayer was effectively connected with PE and was taxable under Article 72 .

Held:
The Tribunal held as follows3.

Existence of PE for supervision activities.

• Article 12(5) is on the line of OECD Model Convention which provides that income should arise as a result of the activities of the PE and that only profits which are economically attributable to a PE are taxable. The state where the PE is located can tax the income only if a connection exists, between the income and the PE. Thus, Article 12(5) of the tax treaty does not have force of attraction principle.

• Article 7 will apply if the beneficial owner of the FTS carries on business in India (in which the FTS arises) through a PE and the contract in respect of which FTS is paid, is effectively connected with that PE. Though the taxpayer had PE in respect of two projects, supervision fee was not attributable to either PE.

• Under Article 12(5), to be ‘effectively connected’, apart from the economic connection with the PE, the connection must be real in substance and income producing activities should be closely connected. LO was only facilitating communication and nowhere involved in supervision. Mere existence of LO cannot result in taxpayer having supervisory PE in India.

Different projects and threshold period for service PE.

• Each purchase order was procured by head office of taxpayer through competitive bidding on global tender floated by MUL under different terms and conditions and none was linked to others.

• Different performance guarantees were given for different work.

• Installation and supervision under each purchase order was done independently. Also, no purchase order was dependent on completion of work under any other purchase order.

• Test of minimum period had to be determined for each site or installation project and period of supervision under each contract was less than the requirement of 180 days under Article 5(4).

• Therefore, no PE of taxpayer existed in India. Accordingly, supervision fee had to be taxed as FTS under Article 12 and not as business profit under Article 7 of India-Japan DTAA.

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Samsung Heavy Industries Co. Ltd. v. ADIT (2011) 13 taxmann.com 14 (Del.) Articles 5 & 7 of India-Korea DTAA A.Y.: 2007-08. Dated: 30-8-2011

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(i) On facts, turnkey contract found to be a composite contract.

(ii) On examination of documents, PO held to constitute PE.

(iii) PE under Article 5(3) can emerge even when it does not satisfy the requirement of Article 5(1) and (2).

(iv) On facts, activities of PO were not preparatory or auxiliary in nature as contemplated in Article 5(4).

Facts
The taxpayer, together with another Indian company, entered into turnkey contract with ONGC for survey, design, engineering, fabrication and installation of facility. In accordance with the contract, it opened a Project Office (‘PO’) in Mumbai after obtaining approval of RBI. The approval did not place any restriction on PO’s activities. The fabrication of equipment was given to an unrelated entity in Malaysia. The fabricated equipment was received in the subsequent tax year. The taxpayer filed the return of its income declaring loss in respect of its Indian operations. The loss was computed in accordance with Article 7 of India-Korea DTAA.

The taxpayer contended that:

As per Article 7(1) of DTAA, business profits could be taxed in India only if the business was carried on through PE in India. Hence, it was essential that a PE should be constituted. However, a fixed place of business carrying on only preparatory or auxiliary activities would not constitute a PE.

The PO was not involved in pre-contract meetings and it was set up after the contract was executed.

The PO had employed only non-technical personal and it only acted as interface between the taxpayer and ONGC.

Vis-à-vis the scope of overall project, the activities of the PO were merely preparatory or auxiliary and hence were covered within exemption scope of Article 5(4).

As per Article 5(3), installation PE comes into existence only if time threshold of nine months has elapsed. Since the taxpayer was involved in installation project, specific provisions of Article 5(3) should override the general provisions of Article 5(1) and (2). Also, an installation PE would be constituted only when installation activity is commenced.

Contract of taxpayer comprised two divisible components, namely, supply of fabricated equipment from Malaysia and installation of the same. The supply component cannot be attributed to installation PE which came into existence at a later point of time.

 The onus of proving that the PO was carrying out revenue generation activity was on the tax authority.

The tax authority contended that:

The PO was fixed place of business in India of the taxpayer. The resolution of the Board of Directors of taxpayer stated that the PO was opened for carrying on and execution of contract. PO was coordinating with ONGC on an ongoing basis and without such coordination, contract would not be executed. Therefore, PO constituted PE of taxpayer in India.

The contract showed that it was not divisible and hence, the income was taxable in India to the extent of the profit attributable to the PE. The PO was actively involved in bidding, negotiations, tendering and award of contract. Therefore, it was involved in execution of core functions of the taxpayer. Title to the goods passed to ONGC after the project was completed. The consideration payable was for the full contract to be executed in India. Income earned by the taxpayer even in respect of activities carried on outside India should be taxable in India as being attributable to PE in India.

The fixed place PE is based on ‘permanence test’, irrespective of the nature of business carried on. To cover the situation where ‘permanence test’ is not likely to be met, Article 5(3) lays down ‘duration test’. However, Article 5(3) does not preclude application of base rule PE, Article 5(3) does not override Article 5(1).

The contract showed that it was not divisible right from the beginning and hence, the income was taxable in India to the extent of the profit attributable to the PE.

Held
The Tribunal observed and held as follows.

(i) The contract commenced with survey and ended with commissioning of the facility. Existence of PO was a condition precedent to commencement of the contract. The contract price was fixed without any provision for escalation. The progress payments were provisional and based on milestone formula, which did not indicate that the payment was related to any component. Hence, on facts, the contract was a composite contract.

(ii) Several documents such as board resolution, RBI application, RBI approval, etc. showed that PO was not restricted from carrying on any business activity. Rather, the board resolution clearly mentioned that PO was for coordination and execution of the project in India. The documents indicated that all project-related activities were to be routed through PO. Hence, PO constituted base rule PE in terms of Article 5(1).

(iii) Supreme Court decision in CIT v. Hyundai Heavy Industries Co. Ltd., (2007) 291 ITR 482 (SC), which was relied on by the taxpayer, was concerned with a contract, which was divisible in two parts, namely, fabrication and installation. In that case, taxpayer merely had a liaison office which was not authorised by RBI to carry on any business. Also, fabrication was completed outside India and that taxpayer did not have any other place of business in India till such date. As against that, the taxpayer had set up PO for coordination and execution of the project. Taxpayer also, wholly or partly, carried on business activity in India and hence PO constituted a PE.

(iv) Article 5(1) defines PE as a fixed place of business. Article 5(2) enlarges the meaning of PE to specifically include certain kinds of establishments. Article 5(3) mentions the expression ‘likewise encompasses’ and mentions construction, assembly or installation project, etc. Thus, Article 5(3) further enlarges the term PE. Therefore, Article 5(3) is not an exclusionary clause which restricts scope of Article 5(1) and 5(2).

(v) The terms of the contract and the manner of carrying out of the work clearly suggested that PO had a role in all the activities of the contract. The taxpayer had not proved that the activities of the PO were preparatory or auxiliary in nature as contemplated in Article 5(4).

(vi) In absence of necessary material on record, the AO was not justified in attributing 25% of the offshore income to the PE and hence, the matter was restored to the AO for proper determination.

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Four Soft Ltd. (Unreported) (ITA No. 1495/Hyd./2010) Section 92B of Income-tax Act A.Y.: 2006-07. Dated: 9-9-2011

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Counsel for assessee/revenue: Rajan Vora/ V. Srinivas Before Shri G. C. Gupta (VP) and Shri Akber Basha (AM)

Corporate guarantee provided in respect of an AE is not an international transaction in terms of section 92B of Income-tax Act.

Facts
The taxpayer was an Indian company engaged in providing IT and ITES Services. The taxpayer had several kinds of international transactions with its AEs. Among others, the taxpayer had issued corporate guarantee to banks in respect of loan taken by its Dutch subsidiary (which was an AE). The TPO determined ALP of corporate guarantee commission @ 3.75% of the guarantee amount taking commission charged by bank as a benchmark. In appeal, DRP confirmed the action of TPO.

The taxpayer contended that:

for transfer pricing purposes, income from international transactions is to be computed as per section 92B of Income-tax Act;

corporate guarantee transactions are not covered within the scope of section 92B;

transfer pricing provisions do not stipulate any guidelines in respect of guarantee transactions; and

in absence of any charging provision, such transaction would not be subject to transfer pricing provisions.

The taxpayer further contended that provision of corporate guarantees in respect of subsidiary company was a normal business practice and the Dutch subsidiary did not receive any benefit, such as reduction in rate of interest by virtue of corporate guarantee provided by the taxpayer.

The tax authority contended that a guarantee is an obligation which the guarantor is liable to honour if the principal debtor does not discharge the debt.

Held
The Tribunal observed and held as follows.

Corporate guarantee provided by the taxpayer is not covered within the definition of international transaction in section 92B. No guidelines are stipulated in respect of such transactions. Unlike a bank or a financial institution, provision of corporate guarantee is incidental to the business of the taxpayer. In the absence of any charging provision, such transaction cannot be subjected to transfer pricing.

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Anchor Health and Beauty Care Pvt. Ltd. (Unreported) ITA No. 7164/Mum./2008 (Mumbai ‘A’ Bench) Article 13 of India-UK DTAA; Section 40(a)(i) of Income-tax Act A.Y.: 2004-05. Dated: 26-8-2011 Shri Pramod Kumar (AM) Shri Vijay Pal Rao (JM) Counsel for the appellant : P. K. B. Menon Counsel for the respondent : P. J. Pardiwala

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(i) As accreditation fee was not ‘royalties’ under Article 12(3) of DTAA, in absence of PE in India, was not chargeable to tax in India.
(ii) Obligation to withhold tax u/s.195(1) arises only if the payment is chargeable to tax in India.

Facts:
The taxpayer was an Indian company engaged in the business of manufacturing and trading of tooth powder, tooth paste, tooth brush and other health care products.

BDHF is a UK-based registered charitable institution. Based on study made by an independent panel of internationally recognised dental experts, BDHF evaluates consumer oral health care products to ensure that manufacturers’ product claims are clinically proven and not exaggerated. As a result of accreditation granted by BDHF, the manufacturer is allowed to mention this fact while marketing the products. The taxpayer had paid certain amount as accreditation fee to BDHF. The AO noticed that the taxpayer had not withheld tax from the payment made to BDHF.

The taxpayer submitted that as the recipient of income was not liable to be taxed on this income in India, tax was not required to be withheld by the taxpayer. Further, the disallowance u/s.40(a)(i) can only be made when taxes are deductible but not deducted. The AO, however, held that u/s.195 of the Income-tax Act, tax must be withheld at the time of remittance and since the taxpayer had not submitted any certificate about non-taxability of the amount, he disallowed the entire payment u/s.40(a)(i).

In appeal, the CIT(A) held that: the fee could not be treated as ‘royalties’; BDHF did not have any PE in India; consequently, the payment made to BDHF could not be taxed in India; and in absence of any tax liability on the payment, the taxpayer had no obligation to withhold tax from the payment. Therefore, he deleted the disallowance u/s.40(a)(i).

Held:
The Tribunal observed and held as follows.

(i) The expression ‘royalties’ is defined in Article 13(3) of India-UK DTAA and the payment was not covered within the definition. While it was in the nature of ‘business profits’, BDHF did not have PE in India. Hence, it was not taxable in India. Even if in normal business parlance, it could be termed ‘royalty’, it cannot be so classified if it does not fall within the definition in India-UK DTAA.
(ii) In terms of the Supreme Court’s decision in GE India Technology Centre Pvt. Ltd. v. CIT, (2010) 327 ITR 456 (SC), tax deduction u/s.195(1) arises only if the payment is chargeable to tax. The AO has to establish that the nonresident was chargeable to tax. Since BDHF was not liable to tax on fee, the taxpayer had no obligation to withhold tax.

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Nippon Kaiji Kyokoi v. ITO (2011) 12 taxmann.com 477 (Mum.) Article 5, 7 and 12 of India-Japan DTAA; Section 44C of Income-tax Act A.Ys.: 1999-2000 to 2004-05 and 2007-08 Dated: 29-7-2011

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(i) On facts, income for provision of services through independent person was effectively connected to, and chargeable in hands of, PE.

(ii) If receipt is effectively connected with PE, Article 12(5) excludes it from Article 12(1) and 12(2) and hence, it is subject to Article 7.

Facts:
The taxpayer, a Japanese entity, was engaged in the business of providing inspection and certification services to marine industry for classification of ships. The taxpayer had set up branches in India at Mumbai and Chennai. The branches carried out a survey and issued reports. The branches constituted PE in terms of Article 5 of India-Japan DTAA.

Sometimes when employees of PE were not available for the survey, the taxpayer engaged an independent surveyor. The independent surveyor was directly appointed by the HO in Japan and the HO directly raised invoices on customers. The HO collected the invoice amount, paid 55% to the independent surveyor and retained 45%. Since under such circumstances the branch did not render substantial services or play active role, entire fee was retained at the HO and no portion of survey fee was recognised in profit and loss account of the branch.

The AO accepted the contention of the taxpayer that the survey carried out through independent surveyors could not be attributed to PE in India. Accordingly, he held that the amount received from such survey should be treated as FTS under Article 12 and taxable @20% on the gross amount in terms of Article 12(2).

In appeal, the CIT(A) observed that when PE could not undertake the survey, it directed the independent surveyor to carry out the survey and therefore, PE played a procedural role. Since FTS was effectively connected with PE in terms of Article 12(5), its income was to be dealt with under Article 7. Accordingly, the CIT(A) determined 10% of the fee as the income attributable to PE as business income and directed that no further expenditure other than allowance for HO expenditure u/s.44C should be allowed. Before the Tribunal, the issues were:

  • Whether FTS was effectively connected with the PE?
  • If part of the amount was taxable as business profits under Article 7, whether balance amount could be taxed as FTS under Article 12(2)?

Held:
The Tribunal observed and held as follows.

(i) In case of FTS, the test to be applied is activity test or functional test. Surveys, whether through own staff or through independent surveyors, should not be treated differently. As per Article 7(1), profits directly or indirectly attributable to PE were to be taxable in India. The CIT(A) had estimated these to be 10% of gross receipts, which was not disputed by the tax authority. Hence, this amount was to be treated as attributable to PE.
(ii) If the receipt is effectively connected with PE, Article 12(5) excludes entire receipts from Article 12(1) and 12(2). Thus, DTAA does not contemplate taxing of balance (excluding 10%) receipt under Article 12(2).

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SIEM Offshore Inc., in re (2011) 12 taxmann.com 374 (AAR) Article 23, India-Norway DTAA; Section 44BB, Income-tax Act Dated : 25-7-2011

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(i) On facts, consideration for services provided by the applicant to ONGC was not FTS. Hence, was not excluded from section 44BB of Income-tax Act.

(ii) After shifting of managerial control to Norway, the applicant qualified for benefit under Article 23(4) of India-Norway DTAA.

(iii) In terms of section 44BB of Income-tax Act, Service Tax cannot be excluded for the purposes of determining presumptive income. 

Facts:
The applicant was a company incorporated in Cayman Islands. To qualify for listing on stock exchange in Norway, in January 2010, the applicant shifted its managerial control to Norway. Thus, it also became a tax resident of Norway and Norway issued tax residency certificate to the applicant. The applicant was of the view that pursuant to its becoming a tax resident of Norway, it qualified to access India-Norway DTAA.

The applicant was owner and operator of support vessel and was engaged in providing services for extraction of oil and gas. In 2009, the applicant formed a consortium with three other members and entered into a contract with ONGC for providing bundled services for a deep water rig for 4 years. In terms of the agreement, ONGC was to make direct payment to each consortium member for performance of the work undertaken by it. The scope of work of taxpayer pertained to sea logistics and included logistical support, rescue operations, safety and security surveillance, etc.

The applicant applied to the tax authority for ascertaining the rate of withholding tax on its income from ONGC. The tax authority treated the applicant’s income as FTS and passed order for withholding tax @10% of the gross amount.

The applicant sought ruling from AAR on applicability of section 44BB to the receipts from ONGC and availability of benefits under India-Norway DTAA. The applicant contended that:

The receipts of the applicant from ONGC were subject to taxation u/s.44BB and consequently, only 10% of the gross receipts were chargeable as income.

Pursuant to shifting of its managerial control to Norway and its becoming tax resident of Norway, it qualified for benefit under India- Norway DTAA.

Under the agreement as well as under the domestic law the obligation of Service Tax was on ONGC. The applicant merely received the Service Tax and paid it to the tax authority on behalf of ONGC. Hence, Service Tax was not the income of the applicant so as to get covered within 44BB.

The tax authority contended that the receipts of the applicant were FTS, which were specifically excluded from section 44BB by proviso to section 44BB(1) through amendment to the Income-tax Act.

Held:
The AAR held as follows.

(i) From review of the role and responsibility of the applicant in terms of the contract amongst the consortium members, the responsibilities of the applicant were not to provide technical services. Therefore, the receipts were not FTS. Hence they were covered by section 44BB and were subject to presumptive basis of taxation.

(ii) Since the tax authority has not disputed shifting of the managerial control of the applicant to Norway and the tax residency certificate issued by Norway to the applicant, India-Norway DTAA should be considered. Having regard to the specific provision in Article 23(4) of India-Norway DTAA, the notional income will be limited to 75% and the tax chargeable shall be limited to 50% of the tax otherwise imposed by India.

(iii) The liability to pay Service Tax is that of the applicant although under the agreement, ONGC had undertaken to reimburse it. Section 44BB does not provide for any deduction in respect of Service Tax. The object of introducing section 44BB was to avoid all complications in determining tax liability of the recipient. Hence, exclusion of Service Tax from income is neither warranted nor permissible in the scheme of section 44BB.

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TS-76-AAR-2014 Booz & Company (Australia) Pvt. Ltd. Dated: 14-02-2014

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Provision of Technical and professional employees to the Indian affiliate company (ICo) results in a Permanent establishment (PE) in India; Factors such as interdependency and nature of services rendered considered in arriving at the conclusion.

Facts:
The Booz & Co. Group (Group entities) is a global network of group companies. With the intention of optimising its global business network and expertise, entities within the Group provided as well as availed services from each other.

Accordingly, the Group entities received payments from ICo (Indian affiliate of Group) for provision of technical and professional personnel (personnel).

Features of the arrangement between the Group entities and ICo as appearing in the application and also emphasised by the tax authorities are as follows:

• All projects won by the Group were catered to by a common pool of personnel.

• ICo executed its projects through its own employees and to the extent required, procured the services of personnel of the relevant Group entity.

• The personnel were under the control and supervision of ICo in respect of ICo’s project. However they were bound by the employment agreement entered with, and overall control of, the relevant Group entity. Thus the relevant Group entity had the power to recall and replace its personnel.

• The relevant Group entity provided on-the-job training to such personnel, was answerable to third party claims for infringement of any rights by such personnel.

• The expertise of the relevant Group entities in giving consultancy in the fields that the Group operates, the brand equity the Group enjoys, the capabilities the Group has developed across the globe and services from the Group professionals and experts is needed for ICo to optimally function.

• The Group’s business is manpower-centric in which the only important asset is human resource.

The Group entities contended that in the absence of a Permanent Establishment (PE) of the relevant Group entity in India, the fee received from ICo cannot be taxed as business income in India but should be taxed as Fee for technical services (FTS).

The Tax Authorities contended that ICo is exclusively dependent on Group entities in getting the services of capable personnel as well as their on-the-job training, in order to achieve optimal efficiency. This dependency of ICo on the Group entities blurs the identity of individual entities and thus, ICo constitutes a dependent agent of the Group entities. Additionally, the number and high level of qualification of personnel deployed by the Group entities to ICo clearly establishes that ICo constitutes a service PE. The access given by ICo’s client/ICo to the personnel deployed to ICo in a given space also renders that place a fixed place PE of the relevant Group entities.

Held:
On Fixed Place PE:

Under a Double Tax Avoidance Agreement (DTAA), one of the sine qua non of a fixed place PE is that, the fixed place of business through which the business is carried on should be ‘at the disposal’ of the relevant Group entity.

Conducting trading operations generally requires a fixed place which the taxpayer uses on a continuous basis. However, taxpayers rendering service usually do not require a place to be at their constant disposal and therefore application of ‘disposal test’ is generally more complex in such cases.

In some jurisdictions the ‘disposal test’ is satisfied by the mere fact of using a place. In other jurisdictions, it is stressed that something more is required than a mere fact of use of place.

Various factors have to be taken into account to decide a fixed place PE which, inter alia, includes a right of disposal over the premises. No straight jacket formula applicable to all cases can be laid down.

Generally, the establishment must belong to the foreign enterprise and involve an element of ownership, management and authority over the establishment. Principles were derived from the following decisions on the ‘disposal test.’

• Rolls Royce Plc. [339 ITR 147]
• Seagate Singapore International Headquarters Pvt. Ltd. [322 ITR 650 (AAR)] –
• Motorola Inc. [147 Taxman 39 (SB)] –
• Western Union Financial services [104 ITD 34]

On Service PE:

In terms of the DTAA a service PE is triggered if services are provided in a source State and such services are provided through employees or other personnel. In case of deputation of employees, if the lien over such employees is retained by the deputing company and the employees continue to be on the payroll of the deputing company, a Service PE emerges.

Where a business of a group cannot be carried on exclusively without intervention of another entity, normally that entity must be deemed to be the establishment of the group in that particular country.

On Agency PE:

On the issue of Agency PE, the relevant question is ‘business connection’. The essential features of ‘business connection’ are as follows:

• A real and intimate relation must exist between the activities carried out outside India by nonresident (NR) and activities within India;
• Such relation must contribute directly or indirectly to earning of income by the NR in his business;
• A course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the NR outside India and the activity in India, would furnish a strong indication of ‘business connection’ in India.

Apart from the fact that the requirements of agency are satisfied, the facts fulfil the above essential features of ‘business connection’.

On the basis of the above, the AAR ruled that the fact pattern of the Group entities and ICo, a PE of the Group entities does exist in India. Therefore, incomes received by them from ICo are taxable as business profit under Article 7 of the respective DTAAs. Where there is no DTAA, it is taxable under the provisions of the Act.

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TS-78-ITAT-2014(Bang) IBM India Private Limited vs. DIT A.Ys: 2009-2012, Dated: 24-01-2014

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S/s. 9(1)(vii), 195 – Absence of Fee for technical services (FTS) article in the DTAA, does not result in the income being taxed as per the domestic laws in terms of Article 24 of India-Philippines DTAA; Services provided in the course of business covered by business income article; Not taxable in absence of a PE in India; other Income article does not cover such income.

Facts:
The Taxpayer is an Indian Company (ICo) engaged in the business of providing information technology services. The Taxpayer made certain payments to a Philippines Co. (FCo) for certain business information services, work force management, web content management and human resource accounting services without withholding tax at source.

The Taxpayer contended that in absence of FTS Article in India- Philippines DTAA, Article 7 on ‘business profits’ should be applicable, and payment made to FCo is not chargeable to tax in absence of PE in India.

However, the Tax Authorities contended that in the absence of an FTS article in the DTAA, the same should be taxable as per the domestic laws by virtue of Article 24(1) of the DTAA, which provides that the laws of the contracting states shall continue to govern the taxation of income except where provisions to the contrary are made in the DTAA.

Held:
On Applicability of Article 24:

If Article 24(1) is interpreted as conferring right to tax ‘FTS’ in accordance with the domestic laws of a contracting state, then Article 23 dealing with other income and granting exclusive right of taxation to country of residence would become redundant as Article 23 will then cease to be an omnibus clause covering the residuary income.

It is a well settled principle that a clash is to be avoided while interpreting the provisions of a treaty. Hence the scope, context and setting of the articles have to be understood in their proper perspective.

Article 24(1) does not confer a right to invoke the provisions of domestic laws for classification or taxability of income covered by other articles of the DTAA. Article 24 is limited to elimination of double taxation and operates in the field of computation of doubly taxed income and tax thereon in accordance with the domestic laws and is not part of treaty Articles which deal with the classification of income.

On interplay between Article 7 and Article 23:

The services rendered by FCo are in the course of its business and hence covered under Article 7 of the DTAA and not other income Article. Further in the absence of PE in India of FCo, the amount paid is not chargeable to tax in India.

Even assuming that the payments made to FCo are covered by Article 23, the same should also not be taxable in India, by virtue of exclusive taxation rights being provided to the country of residence.

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TS-15-ITAT-2014(Del) Brown & Sharpe Inc. vs. DCIT A.Ys: 2003-2006, Dated: 17-01-2014

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Income attributable to the Liaison office (LO) engaged in promoting sales in India on behalf of its head office is taxable in India.

Facts:
The Taxpayer, a US company, has set up an LO in India with the RBI approval. The RBI approval was granted on the condition that the LO will not render any services, directly or indirectly, in India.

The Tax Authority contended that the LO was not merely a communication channel but it was also promoting the Taxpayer’s product brands in India, which was evident from the fact that the performance incentive of LO’s employees was calculated on the basis of number of orders received by the Taxpayer.

The Taxpayer contended that LO was established only as a communication channel between the Taxpayer and its customers or prospective customers in India. The LO did not render any service for the procurement of order or sale of the product in India. Hence, there was no income earned in India. In this regard, the Taxpayer referred to various decisions like Angel Garment Ltd. [287 ITR 341 (AAR)], U.A.E. Exchange Centre Ltd. [313 ITR 94], and K. T. Corporation [181 Taxman 94 (AAR)] etc.

Furthermore, the payments made to the LO were merely reimbursement of expenses incurred by the LO on behalf of the Taxpayer. Hence, it cannot be liable to tax in India.

Aggrieved, the Taxpayer appealed before the Tribunal.

Held:
The LO was engaged in promoting the Taxpayer’s product and brands in India. Other than the Chief Representative Officer, the LO had also appointed a Technical Support Manager. The employees of the LO were offered sales incentive plan as per which they were to be provided with remuneration, based on the achievement of the sales target of the Taxpayer in India.

The Taxpayer was registered with the Registrar of Companies for carrying on business in India. It had also, on its own volition, filed a return of income declaring loss under the head ‘Profits and gains of business or profession.’ Thus, the Taxpayer itself has taken a stand that it derives income from business in India.

The decisions relied on by the Taxpayer involved, the activities of preparatory and auxiliary nature. Such as:

• LO downloading information contained in the main server located in the UAE; (UAE Exchange Centre (supra))
• LO collecting information and sample of garments and textiles which was passed on to its HO and LO acted as a communication channel between the HO and its customers; (Angel Garment Ltd. (supra))
• LO was merely holding seminars, conferences, receiving trade enquiries, collecting feedbacks and advertising the technology used by its HO (K.T. Corporation (supra)).

However, in the present case, the employees were promoting the sale of the Taxpayer’s goods in India. Thus, income attributable to LO is taxable in India.

Though reimbursement of expenses cannot be treated as income, the receipt, in excess of expenses actually incurred has to be treated as income.

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TS-613-ITAT-2013(Coch) Device Driven (India) Pvt. Ltd. vs. ITO A.Y: 2009-2010, Dated: 29-11-2013

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Section 195 – Assistance in securing orders and in identifying markets, arranging meeting with prospective clients, etc., are not ‘pure’ commissionbased services but are technical services under the Act; Since the service provider (SP) is also the director of the Taxpayer, his office can be treated as a ‘Fixed base’ regularly available to the SP and taxable as per Independent Personnel Service (IPS) Article of the India–Switzerland DTAA.

Facts:
The Taxpayer, an Indian company, was engaged in the development and sale of software. The Taxpayer paid export commission to the SP who was tax resident of Switzerland, and claimed the same as deduction against its taxable profits.

The scope of work for the export commission, as decided between the Taxpayer and the SP covered the following:

• Facilitate marketing of the services and provide support as well as sales expertise for projects to be executed at customer site.
• Generate leads and initiate interaction with end customers in the relevant competency areas of the Taxpayer.
• Support in evaluating the Taxpayer’s presentations and other collateral proposals and contracts.
• Review proposals of the Taxpayer for target prospects and provide advice and assistance, to help securing projects.
• Hold periodic meetings with the Taxpayer to track project progress and status.

The Taxpayer contended that (i) the services rendered by the SP were for marketing assistance/ support and guidance for securing orders from overseas clients and not for rendering any technical expertise/services. (ii) Pure export commission earned by a person for rendering services outside India would not be taxable in India.

The Tax Authority contended that the SP is technically qualified and highly experienced in the software business. Considering the vast experience and technical knowledge, the services rendered by the SP were technical in nature and beyond what a normal commission agent would have rendered. Accordingly, the same was taxable under the Act as Fees for Technical Services (FTS).

Also, as the SP was required to hold regular meetings for monitoring the progress and status of the projects undertaken by the Taxpayer in India, the Taxpayer would have provided a fixed base in the form of office to the director, which triggered tax under IPS Article of the DTAA.

Aggrieved, the Taxpayer appealed before the Tribunal.

Held:
The nature of responsibilities and obligations placed on the director is significantly higher than what would have been placed upon a pure commission agent working in normal business transactions.

Customised software is a highly technical product, which is developed in accordance with the requirements of the customers. Even after the development, it requires constant on-site monitoring so that necessary modifications are carried out in order to make it suitable to the requirements.

Unlike sale of commodities, the role of the commission agent is not limited, but vast technical knowledge and experience is required to understand the needs of the clients, to procure orders, to identify markets, making introductory contacts, arranging meeting with prospective clients, assisting in preparation of presentations for target clients, monitor the status and progress of the project etc. Accordingly, the services rendered are technical in nature.

As the SP is a director of Taxpayer and also the sole foreign marketing agent, he has the responsibility to take care of business interests of the Taxpayer. Director, the SP has every right to look into and is also required to take care of the affairs of the Taxpayer. Further, the certificate/affidavit given by the Taxpayer confirming that it has not provided any fixed base to the SP cannot be of any help due to the closeness of the SP with the Taxpayer. Therefore, there is no infirmity in the Tax Authority’s view that the Taxpayer must have provided a ‘fixed base’ to the SP.

Hence, the office of the Taxpayer can conveniently be treated as a fixed base for the SP. Accordingly payment to the director is taxable in India and warrants withholding.

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Diageo India Pvt. Ltd. v. DCIT (2011) 13 taxmann.com 62 (Mum.) Section 92A(1) & 92A(2)(g) of Income-tax Act A.Y.: 2006-07. Dated: 5-9-2011

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Unrelated party wholly dependent on use of trademarks of taxpayer is an AE u/s.92A(2)(g) by virtue of effective control on decision making and hence, its transactions with other AEs of the taxpayer are deemed to be transactions between AEs.

Facts
The taxpayer was an Indian company engaged in the business of marketing alcoholic beverages in India. It procured the beverages either by getting them manufactured from Contract Bottling Units (‘CBUs’) or by importing them from its associated enterprises (‘AEs’). The CBUs were unrelated parties. The CBUs imported concentrates and other inputs from the AEs of the taxpayer. As per the agreement between the taxpayer and a CBU, the CBU was required to meet all costs, realise sale proceeds and if the sale proceeds exceeded the costs and the agreed margin of profit, the CBU was to credit the surplus to taxpayer.

The following is the diagrammatic presentation of the abovementioned arrangement.

The taxpayer reported all the transactions with AEs including purchase of concentrates and inputs by CBUs from AEs.

The AO made reference to the TPO for determination of ALP in respect of all transactions reported by the taxpayer. The TPO noted that the CBU was dependent on the trademarks owned by Diageo Group and accordingly, u/s.92A(1)(a) as also the deeming fiction in section 92A(2)(g) of Income-tax Act, the CBU was effectively controlled by Diageo Group. Hence, the CBU, the taxpayer and other Diageo Group entities are AEs. Therefore, TPO made adjustment in respect raw material purchases by CBU from the AEs of the taxpayer.

The taxpayer contended that: the CBU was an unrelated party; merely because a transaction with an independent enterprise is reported in Form No. 3CEB out of abundant caution, such transaction does not become a transaction with an AE; the CBU had entered into arrangement with the taxpayer and hence, the relationship of AE could at best be between the taxpayer and the CBU and cannot extend beyond that; also, there was nothing on record to suggest that the AEs from whom the CBU had imported raw materials participated in control or management or capital of the CBU.

Held
The Tribunal observed and held as follows. The true test of AEs is control by one enterprise over the other, or control of two or more AEs by common persons. Essentially, such control is effective control in decision making. The CBU is wholly dependent on the use of trademarks in which the taxpayer has exclusive rights. Hence, this relationship meets the test of de facto control of decision making as set out in section 92A(2)(g). The taxpayer, in turn, is controlled by way of capital participation by Diageo PLC, which also controls other entities in Diageo Group including those from whom the CBU imported raw materials. Therefore, the CBU, the taxpayer and Diageo Group entities supplying the raw material are all AEs. Since, the costs of all raw materials are effectively borne by the taxpayer, the transaction is actually between the taxpayer and the Diageo Group entities. Since the taxpayer as well as the CBU is under the control of Diageo PLC, the transactions are between AEs.

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ADIT v. Star Cruise India Travel Services (P) Ltd. (2011) 12 taxmann.com 242 (Mum.) Sections 5 & 9 of Income-tax Act A.Y.: 2006-07. Dated: 22-7-2011

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Even if a non-resident had a business connection in India, no income can be deemed to have accrued or arisen in India if no business operations were carried on in India.

Facts
Star Group operates, manages and charters cruises. Star Cruise Management Limited is a company registered in Isle of Man (‘Star Isle of Man’). Star Isle of Man was providing sales, marketing and promotional services for Star Group cruises. Star Isle of man appointed Star Cruise India Travel Services Pvt. Ltd. (‘taxpayer’) as its canvasser in India for canvassing business. Taxpayer was responsible to remit all monies received by it to Star Isle of Man without any deduction and to advise Star Isle of Man on all relevant laws and regulations. Star Isle of Man was to pay 3% of the net cruise charges as retainer fees to the taxpayer.

While making assessment, the AO held that Star Isle of Man had a ‘business connection’ in India through the taxpayer. Consequently, in terms of section 9(1) (i) read with section 5(2)(i), Star Isle of Man was taxable in India. The AO relied on CIT v. R. D. Aggarwal & Co., (1965) 56 ITR 20 (SC) and Anglo-French Textile Company Ltd. v. CIT, (1953) 23 ITR 101 (SC). Based on certain assumptions, the AO determined 5% of the net cruise charges as income of Star Isle of Man.

In appeal, the CIT(A) held that the services rendered by the taxpayer were general in nature and they could not be interpreted to constitute ‘business connection’ u/s.9(1)(i) and concluded that Star Isle of Man had no tax liability in India.

Held
The Tribunal observed and held as follows. As per the source rule of taxation the income is taxed in the jurisdiction in which it is earned. However, the Income-tax Act also covers income which is deemed to accrue or arise in India if a non-resident has a ‘business connection’ in India. However, even under such situation, tax in India can never exceed beyond income attributable to operations carried out in India. Thus, where a non-resident has a business connection through an agent, and the agent is fully compensated for his services, no further income of non-resident can be taxed u/s.9(1)(i) r.w.s 5(2)(b).

Supreme Court decision in R. D. Aggarwal & Co. supports that for business connection trigger, a greater nexus of operation in taxable territories with core operations of business is essential. Further, the Supreme Court held that the scope of ‘business connection’ does not cover mere canvassing for business by an agent.

Since Star Isle of Man had no tax liability in India, the taxpayer had no obligation to deduct tax u/s.195.

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ITO v. Abu Dhabi Commercial Bank (2011) TII 103 ITAT-Mum.-ITNL Dated: 12-5-2011

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Section 195, 201/201(1A) of Income-tax Act, Article
13(3) of India-UAE DTAA — Liability to deduct tax on remittance of sale
proceeds of shares, by bank to UAE resident, does not arise as bank is
only acting as an authorised dealer in transferring the funds on behalf
of the share-broker-in absence of liability to deduct tax, the bank
could not be treated as an assessee in default.

Facts:
Abu
Dhabi Commercial Bank (ADCB) was engaged in the business of banking and
operated through branch in India. ADCB made remittances to individuals
being UAE residents, in respect sale proceeds of shares which sales had
resulted in short-term capital gain in India. Remittance was made
without deducting tax at source. Nil tax deduction was supported by CA’s
certificate which provided for nil tax deduction from sale proceeds to
UAE residents as capital gains tax was exempt in India in terms of
Article 13(3) of the DTAA. The Assessing Officer (AO) rejected the
contention of ADCB and held that capital gains earned by UAE residents
would not qualify for exemption under the DTAA as individuals in UAE are
not liable to pay tax on capital gains and hence in absence of existing
tax liability in that country, no benefits under the DTAA would not be
available to them. The AO therefore treated ADCB as an assessee in
default. U/s.201 and also levied interest u/s.201(1A).

Apart
from the treaty benefit, ADCB contended that shares had been purchased
and sold by UAE individuals through their brokers. Hence the term
‘payer’ as contemplated u/s. 204 of the Income-tax Act, referred to the
broker and the bank was only the medium through which remittances were
made. ADCB placed reliance on the Mumbai ITAT decision in the case of
Hongkong & Shanghai Banking Corpn. Ltd.1 to contend that a bank
merely acted as an authorised dealer to transfer funds and the Bank
cannot be regarded as ‘payer’. On appeal, the CIT(A) held that though
ADCB could be regarded as payer u/s.204, there was no withholding tax
obligation due to availability of treaty benefit.

On appeal to the Tribunal by the Department and the assessee:

Held:
Reliance
placed by ADCB on decision in the case of Hongkong & Shanghai
Banking Corporation was correct. In the said decision, it had been held
that in respect of remittance of sale proceeds of shares the bank which
merely acted as an authorised dealer, was not under any obligation to
deduct tax at source. Consequently, the action of the AO in treating the
bank as an assessee in default u/s.201 and levying interest u/s.201(1A)
was not justifiable.

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Lubrizol Corporation USA v. ADIT ITA No. 7420/Mum./2010 Dated: 3-6-2011

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Section 195 — Article 5 of US DTAA — Sales, support and marketing activities of independent nature by an Indian affiliate — Not to result in PE for USCO — Contracts entered on principal to principal basis and all operations carried out and concluded outside India.

Facts:
The taxpayer was a manufacturer of high performance chemicals, a company incorporated in and a tax resident of the US (USCO).

Indian Company (ICO) was a JV between IOC (Indian Oil Corporation) and USCO. ICO was primarily engaged in the business of manufacture of various products. In addition, ICO also agreed to render to USCO assistance pursuant to an Exclusive Sales Representation Agreement. In terms of the agreement, ICO solicited orders for the products. All orders received by ICO were forwarded to USCO for acceptance or rejection and ICO did not have any authority in that regard or in regard to prices to be charged.

ICO was required to inform USCO of business opportunities; tenders and competitive bids received from customers, make reasonable efforts to promote sale and distribution of the products of USCO. ICO assumed no responsibility for the quality of the products, creditworthiness of customers etc. Service fees constituted very small portion of overall turnover of the company and was calculated based on shipments of the products resulting from orders which were submitted by ICO.

USCO was of the view that no income was taxable in India since (a) USCO did not carry on business in India; (b) Transfer Pricing Officer had accepted the price to be arms length. (c) In absence of any form of PE no part of income could be taxed in India. To support that there was no PE in India, USCO also urged that ICO could not be considered as dependent agent as it did not ‘secure orders’ on behalf of USCO.

The Assessing Officer took a view that ICO was a virtual projection of USCO in India and it constituted a sole/exclusive agency of USCO in India. Consequently profits being 5% of sales made by USCO were attributed in the hands of USCO, in addition to commission which was paid to ICO.

USCO filed objections before the Dispute Resolution Panel which upheld the order of Assessing Officer. On appeal to the Tribunal.

Held:
ICO had an independent business of manufacture of various products in India. It had its own marketing network in India for sale of various products. Commission received by ICO in India accounts for only 0.18% of its sales. USCO did not have a PE in India as

(a) Sales were made on principal-to-principal basis to Indian customers.

(b) ICO did not have the authority to negotiate the terms of the contract and contracts were concluded only when the purchase order was accepted by USCO.

(c) USCO did nott have any right to use ICO’s premises in India.

Thus in absence of PE, no profits could be attributed to USCO and mere presence of someone acting on behalf of USCO was not sufficient to give rise to PE.

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ADIT v. ACM Shipping India Ltd. ITA No. 5085/Mum./2009 Dated: 10-6-2011

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Article 5(4), 7(1), 13(4) of India-UK DTAA, Section 195(2) of Income-tax Act — Commission earned by UK company from its Indian WOS for providing support services taxable as business income — Accrual by virtue of parent company’s business connection/operations in India — Circular No. 23, dated 23-7-1969 cannot be relied on after its withdrawal.

Facts:
UKCO is engaged in international business of shipbroking services and has an extensive worldwide network with international ship-owners. ICO, a wholly-owned Indian subsidiary of UKCO, is engaged in the business of ship-broking and transportation of cargo from India.

ICO entered into a service agreement with UKCO, in terms whereof UKCO was required to provide the following services:

— Identifying potential international ship-owners outside India and referring them to ICO and facilitating their interaction with ICO

— Co-coordinating with ship-owners regarding availability of ships on requisite dates.

As per the agreement, ICO was to pay 50% of commission earned to UKCO.

ICO applied to the Assessing Officer (AO) for remitting payments to UKCO, without deducting tax at source. ICO contended that the commission payable to UKCO was not chargeable to tax in India. The AO rejected the contentions of ICO and held that it was an agent of UKCO as it was effectively procuring business for UKCO. The activities of ICO were carried out wholly and exclusively for UKCO and commission payment to UKCO was 50% of overall commission of ICO’s income. Hence ICO triggered agency PE of UKCO in India and its profits attributable to Indian operations would be taxable in India. The CIT(A) held that commission received by UKCO was not taxable in India as it pertained to remuneration for commercial services rendered outside India.

On an appeal by the Department to the Tribunal:

Held:
Contention of ICO that commission was paid to UKCO for services rendered outside India and the customers instead of paying the commission to UKCO, directly paid UKCO through ICO was selfserving and without any substantive proof.

Commission paid to UKCO by ICO in respect of services may ultimately result in business to ICO in India and commission paid by ICO to UKCO accrued to UKCO by virtue of its business connection in India and the same is liable to tax as business income in India. Reliance on Circular No. 23 was not permissible as the same had been withdrawn in 2009. Even otherwise applicability of the Circular was doubtful as the same had been issued in the context of sale of goods and may not apply in a case of rendering of services.

However the fact that ICO was a wholly-owned subsidiary of UKCO and that ICO worked only for UKCO would have a substantial bearing on the case. In the light of the same, the case was remanded to the Assessing Officer to reconsider the issue.

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Hovels India Ltd. v. ACIT (2011) TII 96 ITAT-Del.-ITNL Dated: 27-5-2011

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Section 5(1), 9(1)(vii), 195 — Article 12 of India-US DTAA — Payment made to non-resident for product testing and certification — Services utilised by resident in a business or profession carried on or for making or earning income from source outside India — Onus on assessee to prove this fact — Onus discharged — No liability to deduct tax at source.

Facts:
Taxpayer (ICO) was engaged in the business of manufacturing electrical products including switchgears, electric fans, cables and wires. It paid to US-based company (USCO), a specialist in product testing and certification for electrical products, for getting its products tested and getting certification. This certification was necessary for enabling ICO to export its products to the USA and European Union (EU).

No tax was deducted at source on the ground that since testing of products was done in a laboratory outside India, no income had accrued or arisen to USCO in India. Further the payment was not in the nature of fees for included services in terms of India- USA DTAA. The Assessing Officer took the view that as the testing and certification of ICO’s products was required to be utilised in the manufacturing activity of ICO, the payment was covered by source rule of section 9(1)(vii) as ‘fees for technical services’ (FTS) and) the services and payments would also be covered under ‘fees for included services’, in terms of Article 12(4)(b) of the DTAA. The expenditure was disallowed u/s. 40(a)(i).

ICO also contended that the service was rendered and utilised outside India. The certification was required to enable ICO to export its products to the USA and EU and such certification was not required for sale of goods in India and the source rule exception u/s. 9(1)(vii)(b) would come into play.

The Assessing Officer rejected these contentions and the order of the AO was confirmed by the CIT(A). On appeal to the Tribunal.

Held:
To seek exemption u/s.9(1)(vii)(b), onus was on ICO to prove that the services were utilised either in a business carried on outside India or for the purposes of making or earning any income from any source outside India.

The AO has not been able to bring anything on record to prove that the services have not been utilised outside India. He has not been able to rebut the representation of the taxpayer that certificates were required only for purposes of export. and that such certificates were utilised for export; and that they were not utilised for its business activities in India. Hence, onus which lies on the assessee was discharged. No tax withholding was required and disallowance u/s. 40(a)(i) was not sustainable.

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Gains arising to Mauritius company from sale of Indian company’s shares are not taxable in India under Article 13 of India-Mauritius DTAA. Mauritius company is entitled to receive sale consideration without tax deduction. Mauritius company is required to file its return of income in India in respect of sale of shares of an Indian company, even though the transaction is not liable to tax in India.

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Ardex Investments Mauritius Ltd.
AAR No. 886 of 2010
Section 245N/Q of ITA, Article 4, 13(4) of
India-Mauritius Double Taxation Avoidance
Agreement (DTAA) Dated 14-11-2011
12 Justice P. K. Balasubramanyam (Chairman)
V. K. Shridhar (Member)
Present for the applicant: Kanchun Kaushal, Raju Vakharia, Amit G. Jain, Ravi Sharma Present for the respondent: Shishir Srivastava, Satya Pal Kumar

Gains arising to Mauritius company from sale of Indian company’s shares are not taxable in India under Article 13 of India-Mauritius DTAA.
Mauritius company is entitled to receive sale consideration without tax deduction.
Mauritius company is required to file its return of income in India in respect of sale of shares of an Indian company, even though the transaction is not liable to tax in India.


Facts

  •  The applicant, a company incorporated in Mauritius (MauCo), holds a valid Tax Residency Certificate (TRC) issued by the Mauritius Tax Authority. MauCo is a wholly-owned subsidiary of its UK parent company, Ardex UK.
  •  MauCo held 50% shares in Ardex Endura (India) Pvt Ltd (ICO), which it proposed to sell to its German group company (Ardex Germany), at fair market value prevailing at the time of the proposed sale. The fact pattern is schematically depicted as under:
  • MauCo was originally created in 1998 by another UK company (an unrelated party to Ardex group). MauCo had made substantial investments in the Indian company. In November 2001, the Ardex group took a decision to acquire MauCo with a view to expand its business. Over a period of time MauCo made significant investments in ICO.
  •  With regard to proposed transaction, MauCo applied to AAR to deal with its eligibility to claim exemption in respect of proposed sale of shares of ICO and to also deal with its obligation to file return of Income in India.
  •  Before AAR, Tax Authority claimed that MauCo was not eligible for India-Mauritius treaty as: n The source of all the funds of MauCo was its 100% parent in UK and the beneficial ownership of the shares vested in Ardex UK. n The decision to sell the shares in ICO was taken by Ardex UK and MauCo was bound to follow Ardex UK’s decision. n Ardex UK intended to take advantage of the beneficial capital gains provisions under the Mauritius DTAA by creating a subsidiary in Mauritius, a facade, to hold and sell the shares held indirectly in ICO. n On lifting the corporate veil, it becomes clear that Ardex UK had invested funds for purchase of ICO shares, and hence gains on the proposed transfer of the shares accrued to Ardex UK. Consequently, UK DTAA and not Mauritius DTAA would be applicable. 
  •  Before AAR, MauCo put up the following contentions:
  •  Allegation of the Tax Department that MauCo was created by Ardex group is not correct and justified, since it was created in 1998 by another UK holding company. It was only in November 2001, the Ardex group took a decision to acquire MauCo with a view to expand its business.
  •  The decision to transfer ICO’s shares to Ardex Germany was taken by MauCo’s Board of Directors, and not by Ardex UK.
  •  Investment in ICO was made by MauCo itself and not by its UK holding company. MauCo owned shares of ICO which was evident from the share certificates furnished. The investment in India was made legally and by following the required procedure.
  • Since MauCo was a separate legal entity and the beneficial ownership of the shares vested in its hands. Accordingly, there was no justification to lift the corporate veil.
  •  MauCo is a tax resident of Mauritius and the Mauritius DTAA would be applicable in the given case. The TRC constituted valid and sufficient evidence of residential status under the Mauritius DTAA. Decision of SC in the case of Azadi Bachao Andolan and AAR ruling in the case of E*Trade Mauritius2 supported claim of MauCo.

 

Held

 AAR accepted the contentions of MauCo and held that it would not be liable to tax in India on account of transfer of shares of ICO to its German group company for following reasons:

  •  It is true that the funds for acquisition of shares in ICO were provided by the principal, a UK company. However, the shareholding arrangement has not come about all of a sudden. The shares were first purchased in the year 2000, and the shareholding steadily increased in 2001, 2002 and 2009. This is not an arrangement which has come into existence all of a sudden. It is not clear how far the theory of beneficial ownership may be invoked to come to the conclusion that the holder of shares in ICO is the UK company.
  •  Formation of a Mauritius subsidiary and the selling of shares held in the Indian company may be an arrangement to take advantage of the Mauritius DTAA. But this by itself cannot be viewed or characterised as objectionable treatyshopping. In view of the decision in the case of Azadi Bachao Andolan, treaty shopping itself is not taboo and further, this decision would stand in the way of further probe on this issue.
  •  In the current case shares sold were held for a considerable length of time (i.e., more than 10 years), before they are sought to be sold by way of a regular commercial transaction. Hence it may not be possible to go into an enquiry as to who made the original investment for the acquisition of the shares and the consequences arising therefrom.
  •  Even if it is a case of treaty shopping, in light of the SC decision in Azadi Bachao Andolan, no further enquiry on the question of treaty shopping is warranted or justified on the aspect of eligibility of beneficial capital gains provisions under the Mauritius DTAA. Further, the SC decision in the case of Mc Dowell3 did not deal with treaty shopping, only the SC in Azadi Bachao Andolan provided guidance in this regard.
  •  Thus, capital gains arising on the proposed sale of shares by MauCo to Ardex Germany will not be chargeable to tax in India in view of the provisions of Article 13(4) of India Mauritius DTAA.
  • MauCo is entitled to receive the sale proceeds without the deduction of tax at source, but, based on the AAR ruling in the case of VNU International [53 DTR (AAR) 189], MauCo is required to file its return of income in India in respect of the proposed transfer of shares.
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Non-resident lessor does not have Permanent Establishment (PE) or business connection in India on account of leased assets used in India but delivered outside India, provided the lease agreement is entered on principal-to-principal basis.

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DCIT v. M/s. Calcutta Test House Pvt. Ltd. (ITA
No. 1782/Del./2011) (Delhi ‘B’ Bench)
Section 195 of ITA, 201(1)/(1A) of Income-tax Act
A.Y.: 2000-01. Dated: 28-10-2011
I. P. Bansal (JM) and Shamim Yahya (AM)
Present for the appellant: Prakash Yadav
Present for the respondent: Rohit Garg

Non-resident lessor does not have Permanent Establishment (PE) or business connection in India on account of leased assets used in India but delivered outside India, provided the lease agreement is entered on principal-to-principal basis.


Facts

  •  Taxpayer, an Indian company (ICO), entered into an agreement with a UK Company (FCO) for hiring certain machinery on lease. ICO paid hiring charges to FCO without deducting any tax at source u/s.195.
  •  The Tax Authority alleged that FCO had ‘business connection’ with ICO in India and consequently disallowed deduction for hiring charges u/s.40(a) (ia) as ICO had failed to deduct tax at source on lease rentals paid to FCO.
  •  ICO contended that FCO was the sole, lawful and absolute owner of the machinery. Also, under terms of the lease agreement, the machinery was to be delivered outside India and all risks and rewards of ownership continued to vest in FCO. Hence FCO did not constitute a PE or business connection in India.
 Held
ITAT accepted ICO’s contentions and held that ICO was not liable to deduct tax at source on lease rent payments to FCO for following reasons:

  •  An analysis of terms of the lease agreement revealed that all the risk and rewards of ownership continued with FCO. Further, as per the lease agreement, the assets were to be delivered outside India. The agreement was also, on ‘principal-to-principal’ basis and it did not create a partnership or joint venture between parties to the lease transaction.
  •  FCO, therefore, did not have a PE or business connection in India. Further, there was no material on record to indicate FCO’s presence in India.
  •  Hence, lease rentals were not chargeable to tax in India. In the absence of liability to tax in India, provisions of section 195, requiring deduction of tax at source, were not applicable.
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In the absence of revenue having brought anything on record to show that assessee was doing construction work, consideration received by assessee was not from doing construction work and consequently, did not fall within the exclusion of Explanation 2 to section 9(1)(vii). Therefore, the income of assessee was liable to tax in terms of section 115A @10%.

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Joint Stock Company Zangas v. ADIT ITA No. 3399/Ahd./2010
Sections 9(1)(vii), 115A, 44DA of ITA, Articles 5, 7 and 12 of India-Russia Double Taxation Avoidance Agreement (DTAA) Dated 19-8-2011. A.Y.: 2007-08

T. K. Sharma (JM) and A. K. Garodia (AM) Present for the appellant: Millin Mehta Present for the respondent: Samir Tekriwal

In the absence of revenue having brought anything on record to show that assessee was doing construction work, consideration received by assessee was not from doing construction work and consequently, did not fall within the exclusion of Explanation 2 to section 9(1)(vii). Therefore, the income of assessee was liable to tax in terms of section 115A @10%.


Facts

  • Taxpayer (FCO) was a Russian company having its registered office in Moscow. It was engaged in the business of laying and installation of gas and liquid pipelines.
  • FCO was a part of a consortium led by an Indian company (KPTL). The consortium was awarded a contract by Gas Authority of India Ltd. (GAIL) for a pipeline project in India.
  • For the purposes of executing the pipeline project, FCO and KPTL executed a co-operation agreement between themselves for determining each other’s responsibilities and also manner of sharing revenue from the pipeline project. ? As per the co-operation agreement, FCO’s share in revenue was 3% and KPTL’s share 96%. Balance 1% was kept aside to meet common expenses of the consortium. Also, in terms of the agreement, any surplus out of 1% would go to KPTL and deficit, if any, would be met by KPTL.
  •  The agreement further provided that KPTL was responsible for arrangement of resources and expenses including common expenses of the consortium. KTPL was also required to arrange bank guarantees, insurance, machinery, manpower, etc. for the project.
  •  FCO offered income arising from the pipeline contract, as Fees for Technical Services (FTS), and claimed benefit of concessional rate applicable to gross basis of taxation.
  •  The Tax Authority rejected claim of FCO and held that in terms of GAIL’s engagement letter, the contract was awarded to the consortium for laying the pipeline. Therefore, nature of work carried on by FCO being construction, assembly, etc., the same would fall within the exclusionary clause of section 9(1)(vii) of the ITA and would therefore not be FTS eligible for concessional rate of taxation. Accordingly the amount would be assessable as business income and is subject to tax u/s.44DA r.w. Article 5 & 7 of the DTAA. On this basis, the Tax Authority taxed entire income received by FCO from the project at a higher rate of 40%.
  •  FCO contended that (a) it was not engaged in any construction or assembly activity so as to attract the exclusionary clause u/s.9(1)(vii) of ITA (b) The co-operation agreement between the consortium members clearly specified scope of FCO’s work which was related to drawing, designing and supervisory activities. (c) Therefore, the concessional rate of tax as provided u/s.115A(1)(b)(BB) @ 10% r.w. Article 12 would be applicable to its share of revenue.
  •  The matter was referred to the Dispute Resolution Panel (DRP), which confirmed the action of the Tax Authority.

 Held

On appeal by the taxpayer, the ITAT rejected the contention of the Tax Authority and held that nature of services provided by FCO was FTS for following reasons:

  •  Terms of contract alone are not the deciding factor. It is important to see the actual activity undertaken by FCO. The cooperation agreement between the FCO and KPTL clearly spells out the scope of FCO’s work which is as under:
  •  Design and engineering for various aspects
  •  Preparation of welding procedure and welder qualification procedure
  • Review work procedure for pipeline laying, and
  •  Deputation of experts for site review of implementation by KPTL and technical services by FCO
  •  The Tax Authority could not prove that FCO’s work extended beyond designing, supervising, etc. Even the personnel deputed by FCO were for purpose of site review and technical supervision. Entire construction work responsibility was undertaken by KTPL.
  •  Ratio of the Delhi ITAT in the case of Voith Siemens Hydro Kraftwerkstechnik GMBH & Co1 is applicable to the current case. In that case the ITAT held that though under terms of the contract, the taxpayer could be assumed to be liable to do assembly erection, testing and commissioning of power project as also the supervision thereof, in the absence of any evidence that the taxpayer actually undertook any activity other than supervision, the nature of activity carried on by it cannot be said to fall within the meaning of the term ‘construction and assembly’ under the exclusion clause of section 9(1)(vii) of the ITA.
  •  The Tax Authority accepted the sharing ratio of 3% of gross receipt as FCO’s income, i.e., onepart of the cooperation agreement, but did not accept the other part of the agreement that FCO is providing only technical assistance. If the Tax Authority was of the view that FCO is engaged in construction, assembly, etc., income from the contract should have been computed after reducing all contract expenses and not on the basis of gross receipts as computed by the Tax Authority.
  •  Provisions of section 44DA are applicable where the contract in respect of which FTS has been paid is effectively connected with a PE where FCO is carrying on business operations in India. In the facts of the case, activities were not effectively connected with installation work of KPTL.
  •  FCO’s income from the project undertaken by the consortium is in the nature of FTS under provision of sections 9(1)(vii) and 115A(1)(b)(BB).
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(2011) 11 taxmann.com 840 (AAR) Articles 7, 11 of India-USA DTAA; Sections 2(28A), 9(1)(v), 245R(2) of Income-tax Act Dated: 3-5-2011

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(i) There being no debt claim, ‘discount’ is not ‘interest’ under India-USA DTAA.

(ii) Income from discounting is business income and accrues in India and is taxable under Income-tax Act. However, in absence of PE, it would not be taxable in terms of DTAA.

(iii) Income accrues on discounting though the proceeds are realised later.

(iv) Since income is not liable to tax in India, transfer pricing documentation/report not required.

(v) As income is taxable under Income-tax Act, but extinguished under DTAA, return of income should be filed.

Facts:
The applicant was an American Company, which was tax resident of the USA. The applicant provided various financial services to its group companies as well as to other companies. As part of its business, it was drawing, making, accepting, endorsing, discount, executing and issuing Promissory Notes (PN), bills of exchange, etc.

ABC India Private Limited was a group company. The applicant proposed to purchase bills of exchange drawn by ABC India on its customers. It also proposed to purchase the PNs issued by the customers of ABC India from ABC India on ‘without recourse’ basis. The applicant has stated that it:

(a) may hold PNs till maturity, or

(b) sell them to another buyer, or

(c) may accept prepayment if the issuer is desirous of prepaying the amount.

The applicant raised the following issues before the AAR for its ruling:

(1) Whether the income earned from discounting bills of exchange or PNs pertaining to its Indian group entities was liable to tax in India under the Income-tax Act or under DTAA?

(2) If it was taxable, whether it would be taxable at the time of discounting, or on maturity, or on re-discounting?

(3) Whether the applicant would have PE in India? If yes, whether profits from discounting could be attributed to such PE?

(4) Whether income of the applicant would be subject to withholding tax u/s. 195 even if it was held not taxable in India?

(5) Whether transfer pricing documentation was required to be maintained and report was required to be filed, even if income was held not liable to tax in India?

(6) Whether the applicant was required to file a return of income even if it did not have any income chargeable to tax in India?

The applicant contended as follows:

The discount is the business income of the applicant. The applicant has no PE in India. Hence, the business income should be accessed outside India.

The discounted margin is not ‘interest’ u/s. 2(28A) of the Income-tax Act read with section 9(1)(v) of the Income-tax Act. Discounting is a mercantile practice and it does not create a loan or debt. The Revenue contended as follows:

The proposed transaction was a case of merchanting trade. The percentage of discount was really the interest on money advanced by the applicant to ABC India. It was a ruse to avoid taxation in India. Hence, such payment would be ‘interest’ u/s. 2(28A) of the Incometax Act.

Proceedings on similar questions were pending before the High Court and the Tax Authority in case of other group companies of applicant. Hence, advance ruling should not be given in this case.

Ruling:
The AAR ruled as follows:

(i) The bar of proviso (i) to section 245R(2) of the Income-tax Act is not attracted since the transaction in respect of which the ruling was sought was different from that in which other group entities were involved.

(ii) Discounting of bill is distinguishable from a pledge on deposit of security. If amounts to purchase of negotiable instrument and does not involve debtor-creditor relationship between endorser and endorsee, nor does it result in assignment of original debt. For ‘interest’ to arise, existence of a debt claim is necessary. Hence, ‘discount’ is not ‘interest’ under Article 11 of DTAA.

(iii) Applying the normal rule that ‘the debtor must seek the creditor’, the payment is to be made in India. Hence, the income accrues in India. Such income is business income taxable in accordance with provision of the Incometax Act, but subject to the rights conferred under DTAA. As applicant did not have PE in India, in terms of Article 7 of DTAA, it would not be taxable in India.

(iv) Income accrues on discounting even though the proceeds are realised later.

(v) The applicant would not be subject to withholding of tax u/s. 195.

(vi) Transfer pricing documentation were not required to be maintained and the report was not required to be filed since the income was not liable to tax in India.

(vii) As the income of applicant was liable to tax under the Income-tax Act and as such liability is extinguished only under DTAA, consistent with the ruling in VNU International BV (2011) 198 Taxman 454 (AAR), the applicant is liable to file a return of its income.

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Verizon Data Service India Pvt. Ltd. (2011) TII 13 ARA-Intl. Article 12 of India-US DTAA Section 9(1)(vii) of Income-tax Act Dated: 27-5-2011

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(i) On facts, seconded employees continued to remain employees of foreign company. Hence, services were performed by the foreign company. Therefore, cost-to-cost reimbursement to foreign company was income of foreign company.

(ii) Under India-USA DTAA, ‘make available’ clause does not apply to non-technical services. Hence, payments for managerial services were FTS and chargeable to tax @20%.

(iii) Being managerial services, payments were FTS as defined in Explanation 2 to section 9(1)(vii) of Income-tax Act.

Facts:
The applicant is an Indian company, which is a whollyowned subsidiary of an American Co. The applicant is providing certain telecom and information technology-enabled services to USCo.

For improving efficiency and productivity, the parent American Company seconded certain employees of its affiliate, also an American Company (‘USCo’), to the applicant. USCo was also engaged in a business similar to that of the applicant.

The applicant entered into a secondment agreement with USCo. Pursuant to the secondment agreement, USCo deputed three persons. Each seconded employee was to function and act exclusively under the direction, control and supervision of the applicant and USCo was not responsible or liable as regards the work performed by the seconded employees. USCo was to pay to the employee the salary which the employee was entitled to receive and the applicant was to reimburse the same to USCo. Responsibility to withhold tax was of the applicant and the payment to USCo was to be on net of tax basis.

The applicant raised the following issues before the AAR for its ruling:

(1) Whether reimbursement by the applicant to USCo is income of USCo and liable to tax deduction u/s. 195?

(2) If answer to 1 is ‘yes’, whether it is taxable as FIS?

(3) Does USCo have a PE in India and, if yes, whether amount received by it from the applicant is ‘business profits’ attributable to the PE under the DTAA?

(4) If answer to 3 is yes, whether the taxable income would be nil because of cost-to-cost reimbursement?

(5) If reimbursement is income of USCo, what would be the rate of withholding tax?

The applicant contended as follows:

Since the applicant was the economic employer of these seconded employees, withholding tax obligation was of the applicant. The payments made to USCo were cost-to-cost reimbursements and no income arose to USCo. Since the applicant had withheld tax u/s. 192 (on salary), there should not be any further withholding u/s. 195.

USCo was not rendering any services to the applicant. The employees work under the control of the applicant, the reimbursement of salary to USCo was for administrative convenience and hence, it should not qualify as FIS under Article 12 of the DTAA as FIS would require that technical knowledge, skill, etc. is ‘made available’.

USCo had no fixed place from where it carried on business in India. Even if it was held that USCo had a fixed place of business in India, salary and expenses incurred on seconded employees would be deductible as expenditure and due to cost-to-cost reimbursement, net income would be nil. Hence, no tax deduction would be required.

The Revenue contended as follows:

Since, the applicant, the parent company and USCo were part of the same group, seconded employees represented the parent company and relying on DIT v. Morgan Stanley and Co. Inc, (2007) 292 ITR 416 (SC), they do not become employees of the applicant. Thus, the applicant would not be the economic employer.

Seconded employees claimed to be part of the parent company. Only USCo had the authority to terminate their services.

In A.T. & S. India P. Ltd., In re (2006) 287 ITR 421 (AAR), it was held that reimbursement of cost of seconded employees is in the nature of FTS and payment of taxes under the head ‘salaries’ is of no consequence. It is not correct to say that persons occupying managerial position cease to render technical service. The employees were seconded to render only technical advice/guidance. Hence, payments would be FIS even under DTAA.

Ruling:
The AAR ruled as follows:

(i) The three employees together constituted a team. While they were providing services to the applicant, they remained employees of USCo and their employment could be terminated only by USCo. This showed that it was USCo who rendered managerial services to the applicant.

(ii) As the seconded employees continued to remain the employees of USCo, it followed that the managerial services were performed by them as employees of USCo and not as those of the applicant.

(iii) The two receipts — one in the hands of USCo (for managerial services) and the other in the hands of employees (salary for employment) — spring from different sources, are of different character and represent different species of income. By correlating the two payments/ receipts, neither the nature nor substance of the transaction would change to give it the character of reimbursement. Amounts paid by the applicant to USCo represent income of USCo.

(iv) From reading of MOU to DTAA, it was clear that ‘make available’ clause does not apply to non-technical services. Since services provided by USCo were managerial services, the payments were FIS under Article 12(4) of DTAA. As regards the Income-tax Act, since the services were managerial in nature, the payments were FTS as defined in Explanation 2 to section 9(1)(vii).

(v) Since the reimbursed amounts were FIS, they would be chargeable to tax @20% under Article 12(4)(b) of DTAA. Also, as the payments are taxable as FIS answers to the other questions were academic.

Lanka Hydraulic Institute Ltd. (2011) 11 taxmann.com 97 (AAR) Articles 5, 7, 12, 22 of India-Sri Lanka DTAA; Sections 9(1)(vi), (vii) of Income-tax Act Dated: 16-5-2011

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(i) Time spent by employees under control and supervision of independent service provider not to be considered for determining service PE.

(ii) Where consideration is for use of scientific work, etc. and no IPR in software is transferred, payment is royalties.

(iii) As DTAA does not have specific Article for taxation of FTS, it would be governed by other income Article.

Facts:
The applicant was a company incorporated in, and tax resident of, Sri Lanka. The applicant was engaged in providing technical feasibility studies, preparation of coastal zone management plan, port and other water-related engineering projects, etc. The applicant did not have any office or place of business in India.

Kolkata Port Trust had awarded a contract to a PSU. The PSU subcontracted the work to the applicant. Under the agreement with the PSU, the applicant was to provide services pertaining to software supplies, installations, modelling, field data collection, transfer of on-job training/technology, maintenance, monitoring, handover of software, designs and submissions of reports, etc. As per the applicant, on the basis of man-hours, substantial part of the services were rendered in Sri Lanka and only about 20% of the services were rendered in India. For rendering the services in India, the applicant deputed engineers to the project site at short intervals.

The applicant had outsourced part of the services to an Indian Company (‘IndiaCo’). Further, the applicant had also engaged a representative for assistance in connection with the contract.

The PSU treated the receipts of the applicant u/s. 9(1)(vii) of the Income-tax Act and deducted tax u/s. 195. The applicant had applied to the AO for nil withholding tax certificate u/s. 197, but subsequently withdrew its application and approached AAR raising the following questions:

(1) Whether on facts, the applicant had constituted PE in India in terms of Article 5 of DTAA read with the Protocol to, DTAA?

(2) Whether the consideration received by the applicant under the contract with the PSU was taxable in India under Article 7 of DTAA?

(3) If answer to the above question is no, whether the consideration received by the applicant under the contract with the PSU was taxable in India under any other article of DTAA?

The applicant contended as follows:

The contract is predominantly for services and supply of software is incidental to the contract. Thus, the payment is for obtaining limited rights for effective operation of the software and not for commercial exploitation of software. Hence, it cannot be considered royalty.

Consideration for provision of services is business receipts. The applicant did not have any fixed place of business, management or branch in India. Under Article 5(2)(i) of DTAA, a service PE is constituted if services are furnished for more than 183 days in any 12 months’ period. Due to MFN clause in DTAA, the period of 183 days is extended to 275 days as that is the period in Sri Lanka-Yugoslavia DTAA.

The Revenue contended as follows:

As DTAA did not have specific provision dealing with FTS, taxing under any other Article of DTAA would mean changing the character of the income. As such, FTS should be taxed u/s. 9(1)(vii) of the Income-tax Act.

As the software was not sold but licensed, the nature of consideration was royalty u/s. 9(1)(vi) of the Income-tax Act.

Presence in India of employees deputed by the applicant for less than 183 days was not ascertainable. Further, while subcontracting part of the work to IndiaCo and the representative, the applicant had given them instructions and thereby controlled them both. The applicant had also not substantiated that IndiaCo and the representative had not provided similar service to others. Hence, it cannot be concluded that they were not dependent agents. Therefore, the applicant has a PE in India.

Under contract between the PSU and the applicant, the applicant cannot outsource certain part of the work. Hence, u/s.s 190 to 194 of the Indian Contract Act, IndiaCo would constitute sub-agent. Therefore, the time spent by employees of IndiaCo should also be considered for determining service PE.

Ruling:
The AAR ruled as follows:

(i) IndiaCo is an independent service provider having expertise who has provided similar services to others. Indiaco has rendered services through its employees under its own control and supervision. Hence, employees of IndiaCo cannot be considered ‘other personnel’ under Article 5(2)(i) of DTAA. Therefore, duration of time spent by employees of IndiaCo is not to be considered for determining PE in India of the applicant.

(ii) The applicant did not sell any off-the-shelf product but provided scientific equipment for perpetual use. The tendered document envisages transfer of technology by means of field data collection and desk study of data to arrive at mathematical model by using software. Though the software is heart and soul of the transferred technology, no intellectual property rights in software are transferred. The consideration is for use of scientific work, model, plant, scientific equipment and scientific experience. Hence, it is royalties under Article 12 of DTAA.

(iii) As DTAA does not have specific Article for taxation of FTS, FTS would be governed by Article 22 (other income) and not as per Article 7.

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DDIT v. Dharti Dredging & Infrastructure Ltd. 9 Taxman.com 327 (Hyd. ITAT) Article 5 of India-Netherlands DTAA; Sections 9, 195 of Income-tax Act A.Ys.: 2000-07 and 2007-08 Dated: 17-9-2010

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Hiring of dredger owned by Netherlands company for work in India under control and supervision of Indian company does not constitute PE in India.

Facts:
The assessee was an Indian company (‘IndCo’) engaged in the business of marine dredging and port construction. IndCo was awarded contract for dredging of Inner Harbour Channel. For executing the contract, IndCo hired a dipper dredger from a Netherlands company (‘DutchCo’). As per the agreement between IndCo and DutchCo, the dipper dredger was provided to IndCo with two charter coordinators and two operators. During the course of survey by Tax Authority it was found that IndCo had made certain payments to DutchCo for usage of dredger. It had not deducted tax from these payments. Hence, the AO held that the dredger constituted PE and permanent base of business of DutchCo in India. Therefore, the AO passed order u/s. 201 of Income-tax Act levying tax and interest.

Before the Tribunal, IndCo contended that:

  • merely because it hired the dredger together with coordinators and operators, it does not mean that the contract was carried out by DutchCo;
  • equipment hired from a foreign company cannot be construed as place of business of foreign company and to constitute permanent base of foreign company in India, the foreign company must have PE to control its business activities in India;
  • IndCo paid salary, lodging, board, etc. of crew and DutchCo had not incurred any expenditure for the crew which stayed in India for operating the dredger;
  • the crew was to work under the directions and instructions of IndCo;
  • IndCo executed the work on its own utilising the dredger and no part of the work was done by DutchCo.
  • DutchCo had nothing to do with execution of the dredging contract; and
  • therefore, dredger cannot be said to constitute PE of DutchCo in India.

The Tax Authority contended that:

  • the dredger belonging to DutchCo stayed in Indian territory for sufficiently long period;
  • the dredger had living space for stay of crew; it had advanced instruments like computer and communication equipments, which met the essential requirements of office/work place;
  • the dredger remained in a particular location; and

hence, DutchCo had a permanent place of business in India and the dredger should be considered as PE of DutchCo.

Held:
As regards PE under Article 5(1):

  • Payments made by IndCo to DutchCo were hire charges.
  • Hiring of dredger for operations under direction, control and supervision of IndCo cannot be construed as PE of foreign company in India.
  • Provision of living space and presence of communication and other equipments, for effective usage at sea cannot be construed as PE.

As regards Article 5(3):

Installation of structure used for more than 183 days would constitute PE if the foreign company was carrying out the contract in India. Since IndCo was carrying out the contract and dredger was used by IndCo and not DutchCo, DutchCo cannot be said to have installed equipment or structure for exploration in India.

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ADIT v. M. Fabrikant & Sons Limited Article 5, 7 of India-USA DTAA; Section 9(1)(i) of Income-tax Act A.Ys.: 1999-2000 to 2002-03 and 2003-04 Dated: 28-1-2011

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On facts, LO purchasing diamonds for export to HO does not constitute PE under India-USA DTAA and it was covered under explaination 1(b) to section 9(1) (i) of Income-tax Act.

Facts:
The assessee was a company based in the USA (‘USCo’). USCo was engaged in the business of sale of diamonds and diamond jewellery. After obtaining approval of RBI, USCo established a Liaison Office (‘LO’) in India for purchase of diamonds for exports to its Head Office (‘HO’). During the course of survey by the tax authority, the following was noted as business model of USCo and its LO in India:

  • Upon receipt of information from HO, LO gets the right quality, size and carats from the supplier.
  • The prices are then negotiated, by LO with the supplier, in order to obtain best prices, as per HO’s requirement.
  • Unassorted diamonds are received; the parcels are assorted with the help of assorters.
  • For getting the right selection and chalking out rejections, the assortment, verification and selection of packets is done by various other employees of LO.
  • Once right selection of diamonds are obtained, packed and sealed, they are dispatched to the customs office.
  • LO has dedicated employee who takes care that the sealed packets are cleared through the approver and examiner at the customs.
  • The supplier prepares the invoice which is directly honoured by HO.

It was also noted that USCo had 76% shareholding in another Indian company and that company purchased rough diamonds, got them processed from others and sold the finished diamonds in open market. About 25% of the total purchases of LO were from this company.

Based on the above activity conducted by LO, the tax authority held that LO constituted PE in India of USCo and computed its income @5% of the value of diamonds imported through LO.

USCo contended that as per clause (b) of Explanation 1 to section 9(1)(i), no income could be deemed to accrue or arise in India through or from operations which were confined to the purchase of goods in India for purposes of export. Reliance, in this regard was placed on Circular Nos. 23, dated 23-7-1969 and 163, dated 29-5-1975.

In appeal, CIT held that LO was not involved in manufacture or production and was not selling diamonds. Also, under India-USA DTAA, LO, which was engaged in the purchasing of goods or merchandise, or for collecting information for the HO, could not be considered as PE in India.

Held:

  • The activity profile of LO, namely assorting, quality checking and price negotiation, under instructions and specifications of HO are a part of the purchasing of diamonds for export from India. Such process did not result or bring any physical and qualitative change in the diamonds purchased.
  • Selection of right goods and negotiation of prices are an essential part of the purchasing activity.
  • The case is squarely covered by Explana-tion (1)(b) to section 9(1)(i) of the Income-tax Act. Further, having regard to Circular No. 23 and Circular No. 163 of the CBDT, no income could accrue or arise in India to USCo by virtue of purchase of goods made for purposes of export.

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VNU International B V AAR No. 871 of 2010 Article 13(5) of India-Netherlands DTAA; Sections 139, 195 of Income-tax Act Dated: 28-3-2011

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On facts, capital gains arising from transfer of 50% shares of Indian company held by Netherlands company are not chargeable in India in terms of Article 13(5) of India-Netherlands DTAA. Hence, the transfer would not attract transfer pricing provisions and the purchaser would not be liable to withhold tax. However, the seller would be required to file return of income in India.

Facts:
The applicant was a company incorporated in, and a tax resident of Netherlands (‘DutchCo’). DutchCo was subsidiary of another Netherlands company. DutchCo held entire capital of an Indian company (‘IndCo1’). IndCo1 entered into a scheme of arrangement with another Indian company (‘IndCo2’) for demerger of one of the divisions of IndCo1 into IndCo2. Subsequently, DutchCo transferred 50% of the shares in IndCo2 to a Switzerland company resulting in substantial capital gains for DutchCo.

DutchCo sought ruling of AAR on the following questions:

  • Whether capital gains earned by DutchCo were liable to tax in India under Income-tax Act and India-Netherlands DTAA?
  • Whether the transfer would attract transfer pricing provisions under Income-tax Act?
  • Whether the purchaser of the shares would be liable to withhold tax u/s. 195 of Incometax Act?
  • If capital gains are not taxable in India, whether DutchCo is required to file return of income u/s. 139 of Income-tax Act?

Held:

  • In terms of Article 13(5) of India-Netherlands DTAA, capital gains would be taxable only in Netherlands and not in India.
  • Since capital gains are not taxable in India, the transfer would not attract transfer pricing provisions under the Income-tax Act.
  • The purchaser of the shares would not be liable to withhold tax u/s. 195 of the Incometax Act.
  • Under the Income-tax Act, every company is required to file return of its income or loss and a foreign company is also included within the definition of ‘company’. While casting an obligation to file return of income, the Legislature has omitted expression ‘exceeded the maximum amount which is not chargeable to income tax’. In terms of section 5, DutchCo is liable to pay tax in India — though, due to treaty applicability, no tax is actually paid in India, but is only paid in the Netherlands. Once power to tax a particular income exists, it is difficult to claim that there is no obligation to file return of income. The Income-tax Act has specifically provided for exemption from filing of return of income where it is not necessary for non-resident to file return of income. Such exemption is not provided in this case. Hence, DutchCo would be required to file income of return. The AAR also observed:

Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a wide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income-tax Department.

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Clough Engineering Ltd. v. ACIT ITA No. 4771 & 4986 (Del.)/(2007) (SB) Article 5, 7, 11 of India-Australia DTAA A.Y.: 2003-04. Dated: 6-5-2011

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  • Interest earned by foreign company on tax refund is not effectively connected with PE in India based on ‘asset-test’ or ‘activity-test’. The ‘indebtedness’ in respect of which interest arose is not ‘effectively connected’ with PE as ‘payment of tax’ is primarily the liability of a foreign company and not PE.
  • The Interest on income tax refund is taxable in terms of Article 11(2) on gross basis (@ 15%) in the hands of foreign company and not on net basis (full rate) under Article 7 r.w. Article 11(4).

Facts:

  • The taxpayer, an Australian company, had a PE in India. PE was carrying out designing, engineering, procuring, fabricating, installing, laying pipelines, testing and pre-commissioning of off-shore platforms on contractual basis.
  • The taxpayer received tax refund along with interest in respect of excess TDS which was deducted from contract receipts of the PE. The taxpayer claimed that such interest income was taxable at the rate of 15% on gross basis as per Article 11(2) of the DTAA.
  • The Tax Authority held that the interest income was received on refund of the tax deducted at source made from business receipts and was directly connected with the business receipts of PE in India and hence the same was chargeable as profits of the PE under Article 7 r.w. Article 11(4) of the DTAA.
  • The CIT(A) accepted the contentions of the Tax Authority. The matter was carried to the Tribunal and in view of conflicting decisions rendered by different Benches of the Tribunal3, a Special Bench was constituted to address the matter.

Ruling:
The ITAT rejected the contentions of the Tax Authority and held as under:

  • For determining taxation of interest under DTAA, what is relevant to determine is whether or not the indebtedness is effectively connected with the PE.
  • If debt is effectively connected with the PE as contemplated by Article 11(4), income would become taxable under Article 7 as business profits.
  • The fact that interest income is not business income is not determinative of whether income is assessable under Article 7. For taxation under Article 7, effective connection with the PE is relevant.
  • Interest income does not have to be necessarily business income in nature for establishing the effective connection with the PE, since it would render provision contained in Article 11(4) of DTAA redundant.
  • In the present case, income is connected with the PE in the sense that it has arisen on account of TDS from the receipts of the PE. However, payment of tax is the responsibility of FCO. Tax liability is determined after computation of income. Tax is not expenditure but appropriation of profit. Thus, though the debt is connected with receipts of the PE, it cannot be regarded as effectively connected with such receipts as primary responsibility is that of FCO and such liability crystallise on the last day of the previous year. In fact, FCO is entitled to pay taxes from any sources.
  • Merely because taxes are collected at source, it will not create effective connection of the indebtedness with the PE, as tax is only the appropriation of profit.
  • In the circumstances such interest is not effectively connected with the PE. Hence, it is liable to tax in terms of Article 11 (on gross basis) and not in terms of Article 7 (on net basis).
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Goodyear Tire and Rubber Company (2011) (AAR No. 1006 & 1031 of 2010) Sections 45, 48, 56(2)(viia), 195 of Incometax Act Dated: 2-5-2011

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  • Transfer of shares held in an Indian company, by one foreign company to its foreign subsidiary would not be chargeable to capital gains and such receipt cannot be considered as income in the hands of the recipient foreign company.
  • In terms of section 45 r.w.s. 48, transfer of shares without consideration is not chargeable to tax under the head capital gains.
  • In an international transaction, transfer pricing provisions can apply only when income is chargeable to tax in India.
  • If transaction is not liable to tax in India, withholding tax implications u/s.195 do not arise.

Facts:
USCO holds 74% shares in Indian listed company (ICO). USCO also holds 100% shares of an operating company in Singapore (SingCo) which managed natural rubber purchases, delivery finances and treasury operations of various entities in the Group. As part of USCO’s global strategy, USCO contemplated restructuring of its Indian investment. For this purpose, USCO voluntarily contributed entire 74% stake in ICO to Singco without any consideration. The contribution deed made it clear that SingCo was not liable to compensate USCO for contribution of shares at any time and there was no obligation on the part of Singco to takeover any liability of USCO.

The proposed transaction is pictorially depicted as given on next page.

Application was filed by USCO and Singco raising issues regarding taxability of contribution in the hands of USCO. Consequentially, questions were also raised about applicability of TDS obligation of Singco as also applicability of transfer pricing provisions to the transaction.

Before AAR, it was contended that:

  • Proposed transfer of shares of ICO to USCO to SingCo is without consideration in money or money’s worth.
  • As consideration for transfer is incapable of being valued in definite monetary terms, the mechanism to charge capital gains u/s.45 r.w.s. 48 of Income-tax Act would fail.
  • Contribution is in the form of gift and would therefore not amount to transfer u/s.45 r.w.s. 47(iii) of the Act.

The Tax Department put forth the following contentions:

  • Proposed transfer is for creation of a better business environment, which itself is a consideration. Hence, the transaction cannot be regarded as a gift or as a voluntary contribution without consideration.
  • The transfer of shares, is an attempt of case of ‘treaty shopping’ for avoidance of capital gains tax at a future date, since in case transferee company gifts/sells these shares to another entity, the transaction will not be taxable in India in view of India-Singapore DTAA, which otherwise would not be the case in the context of India-USA DTAA.
  • The bar under proviso to section 245R(2) of the Act relating to the transaction designed for avoidance of tax covers both present and future scenarios.

AAR held:

  • Computation mechanism is integral and fundamental to the scheme of taxation.
  • Capital gain needs to be calculated after taking into account full value of consideration. There is distinction between ‘full value of consideration’ and ‘fair market value of capital asset transferred’.
  • Having regard to the earlier rulings in case of Amiantit International Holding and Dana Corporation2, the transferor cannot be regarded as having derived any profit or made any gain if transfer without consideration is made in favour of 100% subsidiary. If the transfer is without consideration and is incapable of being valued in definite monetary terms, the same is unascertainable and cannot form the basis of taxation u/s. 48.
  • As there are no tax implications within the realm of sections 45 and 48 of the Act, applicability of section 47(iii) is academic.
  • ICO, being a listed entity, any gains arising on transfer of its shares, being a long-term capital asset, is otherwise exempt u/s. 10(38) of the Act. Hence, the transaction cannot be said to be designed for avoidance of tax through treaty shopping.
  • ICO is a company in which public are substantially interested. Hence, the provisions of section 56(2)(viia) of the Act would not be attracted on proposed transfer of its shares.
  • Transfer pricing provisions u/s. 92 to 92F of the Act would not be applicable in the absence of liability to pay tax.
  • As income is not chargeable to tax, the question of withholding tax by GTRC/GOCPL u/s. 195 does not arise.
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Standard Chartered Bank v. DDIT ITA No. 3827/Mum./2006 Article 7, 12 of India Singapore DTAA Section 195 of Income-tax Act A.Y.: 2004-05. Dated: 11-5-2011

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  • Data processing charges do not constitute ‘royalty’ under the Income-tax Act as also India-Singapore DTAA. Payments are made for use of a facility and not for any process/use of equipment and hence it is not royalty.
  • In the absence of control or physical access to any equipment, it cannot be said that the payment was made for any ‘use’ or ‘right to use’ the equipment.

Facts:

  • The taxpayer (SCB), a non-resident company, is engaged in the banking business in India through various branches. It entered into an agreement with a Singapore company (SingCo) for providing data processing support from outside India. The agreement required SingCo to make available disc storage capacity in its data centre for exclusive use of SCB.
  • The arrangement involved electronic transmission of raw data by SCB and electronic processing of such data by SingCo as per SCB’s requirements. Processed data is electronically transmitted back to India in the form of reports as per specifications of SCB.
  • SCB claimed that (i) charges paid to SingCo did not amount to royalty under the IT Act as well as under Article 12 of DTAA (ii) Payments were in the nature of business profits which, in absence of PE in India, were not taxable.
  • In response to SCB’s application for ‘nil’ tax withholding, the Tax Authority held that the payment constituted ‘royalty’ under Incometax Act as well as DTAA.
  • On appeal, the first Appellant Authority upheld the Tax Authority’s order and concluded that the payments were made (a) for use of ‘process’ provided by SingCo through its computer facility for data processing; or (b) for use of ‘scientific equipment’ since the arrangement was for renting out disc space in the hardware system, over which SCB exercised constructive control over infrastructure facilities and such facilities were for exclusive use of SCB.

Held:

  • For the following reasons, the ITAT held that the payment was not for use or right touse ‘any process’ within the meaning of Article 12(3)(a) of India-Singapore DTAA.
  • There was no use or right to use any process of SingCo by SCB at any of the stages, i.e., transmission of raw data, processing of data by SingCo staff and electronic transmission of duly processed output data by SingCo to SCB.
  • The consideration paid by SCB cannot be said to be for the software embedded in the mainframe computer of SingCo.
  • In Kotak Mahindra Primus Ltd. v. DCIT, (105 TTJ 578), Mumbai, the ITAT had held that payments made for specialised data processing of raw data using mainframe computers located abroad is not liable to tax as royalty since there was no control over the actual processing of data and there was no physical access or control over themainframe computer. This decision squarely applied to the facts of the case.
  • The payment was for a facility which was available to any person willing to use it.
  • For the following reasons, the ITAT held that the payment was not royalty for equipment hire as there was no use or right to use any equipment.
  • Earmarking a space segment capacity of the equipment does not result in possession (actual or constructive) of the equipment being provided.
  • The context and collocation of the two expressions ‘use’ and ‘right to use’ followed by the word ‘equipment’ indicate that there must be some positive act of utilisation, application or employment of equipment for the desired purpose.
  • If an advantage was taken from sophisticated equipment installed and provided by another, it could not be said that the recipient/customer used the equipment as such.
  • What was contemplated by the word ‘use’ in royalty definition was that the customer came face to face with the equipment, operated it or controlled its functions in some manner. Availing services which involved use of infrastructure is not royalty.
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M/s. Wheels India Ltd. v. ITO ITA No. 1793/Mds./2006 (Chennai) Article 12(4) of India-US DTAA; Sections 9(1)(vii), 210, 201(1A) Income-tax Act A.Y.: 2005-06. Dated: 19-4-2011

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In terms of Article 12(4) of India-US tax treaty, payment made to US companies for ‘developing tooling’ and ‘validating new process for manufacture’ of wheels for commercial vehicles is ‘fees for included services’. 

Facts:

  • The taxpayer (WIL), an Indian company, is engaged in the manufacture of steel wheels for commercial vehicles, passenger cars, utility vehicles, earthmoving and construction equipments, agricultural tractors and defence vehicles.
  • WIL developed a new process for manufacturing steel wheels for trucks out of a single piece of steel material. The new design and concept was intended to result in reduction of input material and improvement in the strength of the wheel by elimination of welding process. WIL applied for registering patents in India with Indian Government Patent authorities in respect of the wheels which it intended to manufacture.
  • However, WIL did not have requisite knowhow for designing the machine capable of manufacturing the product as per patented processes.
  • WIL approached two US companies (USCOs), which had the required machine/tooling capability with them for validating the process conceptualised by WIL. In terms of the agreements, WIL got the validation done through USCOs. However, after receipt of initial report, WIL did not pursue the agreement with USCOs as the validation reports did not meet WIL’s requirement.
  • After discontinuation of the agreement, WIL began manufacturing the item/articles in their own in-house facility, after importing requisite machinery from other parties in Germany and US.
  • WIL did not deduct tax at source in respect of advance payments made to USCOs, on the premise that the entire services under the agreement were rendered by USCOs outside India and no income was chargeable to tax in India. And, in any case, in terms of the treaty no amount was chargeable as no technology was made available by USCOs as its services were essentially for validating the new process which was actually developed by WIL.

The Tax Authority rejected the contention of WIL and concluded that the services provided by both foreign companies would come under the purview of ‘fees for technical services’ liable to tax in terms of section 9(1)(vii) of the Income-tax Act and under ‘fees for included services’ under Article 12(4) of India-US DTAA. On this basis, the Tax Department proceeded to treat WIL as assessee in default u/s.201 for not withholding tax on payments made to USCOs.

Held:
ITAT accepted the contentions of the Tax Authority and held that:

  • The term ‘fees for technical services’ and ‘make available’ in the context of DTAA is generally understood by Courts1 as under:
  • Mere rendering of specific technical services is not sufficient to attract definition of ‘fees for technical services’. The services rendered should make available technical knowledge, experience, skill, know-how, etc.
  • To fit into ‘make available’, the technology, the technical knowledge, skills, etc. must remain with the person receiving the services even after the particular contract comes to an end.
  • It is not enough that the services offered are the product of intense technological effort and that a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending upon the provider.
  • WIL got validation done through USCOs and thereafter it began manufacturing items/articles. Necessary tooling was developed in-house with CAD and CAM techniques available with WIL. Furthermore, extensive process trials were conductedat WIL. This directly supports the fact that WIL was ‘made available’ with technical know-how making it able to carry out in-house manufacturing activities.
  • The fact that WIL got the test for validation done and thereafter got the manufacturing of tooling done raises a strong presumption that the technical know-how involved in the process was made available. It is not the case of WIL that the know-how was obtained from some other party and/or that the manufacturing was abandoned. The fact that the toolings were developed in-house by WIL support that the know-how was passed on to WIL and hence the services made available requisite know-how.
  • The payments made to USCO’s, were liable to tax in India, and hence WIL was required to deduct tax at source.
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Fees for technical services (FTS) paid to nonresident company for assistance in relation to proposed expansion of taxpayer’s business outside India is not taxable under Income-tax Act. Having regard to specific source rule exception applicable to FTS taxation, FTS paid by resident for earning income from a source outside India is not taxable in India. The provision is wide enough to even cover any future source of income.

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ITO v. Bajaj Hindustan ITA No. 63/Mum./09 (Mumbai ‘L’ Bench) S. 9(1)(vii), 195, 201(1)/(1A) of Income-tax Act A.Y.: 2007-08. Dated: 3-8-2011 N. V. Vasudevan (JM) and J. Sudhakar Reddy (AM) Counsel for the appellant: Jitendra Yadav Counsel for the respondent: Kirit R. Kamdar

Facts of the case

The taxpayer, an Indian resident (ICO), was engaged in the business of manufacturing of sugar. ICO proposed to acquire sugar mills/distillery plants in Brazil for expansion of its business operations.

For this purpose, ICO engaged the services of a financial advisor in Brazil (FCO) to assist and advise the proposed transaction. Payments were made to the FCO for services availed during the relevant year. The agreement between ICO and FCO was in the form of a proposal to study the possibility of expanding ICO’s operations in Brazil. ICO contended that payments were not taxable in India as payments were for a business or profession set up outside India or for the purpose of making or earning of source of income from outside India.

ICO contended that it had incorporated a subsidiary in Brazil to acquire the sugar mills/distillery plants. Hence, services of FCO would be utilised in the business which would be carried out outside India through the ICO’s subsidiary.

The Tax Authority sought to tax the above payments as FTS taxable in India and treated ICO as assessee in default for not withholding appropriate taxes u/s.195 of Income-tax Act.

ITAT Ruling

Payments made by ICO for services rendered by FCO fall within the meaning of FTS under the Income-tax Act. Hence, the real issue before ITAT was if such payment can be regarded as sourced from India in terms of Source rule of ITA.

 ICO carried on business in India and had utilised the services of FCO in connection with such business. Therefore, case of ICO would not fall within the first exception of the source rule which protected FTS if it was business carried on by a resident outside India.

 ICO wanted to acquire sugar mills/distillery plants in Brazil and for that purpose, had set up a subsidiary company in Brazil. Thus, ICO was contemplating creation of a source for earning income outside India. It is no doubt true that the source of income had not come into existence during the year. As a result, income was not sourced from India as it was making or earning of income from a source outside India. This applied also to payments for creating a future source of income.

There is nothing in the language of the exception of the source rule which would show that the same is restricted to an existing source of income only or when the source of income would have come into existence during the year.

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Contracts for offshore supply of equipments where title of goods passes outside India, sale is concluded outside India and payments are received outside India in foreign currency, do not give rise to taxable income in India.

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LS Cable Ltd. AAR No. 858-861 of 2009 S. 245R of Income-tax Act, Article 5(1)/(3) of India Korea DTAA Dated: 26-7-2011 Justice P. K. Balasubramanyan (Chairman) V. K. Shridhar (Member) Present for the applicant: N. Venkataraman, Sr. Advocate, Satish Aggarwal, FCA & others Present for the Department: Narender Kumar, ADIT (Intl. Taxn.), New Delhi

Facts of the case:

Applicant, a Korean company (FCO), is engaged in the business of manufacturing of electric wires and cables for purpose of power distribution. FCO was successful bidder in bids invited by an Indian company (ICO) for four different projects which involved supplying, laying, jointing, testing and commissioning of power cables. In respect of each of the projects, FCO entered into separate contracts with ICO viz.

(i) for offshore supply of equipments and material including mandatory spares on CIF basis, and (ii) contracts for onshore supply of material. FCO applied to AAR to determine whether consideration received from contract relating to offshore supply is taxable under Income-tax Act as also under India-Korea DTAA. FCO contended that as title to material and equipment passed outside India and as payment for offshore supply was also received outside India, no income accrued or arose to FCO by virtue of offshore supply contract in India. Reliance placed on SC ruling in the case of Ishikawajima Harima Heavy Industries2. The Tax Authority rejected the contention of FCO and held that the income from offshore supply contract was liable to tax in India on account of the following reasons:

? The separate contracts entered into by FCO with ICO were in effect part of composite contract and none of the contracts can exist without each other as breach of one is deemed to be breach of the other contracts as well. Also, all contracts were signed on the same date by FCO.

? The entire activity of onshore and offshore contracts was undertaken by the FCO itself. The offshore contract does not pertain to a case of only sale. This is supported by the fact that FCO was also responsible for activities such as insurance in respect of cargo, workers, compensation, etc.

? Delivery of equipment was not complete until the same is commissioned at the site of ICO. Further full payments against offshore contracts were payable only after successful demonstration of the equipment by FCO. The nature of the contract entered into was a turnkey project and therefore FCO had PE in India.

AAR Ruling

The clauses in the offshore supply contract regarding the transfer of ownership, payment mechanism in the form of letter of credit, etc. establish that the transaction of sale took place outside India. As consideration for offshore supply has separately been defined in the contract, it could be safely separated from the entire project consideration.

Reliance was placed on SC ruling in the case of Ishikawajima Harima (supra) and earlier AAR ruling in the case of Hyosung Corporation3 to support that incomes from offshore supply contracts are not taxable in India.

The Madras High Court decision in the case of Ansaldo Energia SPA4 relied on by the Tax Authority is distinguishable as in the facts of that case the entire turnkey project was awarded to the taxpayer as a whole and thereafter the consideration was split. In that case it was found that there was a façade created for the purpose of avoiding tax and that there was a price imbalance in the contracts which was skewed in favour of the offshore supplies contract, in order to minimise the tax liability. Subsequently it was held that consideration for offshore supply was taxable in India. In the current facts nothing in law prevents parties from entering into contract which provides for sale of equipment for a specified consideration although it is meant to be used in the fabrication and installation of a complete plant.

Even if FCO has a PE in India, the same would be for the purpose of carrying out contract for onshore supplies and the same would have no role in offshore supplies/services. Even though PE is involved in carrying out incidental activities relating to offshore supply, it cannot be said that it is involved in offshore activities.

Accordingly, FCO has no liability to tax in India on account of contract for offshore supply. 2 288 ITR 408 3 314 ITR 343 4 310 ITR 237

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In the facts of the case, procurement activity of USCO undertaken by Indian Liaison Office (LO) is not confined only to the purchase of goods in India for purposes of export. As a result, USCO is not entitled to benefit of exclusion available for income earned from business connection relevant to ‘purchases for export’ operations.

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Columbia Sportswear Company AAR No. 862 of 2009 Article 5(1)/(3) of India US DTAA Dated: 8-8-2011 Justice P. K. Balasubramanyan (Chairman) V. K. Shridhar (Member) Present for the applicant: Rajan Vora & Others, R. Vijayaraghwan, Advocate Present for the Department: Meera Srivastava, JCIT (Intl. Taxn.), Bangalore
Likewise, activities performed by LO constituted PE under Article 5(1) of DTAA and was not protected by purchase rule exception/exception of proprietary auxiliary services.
Facts of the case
Applicant, tax resident of US (USCO), is a wholesaler and retailer of outdoor apparel with worldwide operations. USCO set up LO in India for purpose of purchase of goods from India.
The LO also assisted in procuring goods from Egypt and Bangladesh. The LO with a support staff of 35 employees, carried out following activities from its office in Bangalore:

  •  Vendor identification.

  •  Uploading material prices to the internal product data management system.

  •  Ensuring vendor compliance with policies, procedures and standards relating to quality, delivery, pricing and labour practices.

  •  Inquiry of potential suppliers and interaction with existing suppliers for purchase of USCO’s product range.

  •  Collection of samples from vendors with regard to various materials available in India.

  •  Quality check at laboratories to ensure adherence to quality parameters.

  •  Acting as communication channel with vendors. USCO approached AAR, seeking ruling on taxability of its presence and the benefit it has of the following:

  •  LO operations in India were confined to purchase of goods in India for purpose of export and therefore it should be protected from tax liability in terms of ‘purchase for export’ exception available under Explanation 1(b) to section 9(1)(i).

  •   Under DTAA, no PE emerges if the activities carried out through PE are confined to preparatory and auxiliary activities or relate to purchase of goods or collection of information. Also, no part of PE profit is taxable if the profit is attributed to purchase of goods or merchandise for the enterprise. In support of its contention USCO stated that:

  •  Purchases were invoiced by Indian vendors directly to it, who in turn sells such goods to customers outside India. The sale consideration was received outside India. Further activities carried on by LO were also approved by RBI under relevant regulations.

  •  The activity of LO relates to a source of expenditure and not source of income. It does not relate to generation of income of USCO in India.

  •  LO cannot be considered to be PE in India, on account of specific exclusions applicable for preparatory/auxiliary functions or to functions which are confined to purchase.

Tax Authority contended that the activities carried out by LO are not merely confined to purchase of goods for purpose of export and therefore, the ‘purchase exclusion’ should not be available. The activities of LO constitute business connection under the Income-tax Act and are not in the nature of preparatory and auxiliary activities. AAR Ruling On accrual of income on account of purchase function The goods as designed and styled by USCO cannot be sold without being manufactured and procured in the manner desired by USCO. The LO is responsible for getting products manufactured as per design and specification.

Getting goods manufactured and purchased forms integral part of income generation activity of USCO. LO acts as an important arm of USCO in relation to the prescribed activity. SC decision in the case of Anglo French Textile Company Ltd.1 supports that activities other than actual sale should also be considered while attributing profits to various business operations. It is hence wrong to suggest that no profits can be attributed to purchases or LO activities merely involve expenditure. The decision though rendered in pre-exclusion clause period, lays down principle that in a business of purchase and sale, activity of purchase cannot be divorced from activity of sale which leads to income. Availability of the Income-tax Act purchase exclusion Activities of LO are not merely confined to purchase of goods in India for purpose of export. USCO transacts in India, its business of designing, quality control and manufacturing in consistence with its policy.

All activities of LO cannot be understood to be only confined to purchase of goods in India for export. LO also undertakes identical activities in Egypt and Bangladesh. Thus, since activities of USCO in India also include its business in other countries, it cannot be stated that the operations are confined to purchase of goods in India. PE and Income attribution under DTAA Other than the actual sale of goods, all other activities of LO are carried are conducted by LO of USCO in India.

In other words part of business of USCO is carried on in India. Therefore LO constitutes fixed base PE of USCO in India. Article 5(3) of DTAA, excludes a fixed place of business from the ambit of PE if the activity is solely for the purpose of purchasing goods or for collecting information for the enterprise. The activities carried out by LO are not used solely for purchasing goods/ collecting information but also for other functions such as identifying manufacturers, negotiating prices, quality control, etc. The LO is involved in all activities except actual sale. Hence preparatory and auxiliary exclusion would also not be available to USCO. A portion of income of business of designing, manufacturing and selling products accrues to USCO in India and is accordingly taxable.

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Non-residents who get benefit of the first proviso to section 48 (exchange fluctuation benefit) are not eligible to avail benefit of lower tax rate of 10% under proviso to section 112(1) on capital gains accruing on sale of shares of an Indian company to a foreign company in an off-market mode.

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Cairn UK Holdings Ltd. In re AAR No. 950/2010 S. 9(1)(vii), 195 of Income-tax Act Dated: 1-8-2011 Justice P. K. Balasubramanyan (Chairman) V. K. Shridhar (Member) Present for the applicant: Sunil M. Lalla, CA & Others, Aarti Sathe, Advocate Present for the Department: Bhupinderjit Kumar, ADIT (International Taxation), New Delhi

Facts of the case

The applicant, a company incorporated in Scotland (FCO), acquired shares of Cairn India Limited (CIL), a Indian listed company, by initial subscription, primary and secondary acquisitions. FCO subsequently sold some shares of CIL to another Indian company. The shares transferred were held for a period exceeding 12 months and consequently, constituted long-term capital asset.

The transaction of sale took place in an off-market mode and was not transacted through a recognised stock exchange in India. By relying on the first proviso to section 112(1) of the Income-tax Act, FCO made section 195(2) application praying for lower withholding rate of 10% on the gains made on sale of such shares. The Tax Authority rejected the claim of FCO and passed withholding tax order at 20%. FCO thereafter filed an application before the AAR to determine the withholding tax rate. The issue raised before the AAR was whether Nonresidents (NR) who are covered by the first proviso to section 48 of Income-tax Act (which gives benefit of Exchange fluctuation calculation) can avail the benefit of the proviso to section 112 of Income-tax Act which requires that tax on long-term capital gains on transfer of listed securities beyond 10% of gains before giving benefit of indexation in terms of second proviso, is to be ignored. The main contentions of the Tax Authority before the AAR were:

  •  The Mumbai ITAT in the case of BASF Aktiengesellchaft5 rightly held that proviso to section 112 would not apply to an NR and consequently, the rate of tax would be 20%.

  •  The proviso to section 112 before giving effect to the provisions of the second proviso to section 48 presupposes the existence of a case where computation of capital gain is to be made in accordance with the second proviso to section 48.

  •  The first and second provisos to section 48 are ‘mutually exclusive’ as they provide distinct modes of computation of capital gains to two different sets of persons, i.e., a resident and an NR. Consequently, an NR cannot claim double benefit of protection against foreign exchange fluctuation as also the indexation benefit. FCO primarily relied on AAR ruling in the case of Timken France (294 ITR 513) wherein it was held that the proviso to section 112(1) applies to all clauses of section 112(1) i.e., residents as well as non-residents. It also contended that benefit of the proviso to section 112(1) could not be denied to NRs who were also entitled to relief in terms of first proviso to section 48. Clear words would have been deployed in the proviso if one particular category i.e., NRs were to be excluded. AAR Ruling AAR rejected the contentions of FCO and held as:

  •  While interpreting a taxing statute, the duty of the Court is to give effect to the intention of the Legislature which can be gathered from the language employed and its context.

  •  The ambit of proviso to section 112 extends to all sub-clauses of section 112(1) i.e. it covers residents as well as non-residents.

  •  A ZCB is separate and distinct in nature from a bond as understood in common parlance. Hence, the third proviso to section 48 which restricts the benefit of indexation to bonds and debentures does not cover ZCB. A ZCB is eligible for indexation benefit under the second proviso to section 48. Even if there is second view on the eligibility of ZCB to the benefit of indexation, the explicit reference of ZCB in the proviso to section 112 confirms that the benefit of indexation should be available to ZCB.

  •  Proviso to section 112 requires determination of the amount of liability which ‘exceeds’ by comparing the tax payable @ 20% on capital gains computed from transfer of listed securities, unit or ZCB and 10% of capital gains computed before giving effect to CII.

  •  The indexation formula under the second proviso to section 48 enters into the computation in the limb (a) to section 112. The scheme of the provisions thus requires that proviso (b) restricted to assets and taxpayers who are entitled to the benefit of indexation. Any other meaning would result in rewriting of the provisions of the statute.

  •  The term ‘before giving effect to’ connotes that effect has otherwise to be given. Hence, for application of section 112 proviso, the asset must be one qualified for CII benefit under the second proviso to section 48 of the Incometax Act. If proviso to section 112 was supposed to apply also to the first proviso to section 48, specific provision to that effect would have been made.

  •  The Ruling of AAR in the case of Timken France had not considered the legal proposition that ZCB are entitled to the benefit of indexation. Also, in the said ruling, proviso to section 112 was regarded as applicable to all the taxpayers rather than confining to those taxpayers who are entitled to benefit of CII.

  •  Each ruling is confined to the facts and is binding only to the parties to the transaction. In a case where certain aspects germane to the issue are not examined by the authority in the earlier ruling, the subsequent AAR is not hampered from taking a fresh look at the issue.

  •  Application of section 112 proviso is based on capital assets (being units, securities and ZCBs) to which the provisions of second proviso to section 48 apply and it does not apply to taxpayers who are not entitled to benefit of the CII. The non-resident who are given protection against inflation in respect of shares/debentures of Indian company and who are kept out of CII benefit in respect of such assets, are not eligible for benefit of 10%.
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In absence of ‘test of cohesiveness, interconnection and interdependence’ for the contracts being met, time spent on each contract executed in India cannot be aggregated for the purpose of determination of Construction PE under Article 5(3) of India-Singapore DTAA. Each contract needs to satisfy time threshold of 183 days in the relevant financial year to constitute a PE under the DTAA.

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Tiong Woon Project & Contracting
Pte. Limited
A.A.R. No. 975 of 2010
Article 5(3) of India-Singapore DTAA Justice P. K. Balasubramanyan (Chairman)
V. K. Shridhar (Member) Present for the applicant: K. Meenakshi Sundaram Present for the respondent: K. R. Vasudevan

In absence of ‘test of cohesiveness, interconnection and interdependence’ for the contracts being met, time spent on each contract executed in India cannot be aggregated for the purpose of determination of Construction PE under Article 5(3) of India-Singapore DTAA.

Each contract needs to satisfy time threshold of 183 days in the relevant financial year to constitute a PE under the DTAA.

Facts

  •  Applicant, a company incorporated in Singapore (FCO), executed the following contracts in India in the relevant financial years: 

Financial year  Particulars  Duration
        

 2009-10       Contract 1       136
                     Contract 2        99
2010-11        Contract 3        62
                     Contract 4        83
  •  For the purpose of the contracts, FCO deputed four to five employees from Singapore along with local manpower to India. The scope of work under each of the four contracts was similar and comprised the following: n Erection and installation of heavy equipments at the site of customers. The equipments to be installed are fabricated and provided by the customers at installation sites n Organisation of load movement test on a crane n Holding of equipment after erection and before completion of welding of column section n Setting up, fitting, placing, positioning of the fabricated equipment at the site.
  •  FCO contended that the activities carried out were installation projects and determination of PE would fall under the Construction PE rule of the DTAA. The contracts were independent of each other and were secured through independent work orders. Further, a Construction PE under the DTAA would trigger only if each of the four contracts continued for a period of more than 183 days individually, in any financial year.
  • Tax Authority contended that the activities carried on by FCO were in the nature of services; the DTAA specifies a shorter time threshold for PE trigger as long as, inter alia, such services are not supervisory services in connection with the Construction PE; and accordingly, service PE of FCO was constituted under Article 5(6) of DTAA. 

Held:

  • Activities in the nature of erection, installation 9 of heavy equipments, organisation of crane testing, holding of equipment after erection, etc., undertaken by FCO would constitute installation or assembly project. The activities would not amount to supervisory activities in connection with installation and assembly project.
  •  An Indian company had given two orders to FCO in separate financial years. Each order was for carrying out different work. Thus, for both the financial years, it can be said that the parties were different and the projects are independent projects without any interconnection and interdependence amongst them.
  •  There was no extension of one contract to another. The duration test of 183 days under the Construction PE rule cannot be construed to be read for all the contracts that do not pass the ‘test of cohesiveness, interconnection and interdependence’. Therefore, an aggregation of time periods for the contracts cannot be made.
  •  Since each of the contracts does not cross the threshold of 183 days in the relevant financial year, it would not constitute a PE under the DTAA. In absence of PE of FCO in India, income earned by FCO from Indian contracts would not be liable to tax in India.
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Delmas France v. ADIT ITA No 9001/Mum./2010 Article 5(5)/(6), 7 of India France DTAA Dated: 11-1-2012 Present for the appellant: F. V. Irani Present for the Department: Malthi Sridharan

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Under India-France DTAA as long as it is shown that the transactions between the agent and the principal are made under arm’s-length conditions, the agent would be treated as that of independent status even if he deals exclusively for one principal.

The ‘profit neutrality’ theory on account of arm’s-length remuneration to a dependent agent PE (DAPE) may not always hold good as the dependent agent (DA) may not be compensated for entrepreneurial risks that may arise to the principal.

Facts:
Taxpayer, a French company (FCO), is engaged in the business of operation of ships in international traffic.

FCO carried on operations in India through agents who handled the work at most of the Indian ports. The agents were responsible for all clearances from Government departments.

The Tax Department held that as business of FCO was carried out through a fixed place by an agent in India, wherein the agent was to maintain the office for the principal duly equipped, it could be said that FCO had PE in India. The Tax Department attributed 10% of the gross receipts from India to agency PE.

FCO contended that it did not have a PE in India under the DTAA, hence its business profits could not be taxed in India. In any case, due to arm’slength principal, there was no attribution of profit.

Held:
As the Dispute Resolution Panel (DRP) upheld the AO’s contention, appeal was preferred to ITAT. ITAT accepted contentions of FCO and held that FCO did neither have basic rule PE, nor agency PE. On Basic PE rule

The Agency PE rule specifically overrides the Basic PE rule.

The very business model of business of FCO being carried out through an agent is such that it does not ordinarily admit the possibility of a PE under the Basic PE rule.

In case of Airlines Rotables Ltd.2, UK it was observed that the following three criteria are embedded in the definition of the Basic PE rule:

  • Physical criterion i.e., existence of a physical location.

  • Subjective criterion i.e., right to use that place.

  • Functionality criterion i.e., carrying out of business through that place.

In the agency business model, the above three parameters are not satisfied. Under such a model, the business of the foreign enterprise is carried out by the agent, and the principal does not have the powers, as a matter of right to use the agent’s place for carrying out its business, nor does it have the right of disposal of that place.

On DAPE
The France DTAA in Article 5(5) and Article 5(6) contains the scope of the DAPE. Article 5(5) provides the situations in which business being carried on through a DA creates a PE.

Under Article 5(6) of India-France DTAA even when an agent is wholly or almost wholly dependent on the foreign enterprise, it would still be treated as an independent agent, if the transactions are at arm’s length.

The sine qua non for constituting a DAPE under the France DTAA is the finding that the transaction is not carried out at arm’s length. No such finding was given by the Tax Department.

In absence of findings by the Tax Department or the DRP, FCO does not have a PE in India.

On profit attribution

One of the issues raised was about tax neutrality for the taxpayer even assuming there is emergence of PE. The ITAT ruled that the issue is academic in the facts of the case as DAPE did not exist. ITAT did however caution that the tax neutrality theory (i.e., once the agent is paid at arm’s length no further attribution can be made to PE) on account of existence of DAPE may not always hold good, as the DA may not be compensated for the risks that may arise to the principal.

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Sepco Electric Power Construction Corporation AAR No. 1011 of 2010 Section 245Q(1), 245R(2), 197 of Income-tax Act Dated: 25-8-2011 and 15-11-2011 Present for the appellant: N. Venkataraman, Satish Agarwal Present for the Department: Sanjay Kumar, Dipi Agarwal

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AAR application is not maintainable when applicant has already filed return of income under ITA and/or assessment/reassessment proceedings are pending before the Income-tax Authorities.

Pendency of a proceeding u/s.195 or 197 of the Act, or even a final order under any of these sections, cannot invalidate an application for advance ruling being entertained.

Facts:
Applicant, a tax resident of China (FCO), entered into an offshore supply contract with an Indian company (ICO) in 2006.

FCO filed an application before the AAR on 18 November 2010 on the issue of taxability of the amounts received/receivable by it under the offshore supply contract.

As on the date of filing the application, status in respect of the years covered by the application was as under:

  • Order u/s.197 of the Act was subject to revision proceedings;

  • Issuance of assessment notices in response to returns filed;

  • Issuance of reassessment notice

The Tax Department raised a preliminary objection regarding the admissibility of the application u/s.245R(2) on the ground that for each of the years proceedings are pending.

FCO contended that the application was maintainable and mere filing return before approaching the AAR would not mean that the question raised in the application is already pending before the Tax Department. Reliance was also placed on the ‘Hand Book’ on Advance Rulings.

Held:

AAR rejected FCO’s contentions and held that the bar u/s.245R(2) would operate for the following reasons:

Mere pendency of a proceeding u/s.195 or 197 of the Act, or even an order under any of the sections, would not invalidate an application for advance ruling being entertained. However, where a return of income is furnished and the proceedings for assessment are going on, all the claims raised by the taxpayer are before the tax authority for consideration and decision.

It cannot be said that the issue of taxability of one of the items of income returned has not arisen or not pending before the Tax Authority merely because the same has not been raised in general or specific questionnaire issued by the Tax Authority to the applicant. There is no restriction on the power of the Tax Authority to inquire.

Proviso to section 245R(2) of the Act creates a specific bar on the jurisdiction of the AAR to give a ruling once it is found that there subsists pendency of proceedings. In the circumstances, the application is liable to be rejected.

The ‘Hand Book’ on Advance ruling relied on by FCO itself provides that it should not be construed as an exhaustive statement of law. Even otherwise, what is stated in the ‘Hand Book’ cannot control the rendering of a decision with reference to the relevant provisions under the ITA.

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ADIT v. Warner Brother Pictures Inc ITA No. 3160/Mum./2010 Section 5, 9(1)(vi) of ITA, Article 12(2) of India US DTAA Dated: 30-12-2011 Present for the assessee: Jitendra Yadav DR Present for the Department: W. Hasan

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Consideration received by non-resident taxpayer from Indian company, for granting exclusive rights of distribution of cinematographic films, not taxable as royalty u/s.9(1)(vi).

Business income of foreign company not taxable in absence of a PE in India.

Agency PE cannot be created by an Indian company acting independently.

Facts
Taxpayer, a non-resident company (FCO) of USA, is engaged in production and distribution of films.

FCO entered into an agreement with an Indian company (ICO) to grant exclusive rights of distribution of cinematographic films to ICO. The agreements were signed outside India. ICO had no right to broadcast films on TV or radio and it was an admitted fact that the consideration was for distribution of films. The payment was also made to FCO outside India.

According to FCO, the income was not taxable in India, as the payment was specifically excluded from royalty definition of ITA and once income was not taxable in terms of specific source rule of royalty taxation, the amount was not chargeable u/s.9(1)(i) of the Act.

The contentions were rejected by the Tax Department. Aggrieved by the order of CIT(A), Tax Department further appealed to ITAT.

Held:
ITAT accepted FCO’s contentions and concurred with the CIT(A)’s order for the following reasons:

The definition of royalty u/s.9(1)(vi) excludes payment received for sale, distribution and exhibition of cinematographic films. Hence amount received by FCO cannot be considered as royalty under ITA.

When there is a special source rule dealing with a specific type of income, such provision would exclude applicability of general provision dealing with the income accruing or arising out of any business connection in India.

Consideration received by FCO is also not taxable as business income, as FCO does not have business connection in India. Even if FCO has business connection, profits only to the extent attributable to PE can be taxed in India. However, since FCO does not have PE in India, such income will not be liable to tax in India.

ICO, to whom the licence was granted by virtue of agreement, cannot be considered as Agency PE as it is not exclusively dealing for FCO, but also for other non-residents.

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Nuclear Power Corporation of India AAR No. 1011 of 2010 Section 245R(2), 195 of Income-tax Act Dated: 21-12-2011 Present for the appellant: S. E. Dastur, Sr. Advocate, Nitesh Joshi, Advocate Present for the Department: None

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When tax proceedings are pending against payee, the admission of application is barred by limitation of pendency of proceedings. Advance Ruling is not just applicant-specific, but also transaction-specific and binds payee as also the payer.

Determination of payee’s taxability is a primary question and not incidental while determining withholding obligation of payer u/s.195.

Facts:
The applicant, an Indian public sector company (ICO), entered into various offshore supply and service contracts with a company incorporated in Russia (FCO), for setting up a power plant in India.

In terms of the contract between ICO and FCO, it was agreed that FCO had primary obligation to pay taxes in India and ICO was required to reimburse the same. Effectively, tax obligation in respect of FCO’s income was on ICO.

For the purpose of TDS obligation, ICo had contended that the income from onshore service contract alone was taxable in India and the income from offshore supply contract was not taxable in India.

The AAR, before considering ICO’s application, raised primary question of whether the application filed by ICO was maintainable having regard to the bar imposed u/s.245R(2) (i), wherein AAR is precluded from ruling on a question, which is already pending before any Income-tax Authority, Appellate Tribunal or any Court.

Held:
AAR rejected ICO’s contention and held:

AAR ruling is binding not only on the applicant (payer), but also for the transaction for which the ruling is sought.

An AAR ruling is sought by ICO in relation to a transaction between resident and non-resident and not in terms of the other provisions of ITA which could have entitled ICO to claim tax implications of its own. This ruling is in relation to ‘transaction’ and, hence, pendency of proceedings in the case of any party to the transaction would operate as a bar against the other in approaching AAR.

Reliance was placed on Foster’s ruling1 wherein it was held that if a proceeding in respect of a transaction to which the applicant (as a payee) was a party, was pending before the Tax Authority in the case of the other party (payer) to the transaction, the application would be barred for the reason that the question posed before the Tax Authority and the AAR would be the same.

Withholding tax provisions under ITA obligate a payer to withhold tax on every payment to a non-resident, provided the same is chargeable to tax in India. Thus, the liability of the payee to pay tax on the payment received is not a question that is incidental to the issue of whether the payer is bound to withhold tax; this question is primary and not incidental.

As the issue of whether the payment made under the transaction was taxable under the ITA was already pending before the Tax Authority in the case of FCO before ICO approached the AAR, the application was not maintainable.

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