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Category: Tribunal News : PART B -International Taxation

TS-341-ITAT-2013(Mum) Sargent & Lundy, LLC, USA vs. ADCIT (IT) A.Ys: 2007-08, Dated: 24-07-2013

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Provision of blueprints i.e., technical designs and plans, without recourse and capable of being used in the future satisfies the test of ‘make available’ as stipulated under the India-US DTAA; taxable as fees for included services

Facts:
The Taxpayer, a US tax resident (US Co.), was a consulting firm engaged in providing services to the power industry. The US Co. provided services in the nature of operating power plants, decommissioning, consulting, project solutions and other engineering based services.

The US Co. entered into an agreement with an Indian Company (I Co.) for rendering consulting and engineering services in relation to ultra-mega power projects in India as per which, the US Co. was required to prepare necessary designs and documents.

The Tax Authority observed that the services were technical in nature and accordingly, taxable as fees for technical services (FTS) under the Act. Further, the services rendered by the US Co. satisfied the test of ‘make available’ under the India-US DTAA and, thus, were taxable as fees for included services (FIS).

Aggrieved, the Taxpayer appealed before the Tribunal on the issue whether the services rendered can be regarded as ‘making available’ technical knowledge, skill etc. under the India-US DTAA.

Held:
The expression ‘make available’, in the context of FIS, contemplates that the services are of such a nature that the payer of the services comes to possess the technical knowledge so provided, which enables the payer to utilise the same in the future.

Reliance was placed on the decision of the Karnataka High Court (HC) in De Beers India Minerals Pvt. Ltd [346 ITR 467] wherein the HC had observed that technical knowledge is ‘made available’ if the person acquiring such knowledge is possessed of the same and enabling the person to apply it in the future, on its own.

In the facts, the US Co. renders technical services in the form of technical plans, designs, projects etc. which are nothing but blueprints of the technical side of the projects. Such services were rendered at a pre-bid stage and is quite natural, that such technical plans etc. are meant for use in the future, if and when, I Co. takes up the bid for installation of the projects.

When the technical services provided by the US Co. are of such nature, which are capable of use in the future, the same satisfies the test of ‘make available’ as envisaged under the India-US DTAA. Accordingly, the services rendered by the US Co qualify as FIS and are, therefore, taxable in India.

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[2013] 34 taxmann.com 21 (Mumbai-Trib.) Abacus International (P.) Ltd. vs. DDIT A.Ys.:2004-05, Dated: 31.05.2013 Article 11, 24 of India-Singapore DTAA;section 115A

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Benefit of reduced rate under India-Singapore DTAA will be available only if the income was received in Singapore.

Facts:
•The taxpayer was a company resident of Singapore engaged in the business of Computerized Reservation System (CRS). Its primary business was to make airline reservations for and on behalf of the participating airlines using CRS.

• During the year under consideration, the tax authority granted tax refund to the taxpayer together with interest thereon. Relying on Article 11 of India-Singapore DTAA, the taxpayer contended that the interest should be chargeable to tax @15% and not @20% u/s. 115A of the Act. However, the taxpayer did not provide any supporting evidence about the same having been credited in its Singapore bank account.

Held:
• Article 24(1) of India-Singapore DTAA provides that “……reduction of tax to be allowed under this agreement…. shall apply to so much of the income as is remitted to or received in that Contracting State.” Thus, receipt or remittance of income in Singapore is sine qua non for claiming the benefit of lower rate of tax on the interest income from India.

• Not having a bank account in India does not mean that the taxpayer had received the amount in Singapore. The taxpayer is under an obligation to provide evidence of remittance or receipt of the interest in Singapore.

• Since the taxpayer has not provided such evidence, the benefit of reduced rate under Article 11 was not available and the income was to be taxed as per the Act (i.e., as per section 115A).

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TS-205-ITAT-2013(Mum) M/s. Credit Lyonnais (through their successors: Calyon Bank) vs. ADIT A.Y: 2001-02, Dated: 22.05.2013

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Sub-arranger fee paid to non-resident does not amount to FTS under the Act as such services do not require technical knowledge, expertise or qualification. Doing small parts of overall activity cannot be regarded as rendering managerial services.

Facts:
• The Taxpayer was appointed as arranger by an Indian bank for mobilising deposits from NRI customers and to act as a collecting bank for receiving and handling application forms under “India Millennium Deposit” (IMD) scheme.The services included; canvassing potential investors; printing marketing material and distributing them; assisting customers in filing the application and obtaining necessary documents; ensuring compliance with local laws; ensuring that payment instruments and applications are correct; issuing acknowledgements; preparing daily remittance schedules and consolidated statements etc.

• The Taxpayer in turn appointed sub-arrangers for mobilising IMDs both in and outside India.The sub-arrangers work was in the nature of soliciting NRI customers for IMD of Indian banks and then to remit the amount received by them to the designated banks.

• The Tax Authority disallowed the payments of subarranger fees on the grounds that such payments to non-residents were in the nature of FTS on which tax was required to be withheld under the Act.

Held:
• From the nature and scope of services rendered by the sub-arrangers, it was clear that no technical knowledge, expertise or qualification was required. Convincing potential customers and helping them to fill requisite forms and coordinating transfer of funds, cannot be considered as a “technical service”.

• The services rendered by the sub-arrangers were only a small part of the management of the IMD issue. Sub-arrangers were not involved in the “management” of IMD issue. The Taxpayer was simply acting as commission agent or broker for which it was entitled to a particular rate of commission. Sub-arranger obligation was a part of overall obligation of IMDs and hence services cannot be regarded as fees for managerial services.

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TS-216-ITAT-2013(HYD) DCIT vs. Dr.Reddy’s Laboratories Limited A.Ys: 2003-04 & 2004-05, Dated: 24.05.2013

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Bio-equivalence study to enable registration with a regulatory authority is not covered under Article 12 of the India-USA and India-Canada DTAA as there is no ‘make available’ of technical skill, knowledge or expertise nor does it involve transfer of plans or designs, hence covered under Article 7 of the DTAAs.

Facts:
• The Taxpayer, engaged in the business of manufacturing, trading and exporting of and research and development of bulk drugs and pharmaceuticals, was required to obtain approvals from the US and Canada regulatory authorities for marketing its products therein.

• The Taxpayer made payments to Contract Research Organizations (CRO) in USA and Canada for conducting ‘bio-equivalence studies’ and the report provided by the CRO was submitted to the regulatory authorities for patent registration.

• The Tax authority contended that such payments should be treated as FTS under the DTAAs.

Held:
• The study conducted by CROs to comply with the regulations in USA and Canada does not involve transfer of technical plan or design nor does it make available any technical knowledge, experience or know-how to the Taxpayer.

• The taxpayer did not get any benefit out of the said services and was only getting a report in respect of field study conducted on its behalf, which would help it in getting registration with the Regulatory Authority.

• AAR’s decision in the case of Anapharm Inc. [305 ITR 394], supports that income from bioequivalent studies was not taxable in India, in terms of the treaty as the fees not taxable in India were business income which did not satisfy ‘make available’ test.

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TS-229-ITAT-2013(Mum) St. Jude Medical (Hongkong) Limited A.Ys: 1999-2000 & 2000-01, Dated: 05.06.2013

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Profits of branch office (BO) established after closure of liaison office cannot be attributed to the liaison office; Attribution should be done only after BO comes into existence and profits of holding company cannot be attributed on BO of its subsidiary

Facts:
• The Taxpayer, a Hong Kong Company, was a Wholly Owned Subsidiary (WOS) of an US Company (USCo),and was engaged in the business of selling heart valves, a life saving medical produce. Further USCo was also engaged in the same line of business in the Asian region including India.

• The Taxpayer had set up a Liaison Office (LO) in India with the permission of the Reserve Bank of India (RBI).

• Role of LO was limited to coordinatefor market survey;support services to the new clients; etc. It was a common ground that the Taxpayer as also parent USCo conducted sale through independent distributors.

• At a later date, the Taxpayer set up a Branch Office (BO)and closed its LO.

• For the period up to the closure of LO, NIL return of income was filed on the ground that LO’s operations in India were restricted to RBI permitted activities and LO did not earn any income in India.

• The Tax Authority, based on documents impounded in the course of survey on BO , held that the Taxpayer was involved in business activity in India and was liable in respect of profits earned by HO as also USCo,

Held:
• The procedure adopted by the Tax Authority, to attribute income of USCo in the hands of the Taxpayer, was not correct since there should be separate proceedings for two separate companies established in different countries. It is legally not possible to consider the profits attributable to USCo in the hands of the Taxpayer and therefore, profit of USCo was excluded from the income of the Taxpayer

• There was a clear distinction between the liaison activities and the branch activity and the Taxpayer was not involved in business activity when they were only permitted to do liaison activity by the RBI and accordingly the profit attributable to the liaison period was deleted.

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ADIT v. TII Team Telecom International Pvt. Ltd. (2011) 12 taxmann.com 502 (Mum.) Article 5, 7 and 12 of India-Israel DTAA; Section 9 of Income-tax Act A.Y.: 2006-07. Dated: 26-8-2011

i) In the absence of transfer of certain rights constituting ‘copyright right’, payment received by taxpayer was not ‘royalty’ under India-Israel DTAA.

  (ii)  ‘Process’ in the definition of ‘royalty’ should be understood as know-how and not product. Hence, treating payment for software as payment for ‘process’ is divorced from the ground realities of business.

Facts:
The taxpayer was a company incorporated in, and tax resident of, Israel. The taxpayer did not have any office or PE in India and it qualified to access India-Israel DTAA.

The taxpayer entered into an agreement with an Indian company (IndiaCo) for grant of a perpetual, irrevocable, non-exclusive, royalty-free, worldwide licence, to install, use, operate or copy the software and the documentation licensed under the agreement solely for implementation, operation, management and maintenance of IndiaCo’s wireless network in India.

In terms of the agreement, the taxpayer had received certain payment form IndiaCo. The taxpayer had furnished return of its income disclosing ‘nil’ income. The AO found that the taxpayer had raised invoice on IndiaCo.

The taxpayer contended that the amount received from IndiaCo was business profits and in absence of PE in India, it could not be taxed in India. The AO, however, held that the amount was ‘royalty’ and was liable to tax in India.

In appeal, the CIT(A) held that the payment was for ‘purchase of copyrighted material’ and not payment for ‘use of, or right to use, copyright’. Therefore, it was not ‘royalty’ under Article 12(3) of India-Israel DTAA.

Before the Tribunal, the taxpayer submitted that while the decision in Gracemac Corporation v. ADIT, (2010) 42 SOT 550 (Delhi) was a later decision, it was contrary to law laid down by the Special Bench decision in the case of Motorola Inc. v. DCIT, (2005) 95 ITD 269 (Delhi) (SB). Further, till a Larger Bench decision directly on the issue is not overruled, it has to be followed. On the other hand, the tax authority submitted that the later decision should be followed.

Held:
The Tribunal held as follows.
  (i)  In the context of India-Sweden DTAA, in Motorola case, the Special Bench considered the issue whether payment for software could be treated as payment for ‘use of, or the right to use, any copyright of literary artistic or scientific work’ and held that the software supplied was a copyrighted article and not for providing use of a copyright and hence, it could not be considered as ‘royalty’ either under the Income-tax Act or under India-Sweden DTAA.

  (ii)  The language in India-Israel DTAA is the same as that in India-Sweden DTAA. In Motorola case, the Special Bench has identified four rights which would constitute ‘copyright right’. Since this is not so in case of the licence transferred by the taxpayer, the payment received by the taxpayer is not for use of copyright in the software. Hence, it was not ‘royalty’ under India-Israel DTAA.

 (iii)  When someone pays for the software, the payment is for product which gives certain results and not for the process of execution of embedded instructions. In fact, the software buyer cannot tinker with the process. Hence, to treat the payment for software as a payment for process would be a hyper-technical approach totally divorced from the ground realities of business. The ‘process’ in the definition of ‘royalty’ in the Article 12(3) of India-Israel DTAA should be understood in the nature of know-how and not a product.

Section 9(1)(vi) of the Act and Article 12 of India-USA DTAA – Indian distributor selling advertisement airtime customers held to have authority to conclude contract on behalf of foreign company and consequently, treated as Dependent Agent Permanent Establishment.

15. TS-714-ITAT-2015(Mumbai)
NGC Network Asia LLC vs. JDIT
A.Y.s: 2007-08 and 2008-09,
Date of Order: 16.12.2015

Section 9(1)(vi) of the Act and Article 12 of India-USA DTAA – Indian distributor selling advertisement airtime customers held to have authority to conclude contract on behalf of foreign company and consequently, treated as Dependent Agent Permanent Establishment.

Facts 1

Taxpayer, a US Delaware LLC, was engaged in the business of broadcasting its channels in various countries including India. The Taxpayer appointed its Indian affiliate (ICo) as its distributor to distribute its television channels for which ICO paid a fixed distribution fee to the Taxpayer. The Tax Authority held that the revenue generated on granting of distribution rights was in the nature of “royalty” as per Act as well as Article 12 of the India-USA DTAA.

The taxpayer contended that payment received by it did not fall under any of the clauses of the definition of the term “Copyright under the Copyright Act, Further, based on combined reading of section 37 and 39A with section 2(dd) of the Copyright Act, the consideration paid by ICo for Broadcast Reproduction and distribution rights was in the nature of commercial rights which were distinct and different from copyright. The broadcast and distribution rights, enables the broadcast to be heard or seen by the subscribers on payment of certain charges. Such rights did not fall within the definition of copyright as provided under the copyright law. Hence, the payment did not amount to royalty. Reliance in this regard was placed on Delhi HC rulings in case of ESPN Star Sports [RFA (OS) NO. 25/2008 (Del)] and Star India Pvt. Ltd. [CS(OS) Nos. 2722/2012, 3232/2012 and 2780/2012 (Del)].

Facts 2

The taxpayer also entered into an ‘advertisement sale agreement’ (Agreement) to sell the ‘advertisement and sponsorship time on the channels’ (advertisement airtime) to ICo for a lump sum consideration. ICo, in turn, was to sell the advertisement airtime to its customers in India. While the Taxpayer was obliged to broadcast such advertisements on its channels, the Taxpayer could accept or reject any advertisement provided by ICo. The Agreement also clarified that there would be no privity of contract remain between Taxpayer and the customer, ICo would not be deemed to be acting on behalf of the Taxpayer and risk and responsibility of sale of advertisement airtime by ICo to its customers was that of ICo and on such terms and conditions as ICo may deem fit.

The Tax Authority contended that ICo qualifies as a Dependent Agent PE (DAPE) of the Taxpayer in India under the India-USA DTAA and hence the income from sale of advertisement time to ICo was taxable in India.

The Taxpayer contended that ICo did not qualify as DAPE of Taxpayer in India. Without prejudice, even in a case where ICo is held to be creating a DAPE of the Taxpayer in India, there cannot be any further attribution of profits to such DAPE as the transaction was accepted to be at ALP by the Transfer Pricing officer (TPO). Reliance in this regard was placed on Supreme Court ruling in the case of Morgan Stanely & Co. Inc. (292 ITR 416), Delhi HC in BBC Worldwide Ltd (2011)(203 Taxman 554) as well as Bombay HC decisions in the case of B4U International Holdings Ltd (2015)(57 taxmann.com 146) and Set Satellite (Singapore) Pte Ltd. (307 ITR 205).

Held 1

Definition of the term “royalty” under the Act as well as in the India-US DTAA uses the expression “process”. The term process has been defined under the Act to include ‘transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret’. This definition of process was inserted under the Act vide Finance Act 2012 whereas the decisions referred by the Taxpayer were rendered prior to such insertion by Finance Act 2012 and hence, they did not deal with the issue whether such rights would fall within the definition of “process”.

Hence, the matter was remanded back to the Tax Authority to examine if the payment towards granting of distribution rights would fall under the term ‘process’ so as to get covered by the definition of royalty.

Held 2

As per the judicial precedence, the properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed etc. can be regarded as ‘goods’. The ‘advertisement airtime’ can be identified, abstracted, possessed or stored till the time of its expiry. However, in the instant case, the “advertisement air time” is related to the television channels owned by the Taxpayer only and same does not have any value independent of the Taxpayer. Thus, ‘advertisement airtime’ fails to satisfy the test that it is capable of being used/consumed independently, i.e., independent of the Taxpayer. Accordingly, ‘advertisement airtime’ is merely a “right to procure advertisements” and does not qualify as ‘goods’ within the legal meaning of the said term.

Tribunal held that advertisement airtime, per se, does not have any value without the Taxpayer agreeing to telecast the advertisement material. Thus, in substance, ICo is actually canvassing the advertisements for the Taxpayer through the purchase and sale of advertisement airtime relating to the television channels owned by the Taxpayer. Thus the transaction between Taxpayer and ICo was not on principal-to-principal basis.

ICo provides agency services to the Taxpayer and in turn, the Taxpayer provides advertisement services or telecasting services to the clients. Hence, the relationship between the Taxpayer and ICo is in the nature of principal-to-agent basis.

Further, as per the agreement, ICo could enter into agreement with the customers to sell the advertisement airtime and Taxpayer was obliged to telecast such advertisement on its channel as per the schedule given by ICo. Accordingly, ICo had an authority to conclude contracts with the customers on behalf of the Taxpayer. Therefore ICo constituted DAPE of the Taxpayer.

On attribution of profits, the tribunal distinguished the cases referred by the Taxpayer, on the grounds that:

  • Certain rulings were delivered while examining the existence of PE under Article 5(5) of the DTAA, i.e., independent agent, whereas, in this case, DAPE is held to be created under article 5(4) and hence support cannot be drawn from these rulings;

  • Also, in some of those cases, courts were concerned with the payment made by foreign entity to its Indian PE. It is in this context, the courts have held that once transactions are considered to be at ALP, there need not be any further attribution to the PE. However, in the facts of the present case payments were received by the foreign entity (i.e. the Taxpayer) from its Indian PE (i.e. ICo).

Accordingly, the Tribunal restored the matter back to Tax Authority for the limited purpose of computation of profit attribution to PE.

Section 9(1)(vii), 195 of the Act – Withholding obligation needs to be discharged based on the law that existed at the time of making payments from which taxes were to be withheld.

14. ITA No. 1629/Kol/2012 (Unreported)
DCIT vs. Shri Subhotosh Majumder
A.Y.s: 2006-07, 2008-09 & 2009-10,
Date of Order: 27-11-2015

Section 9(1)(vii), 195 of the Act – Withholding obligation needs to be discharged based on the law that existed at the time of making payments from which taxes were to be withheld.

Facts

Taxpayer, a resident of India and a patent law practitioner specialised in Intellectual Property Laws. Taxpayer facilitated filing of Patents outside India for its clients. For this purpose, Taxpayer acted as an interface between the client and foreign lawyers and law firms and communicated and co-ordinated with them. Taxpayer also made payments to foreign lawyers on behalf of its clients after receiving payment instruction from its clients. For these facilitation services, taxpayer charged a nominal fee.

Taxpayer contended that it only acted as an interface between the client and foreign law firms and it does not have the right or capability or the need to utilise services of the overseas lawyers. In fact, the services were rendered by the foreign lawyers to the Taxpayer’s clients and not to the Taxpayer. Further, even from the view of Taxpayer’s clients, the patents in foreign country could be utilised only in that country in which such patent is granted as the patent protection provided by a country would be valid only in that country. As the services were rendered outside India as well as utilised outside India, income from such services did not accrue or arise in India. Consequently, taxes were not required to be withheld u/s 195 of the Act. In any case, Explanation 5 to section 9(1) inserted by Finance Act, 2010 (inserted retrospectively) provides that FTS would be deemed to accrue or arise in India irrespective of whether such services are rendered in India cannot make the Taxpayer liable to withhold taxes.

However, the Tax Authority held that the Taxpayer availed technical and consultancy services from non-residents and such services, although performed outside India, was for the benefit of Taxpayer’s profession carried on in India and hence, income from services accrued in India in the hands of the foreign lawyers u/s. 9(1)(vii) of the Act. Accordingly, tax was required to be withheld on payments made by Taxpayer to foreign lawyers u/s. 195 of the Act.

Held

Before the insertion of Explanation 5 to section 9(1)(i), the legal position was that unless services are rendered in India, FTS would not be deemed to accrue or arise in India. Although Explanation 5 was inserted retrospectively, so far as withholding liability is concerned, it depends on the law as it existed at the point of time when payments are made. A Taxpayer is not expected to know how the law will change in future. While retrospective amendment in law does change the tax liability in respect of income with retrospective effect, it cannot change tax withholding liability, with retrospective effect.

When withholding obligations are to be discharged at the point of time when payment is made or credited, such obligations can only be discharged in light of the law as it then stands. Accordingly, taxpayer cannot be faulted for not withholding taxes. Thus, the primary issue whether services are in the nature of FTS and whether services are utilised in India was not discussed by the Tribunal.

P.S: Reason why the taxpayer was not seeking protection under the treaty is not clear.

Section 92C, the Act – Since the Taxpayer had paid royalty fully and exclusively in course of business and even after paying the same, had earned gross profit at rate better than that earned by comparables, royalty payment was at arm’s length and addition was to be deleted.

22. [2017] 83 taxmann.com 165 (Delhi – Trib.) DCIT vs. Cornell Overseas (P.) Ltd. A.Y. 2003-04, Date of Order: 2nd May, 2017

Section 92C, the Act – Since the Taxpayer had paid royalty fully and exclusively in course of business and even after paying the same, had earned gross profit at rate better than that earned by comparables, royalty payment was at arm’s length and addition was to be deleted.

FACTS
The Taxpayer was engaged in the business of designer garments. During the relevant year, the Taxpayer entered into an agreement with its AE in USA for licensing designs from the AE. Under the agreement, the AE was to supply designs, provide technical know-how, permit use of logo, provide guidelines and expertise through visits of its personnel and access to the market. In consideration, the Taxpayer paid royalty @ 5% of sales of products.

The Taxpayer benchmarked its major international transaction of sale of garments on cost plus method. It earned gross profit of 19% whereas the comparables had earned between 12% to 16%. The Taxpayer considered that the transaction was at ALP since it had earned better net margins as compared to the comparables.

TPO disallowed royalty on the ground that the Taxpayer was a limited risk contract manufacturer. He thus held that payment of royalty did not conform to arm’s length principle. On appeal, the CIT(A) held that the royalty payment was included in the sale price of garments to its AE. Hence, it was automatically benchmarked. Further, since royalty and export transactions were clubbed to arrive at the gross profit margin, which was higher than the comparables, automatically each of the transactions was to be treated as being carried on at ALP.

HELD

  • The royalty paid by the Taxpayer was fully and exclusively incurred in the regular course of business. Even after paying royalty, the Taxpayer earned gross profit @19% which was better than GP of 12% to 16% in case of comparables.

  • Therefore, royalty payment was at arm’s length. The addition made by the AO was not justified and was rightly deleted by CIT(A).

Part C – TRIBUNAL & AAR INTERNATIONAL TAX DECISIONS

1. M/s. Invensys Systems Inc 183 Taxman 81 (AAR)
S. 5, S. 9(1), S. 195, Income-tax Act; Articles 7(1), 12(1), 12(2) 12(4)(b)
India-USA    DTAA
Dated:    6-8-2009

Issues:

    i) Under Article 12(4)(b) of India-USA DTAA, ‘managerial’ services are not chargeable to tax in India.

    ii) In absence of PE in India, payments for stew-ardship/shareholder activities are not charge-able in India.

Facts:

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

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

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

Before the AAR, US Co contended that:

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

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

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

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

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

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

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

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

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

Held:

The AAR held  that:

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

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

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

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

Dated: 23-7-2009

Issue:

Capital gain on sale of ‘listed securities’, by non-resident investor chargeable @10%.

Facts:

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

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

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

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

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

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

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

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