INTERNATIONAL TAXATION CASE LAWSCOMPILED BY CA KIRIT DEDHIA

INDEX Interpretation of treaty ........................................................................................................................... 5 1. Abdul Razak A. Meman [276 ITR 306 (AAR)]............................................................................... 5 2. Motorola Inc [95 ITD 26] (Del) (SB) [2005] ................................................................................... 5 Article 4: Residence ............................................................................................................................... 5 3. Green Emirate Shipping & Travels [UAE-Resident-entitled to treaty benefit] 99 TTJ 988 (Mum ITAT). .................................................................................................................................................... 5 4. General Electric Pension Trust (Authority For Advance Rulings A.A.R. NO. 659 OF 2005 ) ...... 5 5. Emirates Fertilizer Trading Company WLL (AAR No. 628 of 2004)[Residence-UAE] ................. 5 Article 12:Royalty ................................................................................................................................... 6 Source outside India .............................................................................................................................. 6 6. Seth Shiv Prasad vs. CIT (1972) 84 ITR 15 (All) .......................................................................... 6 7. Aktiengesellschaft Kuhnle Kopp & Kausch W. Germany By BHEL [Source outside India] ......... 6 8. Lufthansa Cargo India (P) Ltd. [Exclusion- section 9(1)(vii)-business outside India] ................... 6 9. Titan Industries Ltd. V ITO Intl. Tax ward 19(1) Bangalore 11 SOT 206 ( Bang.) ....................... 7 Source in India ........................................................................................................................................ 7 10. Rajiv Malhotra AAR no. 671 of 2005 284 ITR 56 ...................................................................... 7 Supply of information: Whether Royalty? ........................................................................................... 7 11. Heg Ltd [263 ITR 230] [MP][2003] ............................................................................................. 7 Royalty v/s Outright sale ....................................................................................................................... 7 12. Hewlett-Packard (India) (P.) Ltd. [2006] 5 SOT 660 (BANG.) .................................................. 7 13. Sonata Software Ltd. vs. ITO (International Taxation) 6SOT 700 (Bang) ................................ 8 14. Lucent Technologies Hindustan Ltd. ......................................................................................... 8 15. Samsung Electronics Co. Ltd. vs. ITO 93 TTJ 658 [Software Sale v/s royalty]........................ 9 16. Mphasis BFL Ltd. vs. ITO (Taxation) Ward 19(2) Bangalore, 9SOT 756 (Bangalore ITAT) .... 9 17. Pfizer Corporation (AAR) 141 Taxman 442 [Sale of technical information-not taxable] .......... 9 18. Wipro Ltd. Vs. ITO [Access to database on subscription basis-not taxable in India] ........... 10 19. Dun & Bradstreet Espana S.A. , In re AAR [Sale of BIR-e-commerce transaction] .............. 10 20. All Russia Scientific Research Institute of Cable Industry [Outright sale v/s royalty] ............. 10 21. Dcit, Co, Circle 2(6), New Delhi vs. M/s Cit Alcatel. Ita No. 407/Del/2001 New Delhi ........... 10 Payment of royalty by one non resident to another non resident (USA) ...................................... 11 22. XYZ, In re (AAR) 238 ITR 99 ................................................................................................... 11 Misc-Royalties Issues .......................................................................................................................... 11 23. ABC ,In re 238 ITR 296............................................................................................................ 11 24. GUJ Jaeger Gmbh vs. ITO (39 TTJ 231)(Bom ITAT) ............................................................. 11 25. BAE Systems Plc. [Agent of Govt. of India-WHT rate applicable to Govt. apply] .................. 11 26. Barmag AG West Germany (Mad.) ......................................................................................... 11 Article 12:Fees for technical services ................................................................................................ 11 27. Danfoss Ind. (P) Ltd. (268 ITR 1)(AAR) [Cost sharing arrangement] ..................................... 12 28. HNS India VSAT Inc. [Payment by NR to NR-FTS] ................................................................ 12 29. Kirloskar Oil Engines Ltd. vs. Dy. CIT (83 ITD 436 ITAT Pune) ............................................. 12 30. Degussa A. G. Germany [FTS-Germany-not taxable in absence of PE in India] ................... 12 31. Mahindra & Mahindra Ltd. [Direct incurring of expenditure-not FTS] ..................................... 12 32. Essar Oil Ltd. [Annual surveillance fees-Australia-DTAA-Technical fees].............................. 13 33. Wallace Pharmaceuticals (P) Ltd. [FTS-USA] ......................................................................... 13 34. South West Mining Ltd. [Analyzing & testing charges-Canada-FTS] ..................................... 13 35. Sheraton International Inc. vs. DDIT (2006) 10 SOT 542 (Del) .............................................. 13 1

36. International Hotel Licensing Co. (AA-No 674 of 2005) 158 Taxman 231. ............................ 14 Payment by non resident - foreign Government .............................................................................. 14 37. Airport Authority of India (AAR) 619 of 2003 [269 ITR 355] [2004] ........................................ 14 Special provision v/s General provision [Business connection v/s FTS] ..................................... 14 38. Copes Vulcan Inc. reported at 167 ITR 884 [1987] ................................................................. 14 39. Graphite India Ltd. [2003] (86 ITD 384), Calcutta ................................................................... 15 Use of facilities ..................................................................................................................................... 15 40. Skycell Communication Ltd. [2001] (251 ITR 53), Madras ..................................................... 15 41. DCIT vs. Japan Airlines (Delhi) 93 ITD 163 [TDS Service v/s rent]..................................... 15 42. WIPRO LTD [Use of facilities].................................................................................................. 15 43. DCIT vs. Panamasat International Systems Inc. (ITAT Delhi) 103 TTJ 861 .......................... 15 44. Kotak Mahindra Primus Ltd. vs. DDIT, TDS Circle 1(1) 11 SOT 578 (Mum. ITAT) ............... 16 Make Available ...................................................................................................................................... 16 45. McKinsey & Co. Inc (Philippines) [99 ITD 549 (Mum)][2006] ................................................. 16 46. Raymond Ltd. [80 TTJ 120] [Mum][2003] ................................................................................ 16 47. Boston Consulting Group Pte. Ltd. [Strategy consulting services-PE in India-115A]............. 16 48. NQA Quality Systems Registrar Ltd. vs DCIT 2 SOT 249 (Delhi)[Make available-UK].......... 17 49. Sinar Mas Pulp & Paper (India) Ltd [Payment for feasibility report-held to be FIS] ............... 19 50. CESC Ltd. vs DCIT 275 ITR 15 (Kol ITAT) [Make available-UK-FTS-Compared with USA] . 19 51. National Organic Chemical Industries Ltd. [Make available Swiss DTAA] ............................ 19 52. Gentex Merchants Pvt. Ltd. [Make available- Designs-USA-taxable] .................................... 20 53. Hindalco Industries Ltd. [Interpretation of Article 12(5)(a) of India-USA DTAA] ..................... 20 54. Pro-quip Corporation [255 ITR 354] [AAR][2002].................................................................... 21 Re-imbursement of Expenses ............................................................................................................. 22 55. Thai Airways International Ltd. v. ACIT 98 ITD 123 (Delhi ITAT) ........................................... 22 56. Danfoss Industries Ltd., In re [2004] 268 ITR 1 ...................................................................... 22 57. Timken India Ltd. (AAR) No. 617 of 2003 193 CTR 610[Reimbursement-FTS]..................... 22 Usance Interest v/s Purchase Price ................................................................................................... 22 58. Vijay Ship Breaking Corporation Ltd. [261 ITR 113][2003] (Guj) ............................................ 22 Article 5: Permanent Establishment .................................................................................................. 23 Basics of PE .......................................................................................................................................... 23 59. Visakhapatnam Port Trust [144 ITR 146] (AP) ........................................................................ 23 60. Subsea Offshore Ltd. [1998] 66 ITD 296 ................................................................................. 23 61. STEEL AUTHORITY OF INDIA LTD. VS. ASSISTANT COMMISSIONER OF INCOME-TAX [2007] 105 ITD 679 (DELHI) ............................................................................................................... 23 An Installation or structure used for exploration of natural resources ......................................... 23 62. Brown & Root Inc [103 Taxman 515][AAR] ............................................................................. 23 Business connection ........................................................................................................................... 23 63. ACIT vs. DHL operations B.V. [Business connection-HK Co.-liable for inbound parcel] ....... 23 Force of Attraction ............................................................................................................................... 24 64. Ishikawajima-Harima Heavy Industries Co. Ltd (AAR) [PE-Force of attraction] ..................... 24 65. Ishikawajma-Harima Heavy Industries Ltd. vs DIT [158 Taxman 259 (SC)] .......................... 24 Liaison office......................................................................................................................................... 25 66. Rolls Royce Plc [Indian subsidiary-doing liasioning no authority to conclude-no PE] .......... 25 67. Gutal Trading Est. [Liaison Office can not earn income in India] ............................................ 25 Service PE ............................................................................................................................................. 26 68. Morgan Stanley and Co. Inc. AAR no. 661 of 2005. 284 ITR 260 .......................................... 26 Agency PE ............................................................................................................................................. 26 69. Western Union Financial Services Inc. vs. ACIT 101 TTJ 56(Delhi) ...................................... 26 70. Morgan Stanley & Co. AAR [Dependent Agency] ................................................................... 26 71. Speciality Magazines (P) Ltd. (AAR) [Dependent Agency PE] ............................................... 28 72. Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad ............................. 28 [1954] 25 ITR 449 (SC), ...................................................................................................................... 28 2

Business Profit v/s Capital Gain ......................................................................................................... 28 73. Fidelity Advisor Series viii (AAR) (271ITR 1)[Business profit v/s Capital gain] ...................... 28 Attribution of profit to PE .................................................................................................................... 29 74. SET Satellite (Singapore) Pte Ltd. vs. DDIT ITA No. 205/Mum/04 (Mumbai Tribunal) .......... 29 75. Annamalais Timber Trust v. CIT 41 ITR 781 (Mad) ................................................................ 29 76. Bertrams Scott Ltd 62 CTR 11 (Cal)........................................................................................ 29 77. P. No. 13 of 1995 (228 ITR 487) ............................................................................................. 29 78. Saudi Arabian Airlines (155 ITR 65) (Bom) ............................................................................. 29 79. MC Dermott ETPM Inc. vs. DCIT 92 ITD 385 (Mum).[Attributable to the operation in India] . 29 80. Caribjet Inc. [Income accrue in India-no books maintained-estimation upheld] ..................... 30 Deductibility of expenses to PE .......................................................................................................... 30 81. ABN Amro Bank NV [Interest paid by PE to HO not deductible] ........................................ 30 Article 15: Expatriate Salary ................................................................................................................ 33 82. Stanley Keith Kinnett, In Re. 238 ITR 155 (AAR).................................................................... 33 83. DHV Consultants BV, In Re- [ Exp. borne by PE ?] ............................................................. 33 84. CIT vs Elitos SPA [Expatriate-salary not borne by PE-not taxable] ........................................ 34 85. Pride Foramer S.A. [Expatriates salary in India v/s Section 44BB] ....................................... 34 86. Kinetic Technology India Ltd [Expatriate Tax-Indian subsidiary agent U/s 163(1)] .............. 34 87. Sedco Forex International Inc. [Expatriate-chargeable to tax in home country-proof] ........... 35 88. DCIT vs. Sedco Forex International Drilling Inc. 103 TTJ (ITAT Delhi) .................................. 35 89. R. Tomassoni vs. ACF I SOT 150 (Delhi ITAT) [Expatriate-Perquisite] ................................. 35 90. Sedco Forex International Drill Inc. vs. CIT(SC) [Expat Taxation] .......................................... 35 91. CIT vs. Halliburton Offshore Service Inc. (Uttaranchal) 140 Taxman 405[Expatriate tax] ..... 36 92. Sankar Narayan Das vs. ADIT, International Taxation 101 ITD 95 (Kol. ITAT) ..................... 36 Article 8: Shipping Profits ................................................................................................................... 37 93. Essar Oil Ltd. [2006] 5 SOT 669 (MUM.) ................................................................................ 37 94. James Mackintosh & Co. P. Ltd. vs. ACIT 92 TTJ 388 (ITAT Mumbai)[Casual Shipping] ..... 38 95. Norasia Container Lines Ltd. (AAR) 139 Taxman 255 [Shipping Profit-not taxable].............. 38 96. Integrated Container Feeder Services [Shipping Co-Mauritius-effective control in Dubai] .... 38 97. Lufthansa German Airlines vs. CIT (90 ITD 310)(Del) [Pool arrangement] ............................ 38 Composite EPC Contract ..................................................................................................................... 39 98. Taikisha Ltd [52 TTJ 594 (Del)] ............................................................................................... 39 99. The CBDT issued Instruction No. 1829, dated September 21, 1989 ..................................... 39 100. Rotem & Co. [Composite contract sale-service lump sum price-can be separated] .......... 39 101. Sundwiger EMFG & Co. [2003] 262 ITR 110 [AP] .................................................................. 39 102. Neyveli Lignite Corporation Ltd. [2000] 243 ITR 459 (Mad) ................................................... 40 103. DCIT vs. Metapath Software International Ltd. 9 SOT 305 (Delhi) ......................................... 40 104. A.P. Power Generation Corporation Ltd. vs. ACIT, Circle 4(2) (TDS), Hyderabad 11SOT 221 (Hyd. ITAT) .......................................................................................................................................... 40 105. ABC LTD. (2007) 159 TAXMAN 344 (AAR) ............................................................................ 41 Section 195 ............................................................................................................................................ 42 106. Joint Official Liquidator of Bank of Credit and Commerce (Overseas) Ltd. vs JCIT .............. 42 107. Reliance Industries Ltd. vs. DDI [2005] 3 SOT 501 (Mum.).................................. 42 108. Sannoore Glass Ltd. vs ACIT 94 ITD 202 (Delhi) [Refund of TDS] ........................................ 42 109. Flakt (India) Ltd. (AAR) 139 Taxman 238 [TDS-on payment or on provision in book] ........... 43 110. ONGC [Multiple stage grossing up U/s 195A and income assessed S.44BB] ...................... 43 Article 14: Independent Personal Services ....................................................................................... 43 111. ACIT vs. Malayasia Manorama Co. Ltd. [Membership/Ad. Austria- not taxable] ................ 43 112. DCIT vs. Chadbourne & Parke LLP (Mum ITAT) 93 TTJ734 [IPS v/s FTS-UK-solicitor firm] 43 113. D.F.G. Von Der Mark (235 ITR 698)(AAR).............................................................................. 43 114. MSEB vs. Dy. CIT (96 ITD 793)(Mum) [IPS] ........................................................................... 44 115. DCIT vs. Chadbourne & Parke LLP (93 TTJ 734)(Mum) ........................................... 44 116. IMP Power Ltd. vs. ITO Range 3(2)(1) (Mumbai) 9 SOT 156 (ITAT Mum) ............................ 44 3

Article: Tax Credit ................................................................................................................................. 45 117. CIT vs. Best and Crompton Engineering Ltd. 284 ITR 225 (Mad.) ......................................... 45 118. Joint CIT vs. Digital Equipments India Ltd. [Tax credit for foreign tax] ................................... 45 119. Wipro Ltd. vs. DCIT [Tax credit on income earned outside India-unit exempt U/s 10A] ........ 45 Article 24: Non-Discrimination ............................................................................................................ 45 120. Chohung Bank vs. DDIT (Intl. Tax) 6 SOT 144 (Mum.) .......................................................... 45 121. JCIT vs. Sakura Bank Ltd. 6SOT 684 (Mum ITAT) ................................................................. 46 122. Metchem Canada Inc [2006][Non-discrimination clause-Section 44C India-Canada DTAA] 46 123. ABN Amro Bank [Non-discrimination & definition of tax does not include interest] ................ 46 124. Credit Llyonnais [Non-discrimination] 94 ITD 401 (Mum)] ..................................................... 47 125. Herbalife International India (P) Ltd. vs. ACIT Range 12 New Delhi, 101 ITD 450 (ITAT Delhi) 47 Section 44C ........................................................................................................................................... 48 126. British Bank of Middle East vs. JCIT[Section 44C-when applicable] ...................................... 48 127. CIT vs. Deutsche Bank AG 205 CTR 28(Bom) ....................................................................... 48 Section 44BB......................................................................................................................................... 48 128. ARB Inc. vs. JCIT (Delhi ITAT) 93 TTJ 608[Meaning of production U/s 44BB] ................... 48 129. ONGC vs. ACIT Circle-I, Dehradun 9 SOT 8 (Delhi ITAT) ..................................................... 49 Exemption U/s 10(4)-NRE Interest ...................................................................................................... 49 130. Rachpal Singh vs. ITO (Amritsar ITAT) 93 ITR 283[Exemption u/s 10(4)-NRE int.] .............. 49 Specific provision v/s General Provision .......................................................................................... 49 131. Hindalco Industries Ltd. vs. ITO 91 ITD 64 (Mum ITAT) [S.9 (1)(vii) v/s 9(1)(i)] .................... 49 132. Copes Vulcan Inc [Specific over general provision] ................................................................ 49 Miscellaneous ....................................................................................................................................... 50 133. Briggs of Boston (India) Pvt. Ltd. (AAR) 145 Taxman 400 [Bonus shares-not dividend] ....... 50 134. Madura Courts Pvt. Ltd. (AAR) 145 Taxman 366 [Deemed dividend U/s 2(22)(c)] ............... 50 135. Board of Control for Cricket in India [Order U/s 195(2) & Revision U/s 263] .......................... 50 136. Royal Jordanians Airlines [Immunity from taxation to any Sovereign State] .......................... 51 137. Tide Water Marine International Inc. ....................................................................................... 51 138. CIT vs. N. P. Methew (Ker.) [Returning NRI-Chapter XII A-concessional tax] ....................... 51 139. Maneklal D. Shah v. P.K. Gupta [2004] 267 ITR 340 (Bom.). ................................................ 51 140. Jayshree Tea & Industries Ltd. 145 Taxman 516 (AAR) [Interest payable to NR taxable] .... 51 141. AFT Trust Sub-I Vs Chairman, CBDT, 144 Taxman 907 (Delhi) [Speaking Order] ............... 52 142. Universities Superannuation Scheme Ltd. (AAR) 194 CTR 289[Sec. 115AD v. 48] .............. 52 143. JCIT vs. Steelco Gujarat Ltd. 99 ITD 408 (Ahd.) ..................................................................... 52 144. Certain facts about DTAA which India has signed .................................................................. 52

Interpretation of treaty
1. Abdul Razak A. Meman [276 ITR 306 (AAR)] Extensive discussion took place. Motorola Inc [95 ITD 26] (Del) (SB) [2005] DTAA is only an alternative tax regime and not an exemption regime and therefore the burden is first on the revenue to show that the assessee has a taxable income under the DTAA and then the burden is on the assessee to show that the income is exempt even under the DTAA.

2.

Article 4: Residence
3. Green Emirate Shipping & Travels [UAE-Resident-entitled to treaty benefit] 99 TTJ 988 (Mum ITAT). Green Emirate Shipping & Travels (GEST), a UAE based company had certain taxable income in India, from Shipping operations. GEST produced xerox copy of tax residency certificate issued by Ministry of Finance and Industry in UAE and cannot produce any evidence that it was liable to pay taxes or paying taxes in UAE. Issue was whether GEST could be considered as resident of UAE therefore eligible to take benefit of India UAE treaty, ITAT held the exemption agreed under the assignment or distributive rule is independent of whether the contracting state imposes a tax in the situation to which exemption applies. Tax treaty not only prevents current but also potential double taxation. Following the decision of Apex Court in Azadi Bachaos case, ITAT held that GEST was entitled to the benefits of DTAA. 4. General Electric Pension Trust (Authority For Advance Rulings A.A.R. NO. 659 OF 2005 ) The applicant trust in USA, established by General Electric Company and its participating affiliated companies (hereinafter referred to as "GE"). General Electric Pension Trust (hereinafter referred to as the "Applicant") registered as FII with SEBI, proposed to make portfolio investment in India. Applicant wanted to clarify whether profits arising to the Applicant from the sale of portfolio investments in India will be treated as business income of the Applicant, and whether in the absence of permanent establishment in India such business income of the applicant will be taxable in India applying India US treaty? AAR ruled that the applicant trust was tax-exempt entity under US law hence it will not be considered as resident of the US. The tax residency certificate produced by the applicant was not considered as it was provided specifically for Australia. AAR held that profits arising to the applicant from the sale of portfolio investments in India will be treated as business income of the applicant and as the applicant is not entitled to avail the benefits of the terms of the treaty, such business income of the applicant will be taxable in India under the Act. 5. Emirates Fertilizer Trading Company WLL (AAR No. 628 of 2004)[Residence-UAE] The applicant is a partnership firm and a resident of UAE. It acquired shares of listed companies and proposes to dispose of the said shares. It was held by the Authority that the capital gains arising from alienation of the shares in Indian companies to the applicant who is a resident of UAE are taxable only in UAE. Under the Act, it cannot be disputed that capital gains arising to a non resident in India, are taxable in India. Having regard to section 90(2) of 5

the Act, the terms of the treaty have overriding effect over the provisions of the Act in the event of there being conflict between the treaty and the Act. [(Union of India vs Azadl Bachao Andolan (SC) 263 ITR 706 and RV.A.L Andagan Chettiar 267 ITR 654 (SC)]. It follows that in view of the provisions of para 3 of Article 13 of the treaty, the capital gains arising to the applicant can be taxed only in UAE and not in India and that their taxability under the Act in India does not depend upon whether they are as a fact taxable in UAE. Accordingly, gains from alienation of shares in Indian companies held by the applicant, a resident of UAE, will not be taxable in India.

Article 12:Royalty
Source outside India 6. Seth Shiv Prasad vs. CIT (1972) 84 ITR 15 (All) Referring to the provisions of s. 3 of the IT Act, 1961, prior to the amendments carried on by the Finance Act, 1999, it was stated that first proviso to s. 3(2) allowed liberty to the assessee to adopt more than one period as the "previous year" for different sources of his income. Relying on the case of Seth Shiv Prasad vs. CIT (1972) 84 ITR 15 (All) it was stated that the Hon'ble Court has held that a source of income may be described as the spring or fount from which a clearly defined channel of income flows. It was explained that in that case it was held that the source of dividend income was not the company paying the dividends but the shareholding of that assessee. Further reliance was placed on the case of CIT vs. Lady Kanchanbai & Anr. (1970) 77 ITR 123 (SC) to contend that where the assessee had head office at Indore and branches at several places, it was held by the Hon'ble Supreme Court that the business of the assessee in Madhya Bharat constituted a separate source of income and as such the assessee was entitled to have a different previous year in respect of income arising therefrom. It was explained by the learned counsel that the ratio of this judgment was that different branches of a particular company may be considered as different sources of income and as such different previous years may be adopted in respect of particular set of branches 7. Aktiengesellschaft Kuhnle Kopp & Kausch W. Germany By BHEL [Source outside India] 262 ITR 513 (Mad) "As far as royalty on export sales is concerned, that amount is also exempt under S. 9(1)(vi) of the IT Act. Though a resident in India paid the royalty, it cannot be said that it was deemed to have accrued or arisen in India as the royalty was paid out of the export sales and, hence, the source of royalty is the sales outside India. Since the source for royalty is from the source situate outside India, the royalty paid on export sales is not taxable. The Tribunal was, therefore, correct in holding that the royalty on export sales is not taxable within the meaning of S. 9(1)(vi) of the IT Act." 8. Lufthansa Cargo India (P) Ltd. [Exclusion- section 9(1)(vii)-business outside India] vs. Deputy CIT 140 Taxman 133 Lufthansa Cargo India (P) Ltd. (Lufthansa) acquired four aircraft from foreign company, and obtained licence to operate aircraft in international route only. Lufthansa engaged crew, technical personnel, engineer and other ground staff, and wet leased the aircraft to a foreign cargo company. Various payments were made to non-residents on account of overhaul, repairs of aircraft, engines or other components in the workshop abroad. No tax was deducted on such payments. The Assessing Officer held that the tax is required to be deducted on such payments rejecting the assessee's plea that it was for the purpose of business outside India and falls under exclusionary clause of section 9(1)(vii)(b) or exempted under the DTAA being fees for technical services. CIT(A) held that in view of the provisions of relevant DTAAs the payments were in nature of fees for technical services therefore payment made to the residents of UK and USA were exempt and payment made to 6

German resident was liable to TDS. Hon'ble ITAT held that the payments made did not constitute the managerial or consultancy or technical services under section 9(1)(vii). Even if it is considered as falling under section 9(1)(vii) it will fall under the exclusion category under section 9(1)(vii)(b) and will be exempt from tax, since it was made for the purpose of business outside India, and as such no TDS was required to be deducted.

9.

Titan Industries Ltd. V ITO Intl. Tax ward 19(1) Bangalore 11 SOT 206 ( Bang.) Titan Industries Ltd (TIL) engaged in manufacture of watches and marketing it under its patent name 'Titan'. TIL paid certain amount to a consultant in Hong Kong to register its patent name in Hong Kong. Assessing officer held that TIL was liable to deduct the tax from the payments. ITAT held that patent was registered outside India for making income from a source outside country hence amount paid will be covered in exception provided under section 9(i)(vii)(b), therefore no TDS was required.

Source in India 10. Rajiv Malhotra AAR no. 671 of 2005 284 ITR 56 The applicant is engaged in the organization of India International Food and Wine shows, wanted to appoint agents abroad for marketing and booking space in exhibition. A French agency was responsible for planning, directing and executing the sales campaign. The services to be provided by the French agency included liaison with government departments etc., distribution of sales and marketing material, briefing the foreign concerns etc. The agent's commission was payable only after exhibitors makes full payment to the principal. Applicant sought the ruling to determine whether the non resident agent was liable to tax in India and whether TDS was to be deducted on the payments to be made. AAR ruled that the commission accrued in India as source of income was in India, the rendering of service outside India and remittance of foreign exchange would not change the source being in India. The article 23 of India French treaty also provided taxation of income in India, being the source country. There for the income was liable and TDS was to be deducted. Supply of information: Whether Royalty? 11. Heg Ltd [263 ITR 230] [MP][2003] It is contended by him (appellant) that any information relating to the commercial venture cannot be regarded as information as understood in the context of the provision or that of the treaty to earn the status of royalty On a perusal of the provisions we are of the considered opinion that any information cannot earn the status of royalty. To have the status of royalty it has to have some special features We are not inclined to accept the submission of Mr. Arya that every information if it concerns the industries or commercial venture would be a royalty. That would be tantamount to stating the law quite broadly. That does not seem to be the purpose of the statute or that of the treaty Royalty v/s Outright sale 12. Hewlett-Packard (India) (P.) Ltd. [2006] 5 SOT 660 (BANG.) Section 9(1)(vi) provides that royalty receivable by a non-resident from a person in India is deemed to accrue or arise in India. Further, section 90(2) provides that if the provisions of Tax 7

Treaty between India and the country of the non-resident are more beneficial to such nonresident, then the provisions of Tax Treaty shall override the provisions of the Act. [Para 6] Article 12(3) of the India-USA DTAA defines the term royalty. As per the India-USA DTAA royalty in respect of the subject-matter of a copyright includes only the payments for the use i.e., exploitation of the copyright of such literary/artistic or scientific work. Therefore, in order to be classified as royalty, the right of the person in possession of the subject-matter of a copyright should be to utilize such copyright in the manner which is otherwise protected by the respective copyright law in favour of the owner of the copyright. The use of the copyright of a copyrighted work is different from use of such work itself. The acquisition of a product, wherein the subject-matter of copyright is embedded, without right to exploit the copyright, does not amount to use or right to use the copyright of such literary/artistic/scientific i.e., copyrighted work. [Para 6.1] Further, as per clause 13.1 of the OECD model commentary, payments made for acquisition of partial rights in copyright would represent a royalty where the consideration is for the right to use the programmes in a manner that would, without such license, constitute an infringement of the copyright. In other words, the payment can constitute royalty only if the transferor grants to the transferee the right to use the copyright of the product. If, on the other hand, the use of the programmes by the transferee (by acquiring a copy of such programme) is in a manner which does not constitute infringement of the copyright, the payment therefor would not amount to royalty. Therefore, under the OECD model commentary also payments for acquiring a copy of a computer programme would not be treated as payments for right to use the copyright in the computer programmes. Accordingly such payments are to be considered as commercial income under article 7 and not as royalty under article 12 of the India-USA DTAA. [Paras 6.2 and 6.3] Further, the computer programme may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the programmes is tangible, movable and available in the market place. The fact that some programmes may be tailored for specific purposes need not alter their status as goods because the code definition included specially manufactured goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132 the Apex Court after citing several decisions of the Courts of the USA has noted that acquisition of a copy of computer programmes, which is a copyrighted article, amounts to sale of such article. [Para 6.7] Therefore, the payment made by the assessee to H was not in the nature of royalty but was subject-matter of article 7 of the India-USA DTAA. Further it was an admitted fact that H, did not have any permanent establishment in India. Therefore, the assessee had no obligation to deduct tax at source on such payments made to H, USA. Therefore, the claim of the assessee was liable to be allowed. [Para 6.8] 13. Sonata Software Ltd. vs. ITO (International Taxation) 6SOT 700 (Bang) Sonata Software Ltd. imported certain software packs under the agreement for the purpose of distributing the same to the ultimate users. Issue arose whether the payment to the nonresident supplier was taxable as royalty or whether the business income will be exempt as there was no PE of the foreign supplier in India. Tribunal held that the payment was not royalty and there was no PE of the supplier in India so the payment was not liable to tax in India

14.

Lucent Technologies Hindustan Ltd. [2005] 92 ITD 366 (BANG.)

Section 9 read with section 195, of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India - Assessment years 1999-2000 and 2000-01 - ITO treated assessee as assessee-in-default for its failure to deduct tax at source in respect of payments made to a non-resident company for importing software along with hardware - Whether since transaction of assessee with non-resident company was for purchase of an integrated equipment, consisting of both hardware and software, and acquisition of software was inextricably linked to acquisition of hardware, payment for impugned transaction did not partake of character of royalty, and, therefore, assessee was under no obligation to deduct tax at source from such payment - Held, yes 15. Samsung Electronics Co. Ltd. vs. ITO 93 TTJ 658 [Software Sale v/s royalty] The branch of the Korean company was engaged in the development, manufacture and export of software for use by its parent company; i.e., Samsung Electronics Co. Ltd., Korea. During the year the assessee imported the software from USA and France. Issue arose was whether the payment made to foreign companies was liable to TDS under section 195. Assessing Officer held that as per the provisions of section 9(1)(vi) payment made was royalty and therefore assessee was required to deduct the tax. CIT(A) upheld the Assessing Officer's order. Tribunal considered the provisions of DTAA and held that acquiring a software is like, the acquisition of a product, wherein the subject matter of a copyright is embedded, without right to exploit the copyright, does not amount to use or right to use the copyright of such literary artistic, scientific; i.e., copyrighted work. Under the agreement the assessee had copy of the copyrighted article, and not the copyright or right to use the copyright. Therefore the consideration is not for use or right to use of any copyright of a literary, artistic or scientific work, hence it will not fall within definition of royalty as per India USA and India France DTAA. For arriving at this decision the decision of Apex Court in case of Tata Consultancy Services Ltd. was applied. 16. Mphasis BFL Ltd. vs. ITO (Taxation) Ward 19(2) Bangalore, 9SOT 756 (Bangalore ITAT)

Mphasis BFL Ltd. (MBL) was engaged in business of development of computer software. MFL made payment for purchase of software to non residents without deduction of tax at source. Assessing Officer held that the payment was in nature of royalty and thus MFL was liable to deduct TDS. MFL argued that a readymade off the shelf computer software was acquired, any right to utilize copyright of the computer software was not acquired Transaction was a purchase of copyrighted article like book or a CD. Accepting the argument ITAT held that payment for import of software was not by way of royalty and TDS was not required.

17.

Pfizer Corporation (AAR) 141 Taxman 442 [Sale of technical information-not taxable] Pfizer Corporation, a Panama Company (PC) owned the technology information pertaining to the manufacture of nutrition food supplement product manufactured and sold by Pfizer India Both trademarks are registered in India. Indian company was using the technology information without payment of any royalty. In November 2003, EAC Nutrition Ltd., a Denmark company acquired technical information and entered into agreement with an Indian company for early termination of license of Indian company and paid consideration for the same. The dossier containing technical information was handed over in Bangkok, Denmark company deducted the tax, Indian company approached AAR, contending the technical information was a capital asset and the amount received was not taxable in its hand AAR accepted the contention and held that the consideration was not chargeable to tax u/s 5 or section 9.

18.

Wipro Ltd. Vs. ITO [Access to database on subscription basis-not taxable in India] (2005) 278 ITR (AT) 57 (Bangalore) Case Fact: Whether assesse was liable to deduct TDS for payments made to foreign co. for providing access to its database on subscription basis. Decision: Held that the foreign co. earned money by providing copyrighted information on subscription basis. The subscription was in the nature of access fee to database maintained outside India. Thus such receipts could not be treated as income accrued in India. Hence no TDS was required to be deducted.

19.

Dun & Bradstreet Espana S.A. , In re AAR [Sale of BIR-e-commerce transaction] [2005] 272 ITR 99 (AAR) In the case of Dun and Bradstreet Espana, S.A., (272 ITR 99) (AAR) it was held that payment of fees made for download of Business Information Report (BIRs), which is in the form of a general information about all the companies in the world online is business income and not "Royalty". Also Bangalore Tribunal in the case of Wipro Ltd vs. ITO (92 TTJ 796) held that periodic subscription charges or fees paid for providing electronic access to information/journal or magazine maintained on database was not taxable as "Royalty

20.

All Russia Scientific Research Institute of Cable Industry [Outright sale v/s royalty] [2006] 98 ITD 69 (MUM) Assessee as Russian Company possessing knowledge and experience in the field of manufacturing technique of a product, granted non exclusive right to an Indian Company to use know how for a specific purpose and imposed an obligation to maintain confidentiality and instructed it not to divulge such know how to third parties without specific permission. Issue was whether the payment received was a consideration for outright sale of designs & drawings. Whether consideration received was chargeable to tax as royalties in view of Article 12 of India Russia DTAA. Tribunal held that it was not a case of outright sale as it does not imply unfettered rights of assessee to use the same. Dcit, Co, Circle 2(6), New Delhi vs. M/s Cit Alcatel. Ita No. 407/Del/2001 New Delhi M/s. CIT ALCATEL (ALCATEL) a non-resident company registered in France, entered into agreement for supply of hardware telecom equipment and software on FOB basis to its Indian subsidiary, Alcatel Modi Network Systems Ltd. (ANSIL). The Assessing Officer concluded that since the Alcatel and ANSIL were related parties and ANSIL was dependent on Alcatel. ANSIL was permanent establishment of the Alcatel and the 70% of the consideration paid for hardware and 30% of the consideration paid for the software was income of Alcatel and liable to tax. Question Tribunal examined was whether the Indian subsidiary of the assessee constituted any business connection or a permanent establishment, answer was no. Alcatel had no place of business in India and the only connection was through the Indian subsidiary. ANSIL was not authorized to conclude any contract on behalf of the assessee. There was also no material to controvert that transaction for supply of the equipment to the Indian subsidiary had been made on principal to principal basis. Tribunal concluded that the income from the licensing of the software is not taxable as royalty and no income can be said to accrue or arise to assessee in India on account of supply of equipment embedded with the software.

21.

10

Payment of royalty by one non resident to another non resident (USA) 22. XYZ, In re (AAR) 238 ITR 99 Royalty paid by one american company to another american company for allowing an Indian company in which controlling interest is held by first company through its subsidiary company to use its trade-mark in india is taxable in India in terms of s. 9(1)(Vi)(c) as well as under sub-para (b) of para 7 of art. 12 Of DTAA between India and U.S.A. Misc-Royalties Issues 23. ABC ,In re 238 ITR 296 Double taxation relief-agreement between india and u.S.A.-Indian company xt using global central processing unit (cpu) of american company y located in usa-xt is retrieving processed data from the cpu and is to make payment to y only for having access to this data- software used in the cpu is that of y and it has allowed the indian company to use its software-payments received in such transactions are for use of intellectual property allowing the use of protected software for a consideration by way of a contract amounts to income by way of royalties covered under art. 12(3)(A) of the dtaa-data is collected in india-income is arising to y in india and is taxable as 'royalty' under art. 12(3)(A). GUJ Jaeger Gmbh vs. ITO (39 TTJ 231)(Bom ITAT) It was held that consideration was "Royalty" as it was for providing recurring know-how including improvement in the methods of manufacture as a result of research development carried on by the service provider. A negligible part of consideration was for imparting training, which was held to be "fees for technical service". Held that, the entire consideration cannot be considered as "FTS". Know-how related payment would be in the nature of "royalty". BAE Systems Plc. [Agent of Govt. of India-WHT rate applicable to Govt. apply] vs. Jt. CIT (Del. ITAT ) 96 TTJ 585 BAE Systems Plc. A UK company entered into agreement with Ministry of Defense, Government of India. As per agreement Government appointed HAL as its agent, issue arose was, whether the royalty payment made by HAL as agent of Government was chargeable at 20% or at 15%, under the article 12 of India UK DTAA. ITAT upheld that the royalty was chargeable at 15%, that is at rate applicable to payment made to Government under the DTAA. 26. Barmag AG West Germany (Mad.) 147 Taxman 136 Barmag AG, a German company, received certain payments pertaining to the A.Y. 1992-93. Under an agreement entered into with its agent in India. Question arose as to whether the amount was taxable at 30% as applicable to royalties or 20% applicable to technical know-how fees. As per agreement the payment was directly linked to the commercial production. During the A. Y. 1992-93 the company has not commenced the commercial production; hence the entire payment was considered as technical know-how fees and was held as taxable at 20% under the DTAA.

24.

25.

Article 12:Fees for technical services

11

27.

Danfoss Ind. (P) Ltd. (268 ITR 1)(AAR) [Cost sharing arrangement] It was held that payment to foreign company under a cost sharing arrangement was tax deductible as the same was a consideration for rendering of service and not a reimbursement. HNS India VSAT Inc. [Payment by NR to NR-FTS] [2005] 95 ITD 157 (Delhi) The assessee in the present case was a wholly owned subsidiary company of Hughes Network Systems, Hughes Electronic Company having its registered office in USA. It is engaged in the business of providing telecom related services including installation and site supervision. M/s. Hughes Telecom Co. was awarded contract for installation of telephony system in Mumbai. This job was sub-contracted by the said company to HNSIPL (Indian) who, in turn, gave the said job to the assessee. During the relevant period, installation was done by the assessee at 12 different sites in Mumbai. It was also noticed by the Assessing Officer that the assessee company has sub-contracted various jobs relating to installation to the contractors in US and payments were claimed to have been made to the said contractors in US against the sub-contracted work. Since no tax at source was deducted by the assessee from the payments made to the said contractors outside India as required by section 195, the Assessing Officer sought explanation of the assessee in this regard. These services have been provided by the foreign sub-contracts in India and for Indian project on continuing basis as admitted by the appellant. These services like installation have been rendered on Indian sites. There nature is technical. The employees of sub-contractor have travelled to India and the appellant has claimed the expenditure on their traveling separately. Kirloskar Oil Engines Ltd. vs. Dy. CIT (83 ITD 436 ITAT Pune) It was held that fees paid for obtaining specialised technical data suitable and useful only for a given purpose, in given parameters and conditions and which would be of no other use to the payer is fees for technical services and not royalty. Degussa A. G. Germany [FTS-Germany-not taxable in absence of PE in India] v/s Director of Income Tax vs. 270 ITR 301 (Delhi) German company received the lump sum payment for technical services in three instilments. The Revenue preferred an appeal in respect of the third installment. The Assessing office treated the payment of first and second installment as royalty and subjected to tax. CIT(A) and Tribunal held that the income was not royalty but business income and not taxable in absence of permanent establishment in India. The Revenue did not prefer any appeal against the order till the appeal in respect of the third instalment was decided by the Tribunal. Hon'ble Tribunal held that consistency is required to be maintained by the Revenue, and the income was held not liable to tax in respect of the third instalment also.

28.

29.

30.

31.

Mahindra & Mahindra Ltd. [Direct incurring of expenditure-not FTS] v. DCIT [2005] 1 SOT 896 (MUM.) Mahindra & Mahindra Ltd.(M&M) entered into agreements with various foreign companies for supply by there foreign companies of technical information and also for sending technical skilled personnel to put into commercial use information supplied. M&M deducted tax from fees paid to these very parties, and the dispute was only about expenses incurred like airfare, hotel expenses and local traveling for foreign technicians visiting India. M&M contended that income was assessable in hands of foreign parties under head 'Profits and gains of business or profession' and since none of them had permanent establishment in India, income was not taxable in India and, therefore, section 195 was not applicable. Assessing officer held that the expenses could not be separated from the fees because the same were incurred during 12

earning of those fees only and, hence, the contention of assessee had no merit. The ITAT up held the contention of M&M and restored to the matter to the Assessing Officer to decide the issue afresh after examining the contention of the assessee regarding direct incurring of expenditure and then pass necessary order as per law in the light of the judgments in the case of CIT v. Tata Engg. & Locomotive Co. Ltd. [2000] 245 ITR 823 and IAC v. Tata Iron & Steel Co. Ltd. after providing adequate opportunity of being heard to the assessee. 32. Essar Oil Ltd. [Annual surveillance fees-Australia-DTAA-Technical fees] V/s. JCIT Sp. Rg.26 4 SOT 161 (Mum) Essar Oil Ltd. paid surveillance fees to Standard & Pours (Australia) Pty. Ltd. (S&P) without deduction of tax, for issue of Credit Rating Certificate. Issue arouse whether the annual surveillance fees was fees for technical services u/s.9 & under India Australia DTAA. Tribunal held that the fees would fall within the ambit of Sec.9(1)(VII)(b) as well as Article 12(3)(c) of DTAA. 33. Wallace Pharmaceuticals (P) Ltd. [FTS-USA] 198 CTR 63 AAR Wallace Pharmaceuticals (P) Ltd., an Indian Company, engaged in manufacture and sale of pharmaceutical product entered into an agreement with the USA company, USA Company agreed to provide business development services to promote sales in International Market as well as in India for a monthly consultancy charges of USD 10,000 plus commission at the rate of 10%. Issue arouse was whether the monthly fees and commission would be liable to tax in India. Authority ruled that it would be income deemed to arise in India and liable to tax. The reimbursement of legal fees to US Company was also considered as part of consideration & subject to TDS. 34. South West Mining Ltd. [Analyzing & testing charges-Canada-FTS] AAR 660 of 2005. South West Mining Ltd. (SWM), an Indian Company engaged in prospecting and extraction of mineral, metal, etc. Met.Chem, a Canadian Company entered into agreement with SWM to provide services of analyzing & testing the sample and ores in the laboratory in Canada. Issue for consideration was whether the laboratory fees were payable to SWM to Canadian Company was liable to tax in India. Authority ruled that the services were utilized in India, therefore liable to tax in India. AAR also ruled that the rate of tax as prescribed under Finance Act or rate as per Para 2 of Article 12 of the DTAA whichever is more beneficial to applicant shall apply.

35.

Sheraton International Inc. vs. DDIT (2006) 10 SOT 542 (Del) Assessee, a non-resident company incorporated in USA, was engaged in the business of providing various services related to hotels around the world including India on terms and conditions stipulated in agreements entered into with said Indian hotels. The Agreements entered into was for payment of fees for publicity, advertisement and sale and reservation services by Indian hotels to assessee. As a result of DTAA between India and USA, assessee contended that there being no permanent establishment in India, its entire income was not taxable in India. It was held that the main job undertaken by the assessee company was to render services in relation to publicity, advertisement and sale and reservation of Indian hotels and provision of other facilities/services was only incidental to rendering of said services. Payments under agreements were entirely made by Indian hotels 13

to assessee company for these main services as per the agreements, payments for other facilities/services like 'Frequent Flier Programmes' were not in the nature of 'royalties' of 'fees for included services' as defined in section 9 and article 12 of India-USA DTAA. It was further held that having regard to integrated business arrangement between assessee company and Indian hotels, the contribution received for other incidental services were neither independent nor separable for the main job undertaken and therefore, entire amount paid for services had been held to be 'business income' which was not liable to tax in terms of article 7 of Indo-US DTAA. 36. International Hotel Licensing Co. (AA-No 674 of 2005) 158 Taxman 231. International Hotel Licensing Co SARL, a non-resident company (IHLC) engaged in Business of promoting enterprises conducting international advertising, marketing sales programme of Marriott chain of hotel in foreign markets. Different Marriott group entities entered into agreement with Unity Hospitality Ltd.(Unity) for setting up hotel in India. IHLC entered into agreement with Unity. Whereby Unity was to participate in marketing business promotion programme. IHLC provide advertising space in and outside India to provide Marriott group as a whole and not specifically for Unity. Unity to pay annual contribution equal to 1.5%. of gross revenue by way of reimbursement of expenses incurred by IHLC and 3.4 % of Marriott reward programme member's room charge. IHLC has no profit motive and as a matter of fact do not earn profit. AAR held that for a receipt to be income element of profit in hands of recipient was not material . Issue arose was since, There was no nexus between expenditure incurred by IHLC in rendering service and consideration by it payment of 1.5% of gross revenue whether can be considered as managerial or consultancy services under section 9(1)(vii) on the basis of the facts of the case AAR rules that there was a business connection of IHLC in India. IHLC has source of income in India. And therefore the payment would amount to rendering of managerial and consultancy service and liable to tax in India.

Payment by non resident - foreign Government 37. Airport Authority of India (AAR) 619 of 2003 [269 ITR 355] [2004] Airport Authority of India (AAI) entered into agreement with Government of USA through the US Trade & Development Agency (TDA) to provide grants for funding a feasibility study on proposed CNS/ ATM project in India. As per terms of agreement, TDS set aside certain funds to finance the study and as per the agreement TDA paid directly to a 'contractor' selected to carry out the feasibility study. Revenue contended that the amount payable was income deemed to accrue in India u/s 9(i)(vi) or 9(i)(vii) & chargeable to tax. AAR held that the payment to contractor in substance was out of grant given by Government of USA. Source of payment to contractor was grant given by Government of USA hence the fees for technical services/ loyalty will arise in USA under the DTAA & not chargeable to tax in India. Under the Act also the source was outside India. Special provision v/s General provision [Business connection v/s FTS] 38. Copes Vulcan Inc. reported at 167 ITR 884 [1987] When there is a special provision dealing with a special type of income, such a provision could exclude a general provision dealing with income accruing or arising out of any businesses connection. Since S. 9(1)(vii) will comprehend income by way of fees for technical services rendered as a result of business connection or otherwise, it is not possible to apply 14

the provision in S. 9(1)(i) merely because S. 9(1)(vii) stands excluded as a result of the proviso. The similar views were expressed by Gujarat High Court in the case of Meteor Satellite Ltd.[121 ITR 311,323 (Guj)] 39. Graphite India Ltd. [2003] (86 ITD 384), Calcutta Provision of Independent Personal Service should be applied as against Article on FTS as Article on IPS is more specific than Article on FTS. Specific provisions of art. 12(5) of the Indo-US DTAA, the amount paid in consideration of these services is outside the scope of art. 12(4) of the Indo-US DTAA. Use of facilities 40. Skycell Communication Ltd. [2001] (251 ITR 53), Madras "Technical service" referred in s. 9(1)(vii) contemplates rendering of a "service" to the payer of the fee. Mere collection of a "fee" for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services. 41. DCIT vs. Japan Airlines (Delhi) 93 ITD 163 [TDS Service v/s rent] Japan Airlines (JAL), a company incorporated in Japan involved in business of air traffic / flights and carries passengers and cargo by its aircraft's. Airport Authority of India (AAI) provides various facilities including for landing and parking facilities to aircrafts. JAL paid certain amount to AAI on account of landing & parking fees and deducted 2% as per provisions of section 194C. AO took view that facilities provided to JAL fall within purview of section 194C and charges for landing and parking were taken by way of rent, deduction should be at the rate of 20% and not 2%. ITAT held that the AAI simply granted landing and parking facilities and had not granted any exclusive right or interest to JAL in any specific portion of land or building hence cannot be termed as rent. 42. WIPRO LTD [Use of facilities] [80 TTJ 91] Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India Assessment years 1999-2000 to 2001-02 - Assessee was engaged in development software, provision of software services and IT enabled services provided through development centres located in India as well as outside India - To transmit data and software appellant had used telecom services provided by VSNL, AT&T, MCI, Worldcom, British Telecom, Singtel, etc. Services were availed separately for uplink from India through VSNL and downlink through telecom companies outside India - Most of services were provided through customer based circuits (CBC), which were like hotlines between assessee and its customers - CBC was commercially divided into two portions - Indian portion and international portion - Whether telecom facility, i.e., CBC, provided by non-resident telecom companies outside India could be treated as provision of technical service and, therefore, amount paid could be treated as fees for technical service under section 9(1)(vii) - Held, no - Whether telecom facility provided by non-resident telecom companies outside India could be termed as royalty for making available a process within scope of section 9(1)(vi) - Held, no

43.

DCIT vs. Panamasat International Systems Inc. (ITAT Delhi) 103 TTJ 861 Panamasat International Systems Inc. (PISI), a US company owns and operates global network of satellite which very high on the earth, enters into contract with Television channel company for providing up linking facilities and providing services. Issue was whether both 15

formula and the process for which the payment was required to be secret formula or secret process to characterize it as royalty, ITAT affirmed. Transponder technology is not the secret technology, the PISI did not have any patent to the satellite, the broadcasters have made the payment of service fees for use of transponder to transmit the signal and not for use of any process and hence the payment was not considered as royalty. The payment could not be considered as fees for included services as there was no making available of the services, which was the condition under India US treaty. 44. Kotak Mahindra Primus Ltd. vs. DDIT, TDS Circle 1(1) 11 SOT 578 (Mum. ITAT) Kotak Mahindra Primus Ltd. (KMPL), a NBFC company entered into agreement with Ford Credit Australia Ltd. (FCAL) Australian company for data processing. The charges under the agreement was annual maintenance fees of US$ 60,000 plus monthly charges based on the cost associated with running the business operations as data processing charges. Question arose was whether the payment was royalty. The payment of fixed and variable charges was not considered as charges for use of the software or for the use of mainframe computer. Considering provisions of Articles 12(3)(a), (b) and (c), Tribunal held that the payment was not royalty and in absence of permanent establishment the payment was not chargeable to tax in India.

Make Available 45. McKinsey & Co. Inc (Philippines) [99 ITD 549 (Mum)][2006] Strategic consultancy services cannot be treated as Included services. McKinsey & Co. Inc. & others (MAC) US resident Company supplied information inputs to Indian branch of MAC, which is engaged in business of providing strategic consultancy services, The information provided was of the nature of Commercial & Industrial information. Consultancy Services were not made available within the meaning of Article 12 of India US DTAA therefore it was held as not liable to tax. Raymond Ltd. [80 TTJ 120] [Mum][2003] Thus, the normal plain and grammatical meaning of the language employed, in our understanding is that a mere rendering of services not roped in unless the person utilizing the services is able to make use of technical knowledge etc. by himself in his business and or for his own benefit and without recourse to the performer of services, in future It was also held that rendering of services cannot be equated with making available the technical services. Boston Consulting Group Pte. Ltd. [Strategy consulting services-PE in India-115A] [2005] 94 ITD 31 (MUM.) Boston Consulting Group Pte. Ltd., a Singapore-based company, carried out its business of strategy consulting services, such as strategy regarding business, marketing, sales, portfolio, etc., through its Permanent Establishment (PE) in India and received professional receipts from both Indian and foreign clients. It claimed deduction of certain expenditure to earn said professional receipts. Assessing Officer held that the fees received from Indian concerns was taxable on gross basis, though at a concessional rate of 20 per cent in terms of the provisions of section 115A, and the fees received from foreign concerns was taxable on net basis. The Commissioner (Appeals) observed that the receipts in question could not be treated as 'fees for technical services' for the purposes of article 12 of the DTAA and the same being 16

46.

47.

attributable to assessee's PE in India, were to be taxed on net basis in India in terms of the provisions of the DTAA. ITAT held that, the scope of 'fees for technical services' under article 12(4)(b) does not cover 'consultancy services' unless those services are technical in nature. The nature of services rendered by the company would not fit into the description of 'fees for technical services' under the provisions of the concerned DTAA. Hence, the limitation on deduction of expenses under section 44D did not come into play. Therefore, the provisions of section 44D, was not applicable on the facts of the case. 48. NQA Quality Systems Registrar Ltd. vs DCIT 2 SOT 249 (Delhi)[Make available-UK] N Ltd., a UK company was authorized to issue ISO certification. The Assessee entered into M0U with N Ltd., and was accredited to provide ISO certification to business and organizations in India & abroad on behalf of N Ltd. for payment of fees. NQA also paid auditing services fees to P who was also a non-resident person. The nature of work carried out by N ltd., was making assessment surveillance for the purpose of ISO certification, which could not fulfil within the ambit of fees for technical services as per India UK DTAA. There was no permanent establishment of N Ltd., in India hence the income was held as not liable to tax in India. The receipt in the hands of P was also not liable to tax in India. Consequently the provisions of section 40 (a)(i) were not attracted in the case of payer. Disallowance u/s 40(a)(i) r/w section 194j Payment of accredition fees for authorisation to issue iso certification and audit fees to u.k. residents Whether liable to tax under Articles 7, 13 and 15 of India-uk dtaa The services rendered in instant case did not result in making available any technical knowledge, experience, skills, know-how or process to assessee. The nature of work carried out by non-resident (N Ltd.) involved making surveillance for purpose of ISO certification. The said service could not fall within ambit of fees for technical services as defined in Article 13(4) of Indo-UK Treaty Moreover, since non-resident (N Ltd.) did not have permanent establishment in India, its business profits could not be taxed in India in view of provisions of Article 7 of Indo-UK DTAA. Since amounts paid by assessee to N Ltd. were not chargeable to tax in India, there was no obligation on part of assessee to deduct tax at source. Consequently, provisions of section 40(a)(i) were not attracted. As regards Audit Fees paid to P, was for rendering professional services, the same could be taxed in India only if person rendering service stayed in India for a period aggregating 90 days during relevant fiscal year or had a fixed base regularly available to him in India for performing such activities. Since it was not the case of Revenue that P was present in India for a period aggregating 90 days or had a fixed base in India, fee paid to P was not taxable in India. Therefore, authorities below were unjustified in refusing to allow deduction by taking recourse to provisions of section 40(a)(i). Facts i. N Ltd., UK, was authorized to issue ISO certification. The assessee-company entered into MoU with N Ltd. and was accredited to provide ISO certification to business and other organizations in India and abroad on behalf of N Ltd. The assessee had to pay certain fees to N Ltd. for that purpose.

17

ii.

The assessee also paid some amounts to one P for auditing services rendered by him in that matter. While remitting the payments, the assessee did not deduct tax at source since the recipients thereof were non-residents. The assessee claimed the aforesaid payments as deduction while computing its income. It was the case of the assessee that the payments in question were not chargeable to tax in India in the hands of the recipients in terms of the DTAA between UK and India and that the same were taxable in UK only, and, thus, there was no violation of section 40(a)(i). The Assessing Officer was of the view that since admittedly no tax had been deducted or paid in respect of the payments made outside India to non-residents, the claim for deduction of those payments as expenditure was to be disallowed in view of the provisions of section 40(a)(i). On appeal, the Commissioner (Appeals) held that the payments in question were in the nature of royalty and fees for technical services rendered and taxable in India even as per the IndoUK DTAA. Accordingly, the Commissioner (Appeals) affirmed the disallowance.

iii.

iv.

v.

vi.

Issue Whether the payments in question were liable to tax in India in terms of India-UK DTAA and whether the A.O. was justified in invoking the provisions of section 40(a) (i) of the Act? Decision On appeal, the Tribunal held as under: 1. A perusal of the MoU clearly revealed that for a fee to be called fee for technical services rendered, it is essential that technical knowledge, skill, know-how should be made available to the assessee and the assessee should be at liberty to use them in his own right. The services referred to in the instant case did not result in making available any technical knowledge, experience, skills, know-how or process to the assessee. That was essential before it could be said that the payments made by the assessee to the non-residents were fees for technical services rendered.

2. The nature of work carried out by the non-residents involved making assessment surveillance for the purpose of ISO certification. The said service could not fall within the ambit of fees for technical services as defined in article 13(4) of the Indo-UK Treaty. 3. As far as the applicability of Article 15 was concerned, the same was relevant only in the case of audit fees paid to P In view of nature of services rendered by P it could be concluded that those were professional services. Those were not technical services. There is a marked difference between fees for technical services and fees for professional services. Professional services are a category distinct from technical services. Even under the provisions of section 194J requiring deduction of tax at source, the definition of professional services includes the legal, medical, engineering, accountancy, technical consultancy and interior decoration, whereas the expression fees for technical services as given in Explanation 2 to section 9(1)(vii) does not include within its fold the professional services as explained in section 194J. 4. Since the amount paid to P was in the nature of fees paid for professional services, the same could be taxed in India only if the person rendering the service stayed in India for a period 18

aggregating 90 days during the relevant fiscal year or he had a fixed base regularly available to him in India for performing such activities. It was not the case of the revenue that the nonresident, i.e., P was present in India for a period aggregating 90 days or had a fixed base in India. Therefore, the remuneration paid to him was outside the scope of fees for technical services, but was in the nature of fees for professional services not taxable in India. 5. The next point for consideration was as to whether the payment could be said to be business profits for the non-residents which had accrued to them in India and, therefore, was taxable. A perusal of Article 7 of the Indo-UK DTAA will reveal that the profits of the non-resident which accrue in India are taxable only in UK unless the non-resident carries on the business in India through a permanent establishment constituted in India. It was not the case of the revenue that the non-residents in the instant case had a permanent establishment in India. Therefore, the business profits could not be taxed in India in view of the provisions of Article 7 of the said DTAA. It was, therefore, to be held that the amounts paid by the assessee to the non-residents were not chargeable to tax in India and, consequently, there was no obligation on the part of the assessee to deduct tax at source. Consequently, the provisions of section 40(a)(i) were not attracted. 6. In view of the aforesaid, the revenue authorities were not justified in disallowing the assessees claim for expenses in question. The disallowance made was, therefore, to be deleted. 49. Sinar Mas Pulp & Paper (India) Ltd [Payment for feasibility report-held to be FIS] 85 TTJ 794 (Del) The assessee intended to raise a loan in the international market and for that purpose, it was required that the appellant had to get an independent assessment of its project done by a reputed consultant. The appellant chose M/s. Jaakko Poyry Pte. Ltd. Singapore to make independent assessment of the project and to prepare a bankable report. Payment for such a feasibility report held to be fees for included services. The report was designed to be used for the presentation of the project to financial institutions. CESC Ltd. vs DCIT 275 ITR 15 (Kol ITAT) [Make available-UK-FTS-Compared with USA] Mott Ewbank Precee of UK, (MEP) was appointed as technical advisor of the financial institutions & CESC (Indian Company) in connection with power project in India. As per agreement CESC was to pay 52000 UK Pounds for services rendered and reimbursement of expenses. The issue arouse was whether amount paid to MEP was 'technical fees' whether it was fees for technical services as per India UK DTAA. Tribunal held that India US DTAA being 'pari materia' to India UK DTAA provision in this regard, it is to be given the same meaning. The amount was held as not taxable in India and therefore no TDS was required to be deducted by the Payer. 51. National Organic Chemical Industries Ltd. [Make available Swiss DTAA] vs. DCIT (Mum. ITAT) 96 TTJ 765 RCC Registration & Consulting Company Ltd., a Switzerland company received payment for preparation of material safety data sheets. Under the India Swiss DTAA the services would be covered by article 12 only if the services fall under the category of "make available". The services were considered as not being covered under the article 12(4). The assessee got the product as a result of the services. There for there was no liability to deduct the tax under section 195.

50.

19

52.

Another payment was made to Techniship SA, a France company as fees for technical services for A.Y. 1996-97. The issue was whether the India US DTAA rate of taxing royalty income at 15% would apply under India France DTAA. In terms of the India France DTAA, if India agrees to a tax rate, which is more beneficial than the India France DTAA, under DTAA with any other OECD countries, then such a rate would apply. The CBDT notification 650(E) dated 10/7/200 also recognized this fact. Hence rate of 15% was held to be applicable in respect of fees for technical services. Gentex Merchants Pvt. Ltd. [Make available- Designs-USA-taxable] 94 ITD 211 (Kol) M/s Wet Enterprises Inc. (WEI), a USA company entered into agreement with the appellant, who was the owner of the property at Delhi. WEI was to give advice, provide design and interact with the Project consultant to review the drawings and documents and provide other services etc. for development of water features at the premises. Assessing Officer held that the consultancy charges payable by the appellant to WEI was fees for technical services and liable to tax at 15% as per India US DTAA. The CIT(A) confirmed. The fact on the record clearly indicated that under the agreement the non-resident company was required to deliver such technical designs or plan for the sole use by the assessee company in India.Tribunal also confirmed that the amount was fees for technical services as it was make available and squarely fall under Article 12(4)(b)of the DTAA.

53.

Hindalco Industries Ltd. [Interpretation of Article 12(5)(a) of India-USA DTAA] [2005] 94 ITD 242 (Mum) The main issue requiring our adjudication in these appeals is as to whether or not the training fees paid to a US based company, which is said to be integral to the purchase of know-how from that company, is taxable in India. The assessee's core contention is that in view of the scope of art. 12(5)(a) of the India USA Double Taxation Avoidance Agreement, the same is not taxable in India. "whether the training could be considered to be the service that is ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how" would indicate that in case the training of personnel, is held to be inextricable and essential part of purchase of know-how, the related fees will be covered by the exclusion clause set out in art. 12(5)(a) and, accordingly, not exigible to tax in India. The easily discernible common thread in all the transactions visualized in art. 12(3)(a) is that all these transactions are such that when sale takes place by the resident of one Contracting State to the resident of the other Contracting State, consideration of sale is taxable under art. 12 in the source country as well. Article 12(3) (a) and (b) only define as to what constitutes 'royalties' and art. 12(2) provides that 'royalties' and 'fees for included services' arising in a Contracting State and paid to the resident of the other Contracting State may also be taxed in the Contracting State in which they arise, i.e., in the source country, though subject to certain restriction on the rate of tax. It is thus clear that when the principal sale itself is subjected to tax in the source country, the services which are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property, are also subjected to tax in the source country. The said principle is also implicit in art. 12(4)(a) which provides that consideration for rendering any technical or consultancy services, where such services are ancillary and subsidiary to the application or enjoyment of the right, property or information which is covered by the definition of 'royalty' in art. 12(3), is also includible in the 'fees for technical services' and accordingly liable to be taxed in the source country. The scheme of the tax treaty, so far as royalties and fees for technical services (termed as 'fees for included services' in the India US tax treaty) is clearly like this. When principal transaction itself is such that it involves taxability in the source country, the transactions 20

subsidiary and integral to such a transaction also give rise to the taxability of subsidiary transactions in the source country. On the other hand, when principal transaction is such that it does not generally give rise to taxability in the source country, the transaction subsidiary and integral to such a transaction also does not give rise to taxability in the source country. In other words, the subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation. That is the intent and purpose, in our understanding, of the provisions of art. 12(5)(a) and it is in this background that we have to interpret the contextual meaning of the expression 'property' in the exclusion clause set out in art. 12(5)(a). A careful reading of art. 12(5)(b) also shows the underlying scheme of the Indo US tax treaty to the effect that when the principal transaction itself is not leading to taxability in the source country, a transaction subsidiary and integral thereto is also not taxable in the source country. Article 12(5)(b) provides for exclusion of services which are ancillary and subsidiary to the rental of ships, aircraft, containers and other equipment used in connection with operation of ships or aircraft in international traffic. The principal transaction in this case is the operation of ships and aircraft in international traffic, but, under art. 8 of the Indo US tax treaty, the profits derived from operations of ships and aircraft are only taxable in the country of fiscal domicile, and 'source rule' has no application on such profits. Since main activity itself does not lead to taxability in the source country, but is taxable only in the country of domicile, the same principle also applies on the services subsidiary and integral to the main activity. The principle thus is that the subsidiary and integral transactions have to take colours from principal transaction itself and are not to be viewed in isolation, so far as taxability in the source country is concerned. There are only two clauses, so far as exclusion ancillary services from the scope of the fees for included services exigible to tax in the source country, in the treaty. In both these cases, the principle clearly is that when the main transaction is not exigible to tax in the source country, the subsidiary and ancillary transaction is also not exigible to tax in the source country. It is also relevant to note that normally sale of goods does not lead to taxability in the other Contracting State, unless the resident of the Contracting State has substantial and somewhat permanent presence in that country. This principle is clearly discernible from the scheme of taxability of business profits in almost all the treaties and from the fact that normally business profits are not taxed in the other Contracting State unless that enterprise (in) the Contracting State has a permanent establishment in the other Contracting State. It is a logical corollary to this well established principle that the payments for such services as are ancillary and subsidiary, as well as inextricably and essentially linked to such a sale are to be treated as an integral part of the sale and, accordingly, to be given the same status of taxability as the sale itself. The taxability, therefore, is not on the source rule which applies to the 'royalties and fees for technical services' but on the basis of substantial and permanent presence on the touchstone of principles for existence of the permanent establishment. Here matter was referred back to CIT (A) for determining whether the principal transaction i.e. Sale of know how was taxable or not. 54. Pro-quip Corporation [255 ITR 354] [AAR][2002] But if, as in this case, there is an out and out sale without any contingent Clause then even if such sale included rendering of engineering services, those Services cannot be anything other

21

than services that are ancillary and Subsidiary as well as inextricably and essentially linked to the sale of Property in paragraph 5. Re-imbursement of Expenses 55. Thai Airways International Ltd. v. ACIT 98 ITD 123 (Delhi ITAT) Thai Airways International Ltd. (TA) made certain payments take refreshment expenses, shift allowances, transport expenditure, laundry expenses, bonus, estimated payment to expatriate employees & air tickets to its employees without deduction of tax AO passed an order 201(1) holding TA to be assessee in default & levied interest U/s. 201(1A). TA claimed it was under bonafide belief that payments were in nature of reimbursements & no TDS was required. The payments were not made when actual expenditure was incurred but on assumption that employees would be incurring the expenditure hence the amount was not exempted in hand of employees. Following decision in case of Indian Airlines 59 ITD 353 (Bom), TA was not considered as assessee in default as acted bonafide. Transport allowance was considered as exempt U/s. 10(14), however free air tickets was not exempt and liable to TDS and interest was chargeable U/s. 201(1A). Appeal against 201(1) was allowed & 201(1A) was partly allowed. 56. Danfoss Industries Ltd., In re [2004] 268 ITR 1 Held that the applicant was liable to pay for services to be provided by a non-resident which was equivalent to the expenses incurred in providing the services even when there is no profit element. This view was again reiterated in AAR of Timken India Ltd 273 ITR 67. 57. Timken India Ltd. (AAR) No. 617 of 2003 193 CTR 610[Reimbursement-FTS] Timken India Ltd., (TIL), an Indian company is a subsidiary of US company Timken Company (US Co.). TIL is engaged in business of manufacturing of bearings and other ancillary products. US Co. agreed to provide certain services to TIL outside India on cost basis without any markup. US Co. raised several invoices while remitting the sum issue arose whether the fees receivable by US Co. was fees for technical services and liable TDS u/s 195. Assessee argued that as there was no profit element in has of US Co., considering Apex court decision in case of Sanyasi Rao It should not be subject to withholding. AAR distinguished decision of Sanyasi Rao and ruled that the said sum would constitute fees for technical services within meaning of section 9(i)(vii) and section 44D read with 115A, provide gross basis of taxation in respect of such fees in hands of non resident corporate assessee. Usance Interest v/s Purchase Price 58. Vijay Ship Breaking Corporation Ltd. [261 ITR 113][2003] (Guj) We are, however, for the foregoing reasons unable to subscribe to the view that the outstanding purchase price of goods is not a debt. The expression "debt claims of every kind" cannot, therefore, be whittled down to mere debt claim in the form of loans. The addition of the words "including interest on deferred payment of sales", in parentheses after the words "debt claim of every kind" in the DTAAs with Indonesia (reproduced in [1988] 171 ITR (St.) 27 at page 35) or the words to the same effect in the DTAA with Philippines (reproduced in [1996] 219 ITR (St.) 60), is, in our view, only explanatory and makes explicit what is implicit in the phrase "debt claims of every kind", to prevent unnecessary arguments of the type raised by these assessees. The usance interest paid by the assessees was not any part of the purchase price of the ships and was interest within the meaning of the definition of the term "interest" under section 2(28A) of the Income-tax Act, 1961. 22

Article 5: Permanent Establishment

Basics of PE 59. Visakhapatnam Port Trust [144 ITR 146] (AP) In our opinion, the words "permanent establishment" postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country, which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country. 60. Subsea Offshore Ltd. [1998] 66 ITD 296 A foreign vessel, which was in Indian waters only for 2 months, could not be said to be a PE. STEEL AUTHORITY OF INDIA LTD. VS. ASSISTANT COMMISSIONER OF INCOME-TAX [2007] 105 ITD 679 (DELHI)

61.

A German company had been providing technical supervisory services to 'SAIL' which applied to Assessing Officer seeking authorization to remit certain amount after deduction of tax at the rate of 10 per cent under section 44D r.w.s. 115A. Assessing Officer held that assessee had permanent establishment (PE) for period exceeding six months in India and it was held that applicable rate of withholding was 30% and not 10%, as the receipt was taxable under article 7 and not under article 12 of DTAA. ITAT held that in view of provisions contained in article 7 of DTAA, income of assessee was liable to be computed in accordance with provisions contained in section 44D and tax at source was liable to be deducted at rate of 30 per cent of gross payments made to assessee. An Installation or structure used for exploration of natural resources 62. Brown & Root Inc [103 Taxman 515][AAR] In our opinion, the contention that the installation of gas pipeline clearly falls within the scope of other clauses such as (a) would militate against the well-established principles that a specific provision will override a general one and that the assessee/subject is entitled to invoke the provision most beneficial to him be they the provisions of a treaty or statute. Since the activity falls short of 120 days, the applicant could not be said to have a PE in India. The element of permanence in relation to an establishment, if any, would be attracted under article 5(2)(k) only if the installation project continues for a period of more than 120 days and that condition is not satisfied here. It is not disputed that the earnings from the work performed by BRI constitute business profits. However, in the absence of a PE, article 7 of DTAA would not be attracted. As such, there is no tax liability on BRI for the business profits earned by it.

Business connection 63. ACIT vs. DHL operations B.V. [Business connection-HK Co.-liable for inbound parcel] [142 taxman 1 (Mum)(Mag.) Hong Kong Company 'D' which was engaged in the business of operating courier services entered into an agreement with Indian Company. Under the agreement Indian Company was to render services as forwarders, courier carriers, and transporters, of business documents and small parcels in India and 'D' was to render similar services outside India. Question arouse as to whether 'D' has any business connections in India and therefore liable to tax in India, during the period while the services were provided by the Hong Kong company and during the later period while its Netherlands subsidiary entered into similar agreement, 23

whether 'D' or its subsidiary was liable to tax considering DTAA provisions. CIT(A) held that 'D' was not having any business connection and not liable to tax in India. Tribunal held that the relationship between 'D' and Indian Company was continous & regular. There was an intimate and real relationship of a Business character, which contributed to earning of profit in their business. Under section 9(1) only such part of Business income as its reasonably attributable to the operations carried out in India was considered as accruing in India. The position would not change under DTAA as the Indian Company was considered as permanent establishment of Netherlands Company and was held as liable to tax in India in respect of receipts collected outside India for effecting delivery in India. However in respect of outbound parcels, 'D' was not responsible for non-delivery of parcels or any default to the consigners or did not receive any consideration. Based on these factors 'D' was held not liable to any tax in respect of outbound parcels under provision of Income Tax. Force of Attraction 64. Ishikawajima-Harima Heavy Industries Co. Ltd (AAR) [PE-Force of attraction] (271 ITR 193) The applicant was a non - resident company incorporated in Japan. It formed a consortium along with five other companies and was awarded a turnkey project to develop, design, engineer, procure equipment materials and supplies to erect and construct storage tanks including marine facility (jetty and island breakwater) for transmission and supply of LNG to purchasers, to test and commission the facilities. The off-shore supply of equipments and materials supplied from outside India was received by the applicant by credit to a bank account in Tokyo and the property in the goods passed to Petronet on high seas outside India. The price of off-shore services for design and engineering including detailed engineering in relation to the supplies, services and construction and erection and the cost of any other services to be rendered from outside India, was also paid in US Dollars in Tokyo. It was held by the authority that in connection with the offshore supply, certain operations were inextricably inter-linked in India, such as, signing of the contract in India, `which imposed liability on the applicant to procure equipment and machinery in India and receiving, unloading, storing and transporting, paying demurrage and other incidental charges on account of delay in clearance. The price of the goods covered not only their price but also of all these operations which were carried out in India and from which income accrued to the applicant. Therefore, so much of the amount received or receivable by the applicant would be taxable in India as is directly or indirectly attributable to the permanent establishment as postulated in Paragraph 6 of the protocol. Further, that the price of the off-shore services would be deemed to accrue or arise under section 9(l)(vii) of the Income-tax Act 1961 and inasmuch as fees for technical services were specifically provided in Article 12 of the Convention, they would not fall under Article 7. Therefore, the price of the off-shore services were taxable in India under the Act as well as the Convention and tax was payable at the fixed rate of 20 per cent of the gross amount of fees for technical services and the applicant would not be able to claim any deduction from the gross amount. 65. Ishikawajma-Harima Heavy Industries Ltd. vs DIT [158 Taxman 259 (SC)]

Ishikawajma Harima Heavy Industries Ltd (IHHIL), a company incorporated in Japan formed a consortium and entered into agreement with 'P' for setting up Liquified Natural Gas receiving storage and degasification facility in India, a turnkey project. The contract involved (i) offshore supply (ii) offshore services (iii) onshore services (iv) onshore supply and (v) Construction and erection. The consideration for offshore supply & offshore service was payable in US Dollars and other partly in Indian Rupees & Partly in US Dollars. 24

Advance Ruling authority earlier in this case ruled that (1) Amount receivable for offshore supply was liable to be taxed in India under India-Japan DTAA as well as under section 9(1)(i), So much of the profit as it is reasonably attributable to operations carried out in India and (2) Amount receivable for offshore supply of services was who liable to tax in India similarly. Apex Court held that, the turnkey contract need not mean that it is integrated one for tax purpose also. Supply of equipment was on high seas basis and title transferred upon delivery outside India. On the Basis of territorial nexus doctrine, such part of income as it is attributable to operations carried out in India would be taxable in India. There existed a permanent establishment of IHHIL in India, due to construction & erection work, however PE had no role in respect of offshore supply of services. There was no profit attributable to PE in respect of offshore services. Section 9(1)(vii)(c), provide two conditions for taxability of income in India, services which are source of income have to be rendered in India and utilized in India. IHHIL provided services to person resident in India and the same have been used in India, but have not been rendered in India, hence not liable to be taxed in India.

Liaison office 66. Rolls Royce Plc [Indian subsidiary-doing liasioning no authority to conclude-no PE] 148 TAXMANN 66 (DELHI TRIB) (MAG) I. Section 9, read with section 147, of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India - Assessment year 2001-02 - Assessee, a foreign company, entered into a contract in India for selling aircrafts and other spares accessories to an Indian company during financial year 2000-01 - Assessing Officer observing that income from said transaction had accrued to assessee during assessment year 2001-02 but assessee did not file return in India for income earned from said contract, re-opened assessment of said year - Whether in view of fact that contracts were executed in India, it could reasonably be concluded that income had accrued to assessee in India and was, therefore, chargeable to tax in India - Held, yes Whether, therefore, Assessing Officer was justified in invoking section 147 - Held, yes II. Section 9 of the Income-tax Act, 1961, read with article 5 of the Double Taxation Avoidance Agreement between India and U.K. - Income - Deemed to accrue or arise in India Assessment year 2001-02 - Assessee, a foreign company, entered into an agreement with its subsidiary company for rendering services in India which were in nature of liaisoning activities - Assessing Officer concluded that assessee through subsidiary had Permanent Establishment (PE) in India and its income chargeable to tax in India - Whether since said subsidiary company neither had authority to negotiate or conclude contracts on behalf of assessee and nor did it habitually exercise such authority on behalf of assessee, it could not be said to be PE of assessee in India - Held, yes - Whether since assessee did not have a PE in India, its business income was not chargeable to tax in India - Held, yes

67.

Gutal Trading Est. [Liaison Office can not earn income in India] AAR no. 634 of 2004 198 CTR 417 Gutal Trading Est. (Gutal) based in Dubai is an agent of various GVB group of companies located in various countries. Gutal's legal status is 'Individual Establishment', being owned by local national Shri Matar Mohd. Matar who is a NRI. Gutal established a liaison office in India to provide information and trade enquiries to GVB group of companies. Question arouse whether activities of Liaison office would contribute to the earning of income outside India, 25

therefore liable to tax in India. Held as individual is not liable to tax in UAE, the applicant is not entitled to claim benefit from DTAA. Liasion office cannot enter into negotiation with customer in India therefore it cannot be considered to have business connection in India and therefore not liable to tax in India.

Service PE
68. Morgan Stanley and Co. Inc. AAR no. 661 of 2005. 284 ITR 260 Morgan Stanley and Co. Inc. US, set up a wholly owned subsidiary in India. Morgan Stanley Advantage Services P. Ltd. (MSAS) to render support services such as IT support, account reconciliation research etc. MSAS did not undertake revenue generating functions of US Company or bear significant market risk. MSAS also developed computer programme of critical importance to parent company. The consideration for the services rendered by MSAS was paid on cost plus agreed mark up, and the profit margin of MSAS on TNMM method was 29%. Question before the AAR was whether MSAS be treated as PE of the US Company or whether deputation of employees to MSAS could result in considering them as PE. AAR ruled that MSAS was not carrying out business of US Company hence Article 5(1) was not attracted. Employees of US Company could not result in MSAS being considered as agency PE of the US Company. The employees may carry out the key managerial activities of MSAS and once their stay in exceeds 90 days would constitute a PE of US company in India AAR did not deal with the question whether 29% margin would meet arm's length test and the valuation of intellectual property & other services provided by MSAS. AAR observed that having regard to the context of first provision to Section 245R(2) the term 'question' would mean a 'point of investigation' or 'theme enquiry'.

Agency PE
69. Western Union Financial Services Inc. vs. ACIT 101 TTJ 56(Delhi) Western Union Transfer Services Inc.,(WUFS) a US company engaged in business of rendering money transfer business rendering cross boarder money transfers through agents in India. WUFS had appointed Post office, banks, NBFC etc. as its agent to complete the transaction of remitting money on behalf of its clients who wants to transfer money in India. WUFS also had liaison office(LO) in India. Issue arose was whether WUFS had permanent establishment in India and whether any profits can be attributable to the PE and if so what will be the percentage of such profits. On examination of the facts the Tribunal held that mere use of software by the agents in India can not lead the premises cum software as PE of the WUFS. The activity of the LO was auxiliary and preparatory character. Hence there was no fixed place PE in India. On question of agency PE, the Post office or the Bank or NBFC were not dependant agent. The services provided by the agents were also in the ordinary course of their business. The agents were not having authority to conclude the contract. There fore there was no PE in India and no profit was attributable for the services rendered in India. 70. Morgan Stanley & Co. AAR [Dependent Agency] [2005] 272 ITR 416 (AAR) 26

Some good principles established: There is no merit in the plea of the Commissioner that the difference between ''dependent" and "independent" agents has to be seen from the perspective of the "principal" and not from that of "agent". In our view for a proper understanding of the deeming provisions contained in paras. 4 and 5 of article 5, they have to be read together. Para 4 deals with a person other than an agent of independent status to whom para. 5 of the article applies. We shall, therefore, refer to the basic features of para. 5, as mentioned above. It contains a deemed non-inclusion clause and provides that an enterprise of the Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status provided such persons are acting in the ordinary course of business. This is clear enough. However, this exclusion clause, is subjected to an exception, namely, where activities of such an agent are wholly or almost wholly devoted for the enterprise or controlling enterprise. In such a situation such a person shall not be considered an agent of independent status. The test is objective and has two limbs. The first limb requires that such persons shall be agents of an independent status acting in the ordinary course of their business and the second requires that the activities of such persons shall not be devoted wholly or almost wholly for the enterprise. The activities referred to therein are those of the broker, general commission agent or any other agent and not of the enterprise. The purpose is to exclude agents who though acting in the ordinary course of their business, are devoted entirely or almost entirely to the work of the enterprise. This implies that they have little work of other enterprises. If properly understood there is no scope to exclude from paragraph 5 "agents" whose activities in the ordinary course of their business not only cover wholly or almost wholly the work of the enterprise but also include work of many other enterprises who are also their clients. In other words only such agents will be out of the purview of para. 5, whose ordinary course of business comprises exclusively the work of the enterprise with little work of any other client; like the standing counsel or law officers of Central/State Government.

It may be pointed out that para. 4 is couched in very wide language, to take in its fold a person other than an agent covered under para. 5, which includes a dependent agent. But merely because an agent does not satisfy the test embodied in para. 5, he does not per se become a dependent agent so as to be called deemed permanent establishment under para. 4. For bringing a person within the meaning of permanent establishment under para. 4, the following conditions will have to be satisfied : (i) a person must be acting in a Contracting State for and on behalf of an enterprise of the other Contracting State; (ii) such a person must be other than an agent of an independent status to whom para. 5 of article 5 applies. The aforementioned two conditions are the qualifications of the person referred to in para. 4. In addition the activities of such a person should fall under any one of the three clauses ((a) to (c)) of para. 4. On the mere ground of an agent not being an independent agent falling under para. 5, he cannot be brought within the meaning of deemed permanent establishment under para. 4 as a dependent agent if he does not satisfy the requirements of clauses (a) to (c) thereof.

27

71.

Speciality Magazines (P) Ltd. (AAR) [Dependent Agency PE] 194 CTR 108 Speciality Magazines (P) Ltd. (SMPL) an Indian company, was the advertisement concessionaire of the UK company, The Economist Newspaper Limited (TENL), which was engaged in publishing the magazines from UK. SMPL secured advertisements on behalf of TENL and entitled to 15% commission on the gross value of the invoices raised on Indian company, directly by TEML outside India. Issues before the Authority were: whether the advertisement revenue was income deemed to accrue or arise in India, whether SEML was liable to deduct the TDS under section 195, whether the advertiser should deduct the tax, if the tax is to be deducted then at what is the withholding rate to be adopted. Based on the activities involved and the nature of the trade AAR came to a conclusion that the TEML has business connection in India. While examining the India UK DTAA provisions issue was whether SMPL was dependant agent. The Authority came to a conclusion that in terms of percentage "almost wholly dependant" would mean anything more than 90 per cent. SMPL was earning 75 to 78 per cent from TENL, hence was not considered as a dependant agent. As a result SMPL was not considered as PE of TENL in India, hence the income was not liable to tax in India. Other questions were not answered by the Authority.

72.

Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 (SC), Their Lordships of the Supreme Court pointed out the distinction between an agent, a servant and an independent contractor and quoted the following passage from Halsbury's Laws of England (Hail-sham Edn., Vol. I, p. 193, para 345), as follows (p. 456 of 25 ITR) : "An agent is to be distinguished on the one hand from a servant and on the other from an independent contractor. A servant acts under the direct control and supervision of his master, and is bound to conform to all reasonable orders given to him in the course of his work; an independent contractor, on the other hand, is entirely independent of any control or interference and merely undertakes to produce a specified result employing his own means to produce that result. An agent, though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in his exercise to the direct control or supervision of the principal."

Business Profit v/s Capital Gain 73. Fidelity Advisor Series viii (AAR) (271ITR 1)[Business profit v/s Capital gain] The applicant, an investment company, registered in USA, obtained registration with SEBI as an Fll. It invested in listed Indian companies through global custodian, which appointed domestic custodian to hold shares. The applicant had made many sale and purchase transactions in respect of shares. On the facts, the Authority ruled that having regard to the object of the applicant company, the amount of investments in India, the registration with SEBI, obtaining Fll license and the enormity and frequency of purchases and sales, the applicant held shares and securities as business assets and profits from the same were in the nature of business profits, and, therefore in absence of dependent agent, and in view of Article 7 of the DTM with USA, such profits could not be taxed in India.

28

Attribution of profit to PE 74. SET Satellite (Singapore) Pte Ltd. vs. DDIT ITA No. 205/Mum/04 (Mumbai Tribunal) SET Satellite (Singapore) Pte Ltd. (SET) a Singapore company engaged in the business of broadcasting television channels. SET appointed an agent in India, for collection of advertisements which constituted its dependent agent PE. SET paid arm's length remuneration to the agent. SET contended that as the dependent agent was being remunerated at ALP, no further profits of the PE should be taxed in India. Issues arose were Once the Indian company has been paid an 'arm's length price' for the services rendered to the foreign company, can any further income, other than the remuneration paid to dependent agent, be attributed to the PE and be taxed in India? Whether the tax-payer, being a non-resident and the entire income being subject to tax deduction at source under section 195, was liable to pay interest under sections 234B and 234C Relying on the OECD Report on "Attribution of Profits to PE" and Australian Tax Office paper on "Attribution of Profits to Dependent Agent PE", A.O. contended that even though the tax-payer had remunerated the agent at an ALP, it could not be said that no further profits of the tax-payer were taxable in India. The Tribunal held that mere payment of arm's length remuneration to the dependent agent does not extinguish the tax liability of the tax-payer in India. The Tribunal held that dependent agent and dependent agent PE are two distinct taxable entities. What is defined as a dependent agent PE is not the dependent agent, per se, but, on the contrary, it is by virtue of an enterprise having a dependent agent that the enterprise is deemed to have a PE. Therefore, the profits attributable to the PE, in accordance with Article 7 of the treaty, are the profits of the foreign company and not that of the dependent agent. The Tribunal further held that since SET was a non-resident and its income was subject to deduction of tax at source under the provisions of section 195 of the Act, it was not liable to interest under sections 234B and 234C of the Act.

75. 76. 77.

Annamalais Timber Trust v. CIT 41 ITR 781 (Mad) Bertrams Scott Ltd 62 CTR 11 (Cal). P. No. 13 of 1995 (228 ITR 487) AAR held that in case of existence of a PE, only the profits attributable to such PE and not the entire profit is taxable in the state in which a PE exists. Saudi Arabian Airlines (155 ITR 65) (Bom) The application of section 44C was not warranted where the computation was made under Rule 10(ii) of the Rules. MC Dermott ETPM Inc. vs. DCIT 92 ITD 385 (Mum).[Attributable to the operation in India]

78.

79.

29

MC Dermott ETPM Inc., a non resident company was engaged in the business of designing, fabrication, construction, and installation of platforms, decks pipelines, jackets, and various other similar activities. Various activities carried out India for A.Y. 1993-94 consisted of mobilisation / demobilisation and transportation of marine spread to offshore India and installation of structures & pipelines at oilfield in continental shelf of India A.O. held that assessees business activities were covered under section 44BB and levied tax @ 10% of gross receipts. Assessee contended that it carried the activities as a sub-Contractor to main contractor and income from continental shelf & exclusive economic zone was not covered under CBDT's notification dated 31-3-1983. Since the notification was related to the activities of prospecting for exploration and/or production of mineral oil and the assessee was not engaged in that. Assessee argued that it was taxable only at 1% of gross receipts in respect of such work in terms of explanation to section 9(l)(i) and CBDT circular of 1987, which clarified that in case of work arrived at outside India only 1% of the gross receipts would be attributable to the activities in India. It was held that activities carried on by assessee were not covered activities contained by notification dated 31-3-1983. as per explanation to section 9(l)(i) only that part of income which can be reasonably attributable to operations carried out in India shall be deemed to accrue or arise in India. Hence only part of mobilisation and demobilization work which was attributable to operations carried out by the assessee was taxable in India.

80.

Caribjet Inc. [Income accrue in India-no books maintained-estimation upheld] v/s. DCIT 4SOT 18 (Mum) Caribjet Inc. (Caribjet) a company incorporated in Antigua & Burbuda, West Indies, entered into wet leasing agreement with Air India (AI), Caribjet contended that only proportionate income which accrued or arising in India should be assessed u/s. 44BBA Assessing Officer levied tax on the entire income as accrued in India under normal provisions of the Act, since no regular books of accounts relating to the operations in India were maintained. The income was estimated at 29.7% based on Arbitration Award given by the International Court of Arbitration to settle dispute with AI. Tribunal upheld the order of Assessing Officer and held that estimate of income was not erroneous or arbitrary. Wet leasing and dry leasing are fundamentally the same. Wet leasing of aircraft is different from dry leasing of aircrafts inasmuch as in wet leasing, the lesser used to shoulder some additional responsibilities. Such additional responsibilities may include providing of crews, responsibility towards repairs and maintenance, botheration on other technical, navigational and operational activities. These additional responsibilities undertaken by lesser/operators are in fact in the nature of Value Added Services. On the other hand, they do not make any fundamental distinction between dry leasing and wet leasing. The basic context and colour of both the transactions is nothing but leasing. It was has held that wet lease; i.e., supply of aircrafts on lease along with the required staff, was no different from a dry lease and the same was not a "business of operation of aircraft" taxable u/s 44BBA of the Income-tax Act. Thus non resident would be taxable as per the regular provisions of sections 28 to 44 of the IT Act. It is pertinent to note that the issue whether consideration for wet lease falls within the definition of "Royalty" was not raised before ITAT in this case.

Deductibility of expenses to PE 81. ABN Amro Bank NV [Interest paid by PE to HO not deductible] vs. The Asstt. DIT International Taxation - I, Kolkata
97 ITD 89 (Kol)(sb):

30

ADIT International Taxation-I, Kolkata vs. Bank of Tokyo Mitsubishi Ltd. ITA No. 899/KOL/2002 (Assessment Year 1992-93) 2005-TIOL-181-ITAT-KOL-SB Facts The assessee-bank, incorporated in Netherlands having its original office at Singapore , carried on banking business in India through its branch (PE). PE had been paying/receiving interest to and from its head office and /or other branches outside India from year to year. In the relevant two years, it claimed interest paid to head office as deduction. The assessee had not deducted tax at sources as per provisions of section 4(a)(1) on such payment under the impression that it, being the same person, was not required to do so. According to the Assessing Officer, however, branch of assessee in India constituted a separate taxable entity different from head office and other branches located abroad as far taxation was concerned and, therefore, on any payment of interest to head office and other branches located abroad, the tax was deductible and assessee having failed to so deduct, the interest was not allowable . He added the same to its income accordingly . On appeal, the Commissioner (Appeals) upheld the impugned order. Decision The Honble Tribunal held The proposition of law is well settled that nobody can make profit out it self nor can trade with self nor earn from self. The contention of the assessee on the first limb of the question, i.e., by virtue of deeming fiction by article 7.3(b) of DTAA, the interest paid by the PE to the head office, in case of a banking enterprise, was an allowable deduction, had no force. Article 7.3(b) prohibits the allowance of certain expense. It, however, specifically excludes interest paid by PE from disallowable list. It, thus, only makes it evident that interest is not disallowable under article 7.3(b) of DTAA and nothing more. The deductibility of the interest payment by PE/ branch to head office or other branches outside India is dealt with by clause (b) of article 7.3 of DTAA. By the mere fact that a particular expenditure is excluded from the list of disallowable items, it does not ipso facto mean that it would be allowable. The deductibility of interest paid by branch in India to the head office is to be seen by looking to other provisions of the treaty or the local law. The payment of such interest may be included in the expense allowable including executive and general expenses by virtue of provisions contained in article 7.3(a) of DTAA. The article 7.3(a) provides that in determining the profit of a PE, there shall be allowable as deduction expenses which are incurred for the purpose of the PE, including executive and general administrative expenses so incurred whether in the State in which the PE is situated or elsewhere in accordance with the provisions of and subject to the limitations of the taxation laws of that state. Interest is not specifically included in the expenses to be allowed in determining the income of the PE. Even if it is included within its purview, then the deductibility has to be in accordance with the provisions of local law and subject to the limitations provided therein, like as provided in section 44C, etc. it has to be judged from the point of view of local laws. Looked at from that point of view, the local law does not allow any deduction of the payment of expenditure to self. Nor it assumes the interest receipt from self through a branch or PE as its income and charges it to tax. As there was only one assessment in the case of the assessee-bank both for the profit earned by the PE as well as the income earned by the head office in India, the result would be that on one hand, an expenditure by way of payment of interest by PE to head office would be allowable as a deduction and on other, the receipt by the head office from PE would have to be charged to tax because the interest had been earned by and arisen and accrued to the head office in India. Result would be same in both cases, i.e., the income or expense was nil in the first case because no profit is earned from self and, therefore, nothing accrued and in the second case again nil by allowing deduction of payment of interest by PE to head office and assessing the receipt of interest in the head office being receipt of income by head office

31

from

PE.

As regards the second part of the question as to whether the provisions of section 40(a)(I) were attracted in respect of such payment of interest, the branch/PE of the assessee in India was not a person in legal terminology. The person was the corporate body/bank and not its branch or the PE, which was also evident from the fact that assessment was made on the corporate body and not on its branch or PE. Therefore, there was force in the assessees contention that the provisions dealing with deduction of tax at source under section 195 presupposes the existence of two distinct and separate entities which was absent in the instant case. On both the grounds, therefore, section 40(a)(I) did not come into play. Therefore, disallowance of interest by invoking the provisions of said section would not be justified. There was also force in the submission of the assessee that the interest paid was not the income of the assessee on the ground that no income did arise from self and, consequently, interest paid by PE to head office was not chargeable under the provisions of Act which was a condition precedent for invoking the provision of section 195 and also on the ground that payment by PE was cancelled by the receipt by the head office of the assesseeenterprise, in case if the PE was considered as a separate entity than the head office of the assessee-enterprise. The Circular No. 740, dated 17-4-1996 opines in the first part that the "branch of a foreign company/concern in India is a separate entity for the purpose of taxation. Interest paid/payable by such branch to its head office or any branch located abroad would be liable to tax in India and would be governed by the provisions of section 115A. If the double taxation avoidance agreement with the country where the parent company is assessed to tax provides for lower rate of taxation, the same would be applicable". To that extent, the circular lays down correct state of law. But its subsequent observation in the second part that "consequently, tax would have to be deducted accordingly on the interest remitted as per the provisions of section 195" are not in accordance with law particularly in view of the fact that the head office and PE are the two wings of the same person and they are not separate and independent taxable entities. It was a payment to self and the same did not require any deduction of tax under section 195. Consequently, section 40(a)(i) would not apply entailing no disallowance of interest allowable under section 7 of DTAA. In the case of Bank of Tokyo Mitsubishi Ltd. appearing in ITA No. 899/Kol/2002 Facts The Indian office of the assessee, Japanese bank, made interest payment to its head office in Tokyo and other foreign branches without deduction of tax at source under section 195 for which default it was held liable under section 201 and was directed to make the payment by the Assessing Officer. On appeal, the Commissioner (Appeals) cancelled the impugned order.
Decision

On revenues appeal the Honble Tribunal held On a close reading of the provisions of various articles of the Japanese DTAA, it is found that clauses 1, 2, 5, 6. And 7 of article 7 of the same are similarly worded as clauses 1, 2, 4, 5, and 6 of Netherlands DTAA. Clause3 of the Japanese DTAA merely incorporates the first part of clause 3(a) of Netherlands DTAA and the proviso placing a restriction by the law of the state in which PE is situate are not incorporated. Again clause3(b) of Netherlands DTAA, which prohibits allowance of certain expenditure, is also missing in Japanese DTAA. There is no other material difference between the two treaties. There are no restrictive covenants in article 7 for allowance of expenses incurred for the purposes of PE either by the prefix of the words " 32

in accordance with the provisions of the law of that State" or by the suffix words "and subject to limitations of taxation laws of that State". This would be one of the other alternate reasons for not invoking the provisions of section 40(a)(i) for disallowing the payment of interest in computing the income of the assessee through the PE. However, in the instant case also, the deeming fiction of treating the PE as a different and separate entity dealing wholly independently with the enterprise in clause 2 of the article 7 of Japanese DTAA for the specific purpose of computing the income attributable to the PE and not for any other purpose would apply. Therefore, no tax was required to be deducted under section 195 from the payment of interest by the PE to its head office or other offshore branches of the assessee-enterprise and, therefore the order of the Commissioner (Appeals) in vacating the order under section 201 by holding that the assessee was not in default in deducting the tax at sources, was to be upheld.

Article 15: Expatriate Salary

82. Stanley Keith Kinnett, In Re. 238 ITR 155 (AAR) The remuneration which is actually paid by the indian company is ultimately reimbursed by foreign company (wc). Therefore, it cannot be said that the burden of payment of the remuneration was actually borne by a permanent establishment or a fixed base or trade or business located in India. Therefore, all the conditions laid down in art. 16(2) are fulfilled by the applicant on the basis of facts as stated by him. In view of the specific provisions of art. 16 Applicant is not liable to tax in india. 83. DHV Consultants BV, In Re- [ Exp. borne by PE ?] [2005] 277 ITR 97 AAR Where income of the Dutch company has been taxed in India , though on presumptive basis U/s 44D r.w.r. 115A , it has to be deemed that all revenue expenses ,including salaries paid by it to expatriate employees for running the PE in India are allowed as deduction and therefore, the conditions specified in Art 15(2)(c) of the DTAA between India & Netherlands is not satisfied. Learned counsel for the applicant pleaded that the word "borne by" is not defined in the IndiaNetherlands DTAA. However, this term is also used in the corresponding provisions of the article on dependent personal services in OECD, UN and US Model Conventions. Accordingly, in order to understand the meaning of this phrase, reference may be made to international tax commentaries. That examination of these commentaries indicate that the remuneration is said to be "borne by" a permanent establishment, if the same is deductible in computing the permanent establishment's taxable profits in the source country. Reference was made to the observations of the learned author Klause Vogel in his book Double Taxation Conventions that states as under: "Remuneration for dependent personal services is considered to have been borne by a permanent establishment or fixed base if it can be claimed as a deduction for business expenses when calculating the profits to be attributed to the establishment or base ... Whether the permanent establishment actually bears the cost of remuneration is decisive, not whether it should have done so or whether the cost should have been attributed to it..." Before parting it would be apposite to refer to the opinions of international commentators on the subject. "(i) The phrase 'borne by' must be interpreted in the light of the underlying purpose of subparagraph (c) of the article, which is to ensure that the exception provided for in paragraph 2 33

does not apply to remuneration that could give rise to a deduction, having regard to the principles of article 7 and the nature of the remuneration, in computing the profits of a permanent establishment situated in the State in which the employment is exercised. In this regard, it must be noted that the fact that the employer has, or has not, actually claimed a deduction for the remuneration in computing the profits attributable to the permanent establishment is not necessarily conclusive since the proper test is whether any deduction otherwise available for that remuneration would be allocated to the permanent establishment. That test would be met, for instance, even if no amount were actually deducted as a result of the permanent establishment being exempt from tax in the source country or of the employer simply deciding not to claim a deduction to which he was entitled. (ii) It may be helpful in arriving at a suitable result in cases of uncertainty to consider the goal of the provision, which is to compensate for tax revenue lost through the deduction of operating expenses in the State of employment. It seems, therefore, that the remuneration is to be taxed in the State of employment even when the permanent establishment bears its costs but the employer is resident in a third State (also, van den Hurk, H.T.P.M. 119 WFR 1229 (1990); differing, van Gennep, C.J.A.M. 118 WFR 1179 (1989)). Conversely, the condition laid down in article 15(2)(c) can be taken to have been satisfied, i.e., the remuneration thus being taxable only in the State of residence, if the enterprise actually maintains in the State of employment a permanent establishment that bears the remuneration, but where, by virtue of article 8 MC, the permanent establishment's profits are not taxable in the latter State. The reason is that in such a case, the deduction of the remuneration as business expenses does not adversely affect the State of the permanent establishment."

84.

CIT vs Elitos SPA [Expatriate-salary not borne by PE-not taxable] 145 Taxman 210 (All) Elitos SPA, (Elitos) an Italian Company had permanent establishment in India, accordingly, ONGC has deducted the tax at source while making payment to Elitos. Issue arose in respect of the taxability of the salary of nonresident employees of Elitos who were working in India. Elitos claimed that salary was not borne by permanent establishment in India and was not taxable in India in terms of Article 16(2)(b) of India Italian DTAA. Total receipts from India as per working given in terms of Indian currency was Rs. 8.49 lakhs against which expenses incurred by it in India on food, transport, hotel charges of employees was Rs. 11.92 lakhs. Salaries paid in Italy were Rs. 59.18 lakhs. Elitos claimed that this will prove its claim. Court accepted that salary received by employees were not liable to tax in India.

85.

Pride Foramer S.A. [Expatriates salary in India v/s Section 44BB] vs. ACIT Sp. Rg. Dehradun 97 ITD 86 (Delhi) ITAT Pride Foramer SA (Pride) a France Company had executed manning & management services contract with ONGC, for supervision of drilling services carried on by ONGC on its own rigs in India. Issue arose whether Pride was required to deduct tax on salary paid to expatriates whose stay in India did not exceed 183 days, on the ground that the salary was exempt under Article 14(2) of the DTAA. Tribunal held that pride had PE in India. Salary was included in 90% of the expenses allowed under section 44BB hence the condition under Paragraph (2) of the Article 14 was not satisfied.

86.

Kinetic Technology India Ltd [Expatriate Tax-Indian subsidiary agent U/s 163(1)] vs ITO 98TTJ90

34

Kinetic Technology India Ltd (Delhi) Indian company in which Kinetic Technology International B.V Netherlands had 50% share holdings. Mr. W.G. Holt was, Managing Director of the Indian Company. Mr Holt received salary in India as well as from parent company in Netherlands for services rendered in India. A.O held that the Indian Company was agent of Netherland Company u/s 163(1) and pass order u/s 201 treating Indian company as assessee in default. Delhi Tribunal held that the income was liable to tax in India and the orders under 201(1) & (1A) were sustainable as assessee was natural agent of the Netherland company. Tribunal restored the matter to the AO to grant reasonable opportunity of being heard under section 163(1) and pass fresh orders in accordance with the law. 87. Sedco Forex International Inc. [Expatriate-chargeable to tax in home country-proof] vs. CIT (Uttaran.) 147 Taxman 389 Sedco Forex International Inc. (Sedco) a Panama company, entered into an agreement with ONGC for drilling operations in offshore areas in India. It was taxed under section 44BB. Issue arose in assessment of employees of Sedco was, whether the salary was exempt from tax. Under India-UK, India-France DTAA the salary income in hands of employees was exempt under Article fifteen, dependent personal services, provided if three cumulative conditions were satisfied. The second condition was that the employer should be resident of the 'other state'. Court held that since Sedco was resident of Panama, this condition was satisfied. Third condition was that the employees should be chargeable to tax in country of their resident, for this condition assessee could not furnish any document, hence this condition was not considered as not being satisfied. Hence the salary income was held as liable to taxation. 88. DCIT vs. Sedco Forex International Drilling Inc. 103 TTJ (ITAT Delhi) The employee of Sedco Forex International Drilling Inc. UK, were paid salary during the off period. Off period was field break to undergo training by attending classes, attend on the spot demonstration, to update knowledge in latest techniques and getting ready for attending to the offshore drilling work at any part of the world. Hence off period which was a field break can not be considered as leave or rest period and section 9 (i)(ii) cannot apply. Delhi Tribunal held that therefore the salary paid for the field break was not taxable in India.

89.

R. Tomassoni vs. ACF I SOT 150 (Delhi ITAT) [Expatriate-Perquisite] Italian Company entered into agreement for rendering various technical services to Indian Company (CFCL) Italian Residents, technical personnel were appointed by Italian Company to provide services in India. CFCL provided perquisites like rent free accommodation, transport, chauffeur driven car, supply of water & Electricity etc,, to the technical personnel out of contractual obligation. Question arouse whether the perquisite was exempt under section 10(14), in hands of the employees. Tribunal upheld the CIT(A) order and confirmed that perquisite was chargeable to tax as income from other sources. Italian Company also contributed on behalf of the technical personnel to provident fund etc., in Italy under Italian law, question arouse whether the contribution was liable to tax as perquisite under section 17(2)(v), Tribunal held that the contribution was not liable to tax, However same was liable to be treated as salary in the year of receipt.

90.

Sedco Forex International Drill Inc. vs. CIT(SC) [Expat Taxation] [2005] 279 ITR 310 (SC) : 199 CTR (SC) 320 : 149 Taxman 352 (SC)

35

Income deemed to accrue or arise in India Salary for off-period Non-Resident employees working on oil rigs in India

There was no ground for assuming that agreement between the appellant and the employees was to render them more fit for service in India. The contract provided the field break for readiness of the employees for service anywhere in the world. The employees had not in fact "served" in India during the field breaks but earned income in the U.K. as residents of the U.K. the consideration therefor being the undergoing of training or updating knowledge and being in a state of readiness to service anywhere in the world. Nor did the contract mention that the salary was for a well earned rest. The clause in the contract relating to salary payable during the field breaks was not "earned in India" within the fiction created by section 9(1). There was no question of introducing a further fiction by extending the Explanation to include whatever has a possible nexus with service in India. The new Explanation substituted by the Finance Bill, 1999, was deliberately introduced w.f. 1st April, 2000, and was, therefore, intended to apply only prospectively. It was also understood as such by the Central Board of Direct Taxes which issued Circular No. 779 dtd. 14-9-1999, which, though not binding on the assessee, afforded a reasonable construction of the amendment. A cardinal principle of tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. An Explanation to a statutory provisions may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time the main provision came into force. But if it changes the law it is not presumed to be retrospective irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts". CIT vs. Halliburton Offshore Service Inc. (Uttaranchal) 140 Taxman 405[Expatriate tax] Mr. J. Spencer, a non resident foreign technician employed by a foreign company Halliburton Offshore Services Inc. which executed contract in India. The employment contract was for two years and provided for off period and on period. After the work on period, technician had to go back to the country of his residence, which was like standby arrangement. During this period technician had to undergo training to remain fit. Assessee argued that it was not a rest period and salary paid for off period was not chargeable to tax. Applying decision in case of Sodeco Forex International Drilling Co. Ltd. Hon'ble Court held that the salary paid for entire period was chargeable to tax. Provision of free food and beverages while working on the rig was not considered as perquisite. Hon'ble Court further held that interest under section 234B was not justified without hearing and without reasons, since a bonafide dispute was pending. 92.
Sankar Narayan Das vs. ADIT, International Taxation 101 ITD 95 (Kol. ITAT)

91.

Five employees of Wallenship Management Ltd. preferred appeal claiming the salary earned outside India as exempt for A.Y.2002-03, 2003-04. As their stay in India in last seven years exceeded 729 days and all of them were residents in nine out of ten previous years preceding that year. Assessing officer took a view that they cannot be treated as not ordinarily resident. Tribunal held that their status was resident based on their stay in India and salary earned outside India was taxable.

36

Article 8: Shipping Profits

93. Essar Oil Ltd. [2006] 5 SOT 669 (MUM.) A foreign ship on its way from Singapore to Arabian Gulf, sailing through international waters, on being chartered by the assessee-company, came to the port of Chennai, loaded the petroleum products and sailed to the port of Hazira for unloading the goods there. Thereafter, the ship conti-nued its sailing to Arabian Gulf. The assessee-company remitted freight to the foreign oil tanker without withholding tax under section 195. The Assessing Officer treated the assessee to be in default and passed orders under sections 201(1) and 201(1A) making demand for tax deductible at source and interest due thereon. On appeal, the Commissioner (Appeals) held that the voyage of the ship was not in international traffic and article 8 of the Singapore DTAA would not apply in the assessees case. He further held that article 23 applied in the assessees case and that the Assessing Officer had rightly invoked the provisions of section 44B in the assessees case. If any ship is operated by a non-resident, it shall be considered to have operated in international traffic even after it is operated between two places in India by chance or along with other voyages. A voyage becomes coastal traffic only if the foreign ship operated solely and exclusively between domestic ports in India. Therefore, in the instant case, the ship never operated between Chennai and Hazira solely and exclusively. It operated only once and that too by taking a short deviation from international waters on its way from Singapore to Arabian Gulf. Examined in terms of article 8, the ship of HMPL had operated in international traffic even while carrying petroleum products from the port of Chennai to the port of Hazira. [Para 30] In the light of the above facts, it could be said that the ship was operating in international traffic and, therefore, income, if any, arising out of the instant case would be taxable only in Singapore and not in India. If the case of the assessee did not fall under the specific provision of article 8, still the assessee could not be deprived of the benefit already available to it under the general provisions of article 7. Only for the reason that the assessee did not come under article 8 the assessee could not be placed under a lesser advantage than article 7. [Para 41] Therefore, the profit attributable to HMPL was in the nature of business income and business income was covered by article 7 even if the assessee was driven out of article 8. [Para 42] Article 5 deals with PE. None of the items specified in article 5 was applicable to the assessee. It was a sailing ship which just crossed over to Indian waters for a period of 10 days. Therefore, according to the stipulations provided in the DTAA, HMPL had no permanent establishment in India during the relevant previous year. [Para 43] In view of above, the case of the assessee was covered by article 8 as well as article 7 of Singapore DTAA and did not come under article 23. Therefore, the amount paid by the assessee to HMPL was not in the nature of a sum chargeable under the provisions of the Act, and, therefore, the assessee was not liable to deduct tax as provided under section 195. The orders of the Assessing Officer under sections 201(1) and 201(1A) were, accordingly, cancelled. [Para 47] The finding of the assessing authority that clause 7 of article 7 precludes the case of the assessee from the scope of article 7 for the reason that shipping profit has been specifically dealt in by article 8 is not a proper finding in law. Article 7 deals with business income derived from any business. Article 8 is in the nature of a proviso to article 7 whereby a special exception is carved out for the profit derived from shipping in international traffic. 37

Article 8 applies only to international traffic. It does not apply to the shipping profit out of transportation in coastal traffic. The scope of article 8 is confined to the limited area of international traffic. The said article does not affect the generality of article 7 in respect of business profit.[A Beautiful interpretation-KD]

94.

James Mackintosh & Co. P. Ltd. vs. ACIT 92 TTJ 388 (ITAT Mumbai)[Casual Shipping] James Mackintosh & Co. P. Ltd. was a shipping agency and representative assessee of Serr Moah Shipping BV, a Netherlands based Shipping Company. Under Article 8 of India Netherland DTAA income from International Traffic was taxable only if the country of residence. Article 8A(2) provides an exception to Article 8A(1), it provides that if the operation of the ships in International traffic is more than casual, such profits, may also be taxed in the other state. Assessee Company claimed that under Article 8A(2) did not apply under Article 8A(2). The issue was whether operation of the assessee company was 'more than casual'. Assessee argued that it was engaged in Tramp shipping' as opposed to linear shipping. The activities of calling on a port only when there is a specific requirement for loading or unloading the cargo is termed as Tramp shipping'. Three of the ships owned by assessee company sailed through Indian ports seven times during the relevant previous year. On this basis CIT (A) held that the operation of the assessee company can not be considered as casual, this was upheld by the Tribunal. The fact that the ships have called Indian ports on as and when required basis implies that it is an account of commercial expediencies that the ships have operated in India. Tribunal also observed that it does not make any difference to the situation because whether the assessee is treated as in occasional shipping business as referred to in Section 172 or not it was not relevant in determining whether or not the operation of ships is casual or more than casual.

95.

Norasia Container Lines Ltd. (AAR) 139 Taxman 255 [Shipping Profit-not taxable] Norasia Container Lines Ltd. (NCLL), a company incorporated and registered in Malta was engaged in business of operating merchandise vessels in International waters. NCLL had no office in India, NCLL sought ruling in question as to whether freight income earned by applicant in India from shipping business if operating merchandise vessels in International waters shall be covered by Article 8 of India Malta DTAA and would not be taxed in India. The Authority ruled in favour of the assessee.

96.

Integrated Container Feeder Services [Shipping Co-Mauritius-effective control in Dubai] vs JCIT 98TTJ 69 Integrated Container Feeder Service, (ICFS) a company incorporated in Mauritius, engaged in Shipping business. The AO found that the activity was controlled & managed from Dubai and only correspondence and only Board meetings were held from Mauritius. All correspondence, orders, inquiries and other operations were carried out from Dubai, on the basis of which the AO came to conclusion that the effective control & management was in Dubai and not in Mauritius, hence applied section 44B to compute tax liability of ICFS. Tribunal did not admit the Tax residing certificate produced by ICFS as additional evidence and uphold the order of the AO. Lufthansa German Airlines vs. CIT (90 ITD 310)(Del) [Pool arrangement] In case of Lufthansa German Airlines vs. CIT (90 ITD 310)(Del) it was held that income earned from services rendered to other Airlines of the same pool recognized as international pool of Airlines falls under Article 8 and not Article 7. This conclusion was drawn on the basis of 38

97.

Article 7(7) which states that Article 7 is not applicable to the profits covered by the other Articles of the Treaty. A contrary view was taken in the case of British Airways case (80 ITD 90) (Del.) as in that case the assessee was not able to prove its membership in the pool.

Composite EPC Contract

98. Taikisha Ltd [52 TTJ 594 (Del)] In the case of composite contract, the ITAT held that no part of the sale consideration of machinery could be taxed in India as the sale was completed in Japan. The Tribunal observed that the guarantee for the effective performance of the machinery is normal features in the sale of costly equipments. And the sale of machinery was complete in Japan notwithstanding the guarantee for its performance. The CBDT issued Instruction No. 1829, dated September 21, 1989 in respect of taxability of income arising to non-residents from the execution of power projects on turnkey basis. Vide this instruction it has been clarified that profits from sale of equipment from outside India, where the title/property in goods passes outside India and the payments are also made outside India, would not be deemed to accrue or arise in India. Rotem & Co. [Composite contract sale-service lump sum price-can be separated] v/s. DIT (International Tax) AAR 148 Taxman 411[ Rotem & Co., incorporated and tax resident of Korea (Rotem) & Mitsubishi Corporation, incorporated and tax resident of Japan (Mitsubishi) formed a consortium, which was awarded contract for design, Manufacture, Supply, Testing, and Commissioning of passenger rolling stock for Delhi Metro. The consideration for the entire work was a fixed lump sum price, applicant contented that the contract was a composite contract for sale and no part of consideration can be regarded as fees for technical services (FTS). Though the contract is a composite contract under which a fixed lump sum price is payable, the pricing schedule has itself disintegrated the fixed lump sum price into various cost centres which laid down milestone activities for payment. Tribunal held that contract comprises of supply and services, the element of FTS was covered by Article of the respective DTAA, and it can be separated for the purpose of levy of Income Tax. FTS cannot be taxed as business income under Article 7 as FTS is specifically dealt with under the respective DTAAs. 101. Sundwiger EMFG & Co. [2003] 262 ITR 110 [AP] The Indian company placed orders with non-resident companies for supply of different types of capital equipment in connection with setting up of special metal and alloy projects. By a separate contract entered into between the parties it was agreed that the non-resident company would send on deputation its employees to India for providing technical services covering supervision of erection, start up, putting into commission etc. The Assessing Officer took the view that the amounts to be remitted by the Indian company to the foreign company for providing such services would amount to fees for technical services and were taxable under section 9(i)(vii) of the Income-tax Act. The Commissioner (Appeals) reversed that order and held that the payments could not be considered as technical fees which was upheld by the Income-tax Appellate Tribunal. On a reference to the High Court, it was held that a plain and cumulative reading of the terms and conditions of the contracts between the Indian and the foreign companies showed that the agreements related to one and the same transaction. The services rendered by the experts and the payments made for the services were part and parcel of the sale consideration and could not be severed and treated as business income of the non-resident company for the services rendered by it in erection of the machinery. The supplementary contract was only by way of abundant caution and that the consideration paid by the Indian company under it, was part of the consideration for setting up 39

99.

100.

of the machinery and that it could not be viewed in isolation of the main contract. Therefore, the provision of section 9(1)(vii) of the Income-tax Act could not be applicable and such payments were exempted under Explanation 2 to section 9(1)(vii) of the Act. In that case it was found as a fact that the amount paid for rendering services under the second contract was part and parcel of the sale transaction under the main contract. 102. Neyveli Lignite Corporation Ltd. [2000] 243 ITR 459 (Mad) The assessee was engaged in the mining of lignite. It entered into an agreement with a Hungarian company for acquiring steam generating plants with auxiliaries for more efficient running of its business. The Income-tax Officer held that the amounts payable under the contracts for design and engineering were income of the foreign contractor in India and, therefore, the assessee was required to deduct the income-tax before payment of the amounts to the foreign contractor. The Tribunal held that the amounts could not be regarded as royalty and therefore it would not be income accruing to the foreign contractor in India. On a reference, a Division Bench of the Madras High Court observed that there was no transfer or licence of any patent invention, model or design; the design referred to in the contract was only the design of the equipment required to be manufactured by the foreign supplier to the Indian purchaser; the information concerning the working of the machine was incidental to the supply as the machinery was tailor-made for the buyer; therefore, the price paid by the assessee to the foreign contractor was a total contract price which covered all the stages involved in the supply of machinery (from the stage of design to the stage of commissioning) and that the design supply was not to enable the assessee to commence manufacture of the machinery itself with the aid of such design. In that case the Madras High Court considered whether the payments made by the Indian company to the foreign contractor fell within the meaning of royalty. 103. DCIT vs. Metapath Software International Ltd. 9 SOT 305 (Delhi)

Metapath Software International Ltd. (MSIL), a UK company was a supplier of wireless communication software solutions. MSIL sold software and hardware to Indian customers against payment. The contracts were signed in India, supply was on CIF basis and installation, maintenance and upgradation was responsibility of MSIL. Employees of MSIL stayed in India for more than a year. Software was not sold but provided on licence basis. Considering this facts Assessing Officer held that MSIL had PE in India and 40% of total value of supply was income of MSIL chargeable in India. ITAT confirmed that MSIL had PE in India, however PE was merely doing the job of business negotiations, therefore profit attributable to PE was reduced to 8%. Licensing of Software was held to be taxed as business income and not as royalty considering the terms of agreement. Following decision of CIT vs. Sidco Forex International Drilling Co. Ltd. 264 ITR 320 (Uttar) the ITAT held that interest for non payment of advance tax under section 234B could not be levied. 104. A.P. Power Generation Corporation Ltd. vs. ACIT, Circle 4(2) (TDS), Hyderabad 11SOT 221 (Hyd. ITAT)

A.P. Power Generation Corporation Ltd. (APPGCL), A State Government undertaking engaged in generation of power, entered into agrement with four companies including two Japanese company for supply of pump turbines, inlet valves, motor generator sets etc. Consideration as per agreement included consideration for supervisory engineer for assembly, erection, testing and commissioning services etc. Agreement with one PES Engineers was for the purpose of erecting and commissioning the generators and other equipments. APPGCL 40

entered into agreement with Sumitomo Corporation (S Corp.), a company resident in Japan, for supply of gas insulated switch gear, insulated power cables etc. The consideration was for designing, manufacturing, testing and supplying the equipments. APPGCL also entered into agreement with EPDC International Ltd., a Japanese company as retainer Consultant to advice on continuous basis in project. A separate agreement was also entered into with BHEL for installation of gas insulated switch gear. Question arose was whether the payments under the various agreements were liable to tax in India and therefore the tax withholding was required under section 195 or 194c.

On the basis of the agreements Tribunal concluded that the supply agreements were completed outside India, as the property in goods passed outside India. More than 80% of the contract value was pertaining to the activity undertaken in Japan lead to the conclusion that the activity under the contract was most densely grouped in Japan and not in india. On the basis of the agreement ITAT held that it was a sale contract and not a works contract. In case of S Corp. the supervisory personnel were in india for a period exceeding six months therefore it was considered as having a permanent establishment in India. The supervisory charges were less than 3% of the contract value, which was considered as amount attributable to permanent establishment in India. Income if any out of these services contract was cosidered as taxable in India. S Corp. paid advance tax and filed return in India, therefore the assessee was not considered as in default for not deducting the tax. Applying the decision in case of Sundwiger and Visakhapatnam Port Trust, Tribunal concluded that the charges paid to EPDC were not chargeable. Withholding was required under provisions of section194C in case of payment to BHEL.

105.

ABC LTD. (2007) 159 TAXMAN 344 (AAR) The applicant company, being a tax resident of Switzerland and engaged in the business of manufacture of turbochargers entered into a turbocharger development and supply (TDS) agreement with XYZ Ltd. for manufacture and supply of turbochargers for vehicles manufactured by XYZ Ltd. Rights, interests and obligations under the said TDS agreement were assigned by the applicant to the proposed Indian subsidiary of the applicant, on payment of agreed consideration in instalments by the subsidiary to the applicant. The applicant sought advance ruling on the question whether receipts arising from proposed assignment of TDS agreement would be taxable in India. It was ruled by AAR that there was no business connection between the applicant and the subsidiary within the meaning of section 9(1)(i) of the Income tax Act, 1961 since it would be carrying on business in its own rights, and not for and on behalf of the applicant. Further, the requirements of business connection nor the ingredients of Explanation 2 to section 9(1)(i) were satisfied. Further the deed of assignment has been executed outside India and the consideration for assignment is also payable outside India. Therefore, income or profit, if any, accruing or arising to the applicant on account of assignment cannot be said to arise in India. The fact that the agreement is stamped in India would make no difference to the situs of the execution of the agreement. Also none of the clauses of Expln. 2 to section 9(1)(vi) is attracted. Therefore the consideration for assignment payable under the deed of assignment does not amount to 'royalty' under said Expln. 2. Hence such consideration is not chargeable to tax under the provisions of the Act. Consequently, section 195 is not attracted and the assignee is not required to deduct any tax while making remittance to the applicant.

41

Section 195
106. Joint Official Liquidator of Bank of Credit and Commerce (Overseas) Ltd. vs JCIT The expression used in the statute is 'Indian concern' and there is nothing to suggest that the scope of this expression is to be inferred as confined to an 'assessee resident in India'. The meaning to be assigned to an expression must flow from the context in which it is used. If we are to see the context, it is in respect of business carried on by the assessee, and not the residential status of the assessee, that interest income is deemed to accrue or arise in India. Therefore, a harmonious interpretation would suggest that the meaning of an Indian concern should be taken as a business carried on in India which may essentially include a business carried on in India even by a non-resident. For the reasons set out above, we are of the considered view that the expression Indian concern', for the purposes of section 115A, will also include Indian branch offices of foreign companies. 107. Reliance Industries Ltd. vs. DDI [2005] 3 SOT 501 (Mum.) External Commercial Borrowings (ECB) were made by assessee-company in terms of policy of Government of India granting permission for ECB to be utilised by industrial undertakings in India. It was further conveyed by Government that payment of interest, commission and fees in respect of said loan was exempt from withholding tax u/s 10(15)(iv)(f). Assessee remitted interest on borrowing without deducting any withholding tax in India, till exemption was withdrawn. According to assessee, such withdrawal was unjustified and legally incorrect, because section 10(15)(iv)(f) did not permit same. Assessee denied its liability to deduct withholding tax at rate of 20 per cent directed vide an order u/s 195(2). Both assessing authority and first appellate authority held that since exemption had already been withdrawn and power of granting exemption vested with Government assessee was bound to withhold tax. Meanwhile, when order of withdrawal was impugned in a writ petition, Delhi High Court rejected the same. It is main statute which will govern rules provided under an Act and not vice versa, and since no criteria has been laid down in section 10(15)(iv)(f) for end-use of money borrowed, it could be stated that imposition of a condition by Dy. Director (ECB) during progress of scheme was like changing rules of game midway, and a retrospective or ex-post facto change in such a manner was an arbitrary approach having no legal sanctity. Where Legislature has granted exemption to lender and not to borrower, if there is a mistake committed by borrower, even then lender cannot be punished by withdrawal of exemption. Considering totality of facts, circumstances, conditions of scheme, evidence of utility of funds and legal matrix of case, withdrawal of exemption was unwarranted and, consequently, assessee-company was not liable to deduct withholding tax @ 20 % in respect of interest payment. A person who denies liability to deduct tax u/s 195 on amount payable to a non-resident is entitled to appeal u/s 248, and Commissioner (Appeals) has jurisdiction to quantify amount on which alone tax is deductible. 108. Sannoore Glass Ltd. vs ACIT 94 ITD 202 (Delhi) [Refund of TDS] Appellant a Joint Venture Company of Coming Incorporated, a US company (Coming) appellant company was directed to deduct TDS at 30% by the assessing officer and accordingly the tax was deducted and paid and the TDS certificate was issued to Corning. Subsequently higher authorities decided that TDS should be at a lower rate, hence appellant company applied for refund of TDS. The refund was denied to the appellant company. Tribunal

42

upheld that the appellant company was not the rightful person to claim the refund of TDS. Payee was not precluded from taking credit in its assessment. 109. Flakt (India) Ltd. (AAR) 139 Taxman 238 [TDS-on payment or on provision in book] Flakt (India) Ltd.(FIL), an Indian company, resident entered into agreement with Flakt Woods AB, Sweden company in respect of IP license and fees agreement and Trademark License & fees agreement & with Flakt Woods Group AG, Switzerland, in respect of management service agreement. FIL sought advance ruling on question, whether the amount payable to Sweden company and amount payable to Switzerland company would be taxable on receipt basis or accrual basis. AAR considering India Sweden Treaty ruled that the royalty income would be taxed in hands of Sweden company on accrual basis, that is on making a mere provision in the books of FIL withholding u/s 195 would be required. Similarly considering India Switzerland Treaty the amount held as taxable on provision in the books of FIL.

110.

ONGC [Multiple stage grossing up U/s 195A and income assessed S.44BB] v/s. CIT 276 ITR 585 (Uttaranchal), M/s. Brown & Root International Inc., a non resident company engaged under works contract with ONGC for carrying out business of exploration etc. of mineral oils. Issue arouse as to whether multiple stage grossing up is required u/s. 195 A. Court held that Sec.44BB is the charging section and it is a complete code by itself. Sec.195A deals with collection & recovery of tax, which will not make the receipt chargeable to tax. Therefore Sec.195A has no application to Sec.44B hence multiple stages grossing up cannot be applied.

Article 14: Independent Personal Services

111. ACIT vs. Malayasia Manorama Co. Ltd. [Membership/Ad. Austria- not taxable] (Cochin. ITAT ) 96 TTJ 442 Malayasia Manorama Co. Ltd. (MMCL) made payments for membership fees, donation, and advertisement charges etc. voluntarily, to International Press Institute (IPI). IPI did not have PE in India. MMCL cannot be considered as agent of IPI. The payments made were held as not liable to tax in India and therefore the provisions of section 195 were not attracted in view of Article 14 of the India Austria DTAA. 112. DCIT vs. Chadbourne & Parke LLP (Mum ITAT) 93 TTJ734 [IPS v/s FTS-UK-solicitor firm] A partnership firm of Solicitors based in New York, USA filed a return of income claiming the refund of the TDS on payment of professional fees received by it from M/s G.V.K. Industries Ltd. Indian company. All the Attorneys as well as the staff and partners of the firm worked only outside India and no office was maintained in India. The firm claimed that the professional fees received was exempt applying article 15 of the India USA DTAA The Assessing Officer instead applied article 12 and sought to tax as fees from included services. CIT(A) concluded that Article 15 of the DTAA was applicable and the income was exempt. Mumbai ITAT upheld the order of the CIT(A) and ruled in favour of the assessee. 113. D.F.G. Von Der Mark (235 ITR 698)(AAR) Where an individual assessee was receiving fees in India in the capacity of a Director of the company and was receiving consulting charges abroad for services rendered there it was held in D.F.G. Von Der Mark (235 ITR 698)(AAR) that the fees for services rendered abroad are 43

"Independent Personal Services" and not taxable in India as the assessee was not having a fixed base in India and was not present for 120 days in a financial year. 114. MSEB vs. Dy. CIT (96 ITD 793)(Mum) [IPS] It was held that payment for professional services of solicitors for advice on documentation, negotiations and for commercial terms of Enron Power Purchase Agreement was "IPS" and taxable under Article 15 and not as "FTS" under Article 13. Article 15 being a specific provision for professional service fees will override the general provisions of Article 13. Tribunal, Mumbai Bench, that the expression 'professional services' will imply any services rendered in the course of the vocation carried on by an individual or group of individuals, requiring predominantly intellectual skills, dependent on individual characteristics of the person pursuing the vocation, requiring specialised and advanced education or expertise. The learned counsel for the assessee has invited our attention to paras 18, 19 and 20 of this decision, relevant portions of which may be reproduced below : "Applying the above test as to what constitutes 'professional services', let us examine facts of this case. It can also not be in dispute that the services that Freshfield was required to deliver under the contract also involved, to use the phraseology of Lord Justice Scrutton, 'either purely intellectual skills or if any manual skill, as in painting or sculpture or surgery, skill controlled by the intellectual skill of the operator'. Any services in the nature of legal consultancy services inherently involve either purely intellectual skills of the person rendering these services or if any manual skill, as in painting or sculpture or surgery, skill controlled by the intellectual skill of the person. There is also no dispute about the factum of services rendered being in the nature of legal consultancy services. We may also mention that Hon'ble Supreme Court has, in the case of V. Sasidhara v. Peter & Karunakar AIR 1984 SC 1700, observed that '....... whatever may be the popular conception or misconception regarding the role of today's lawyers and the alleged narrowing of gap between a profession, on one hand, and a trade or business, on the other, it is trite that, traditionally, lawyers do not carry on trade or business nor do they render services to the 'customers'. Keeping all these factors in mind, as also the observations of Hon'ble Supreme Court, we are of the considered view that the services rendered by Freshfield are distinctly in the nature of professional services. Once we come to a finding that the services in question constitute 'professional services', the natural corollary to this finding is that the provisions of art. 15 are to be applied in this case which specifically deal with 'professional services'.
115.

DCIT vs. Chadbourne & Parke LLP (93 TTJ 734)(Mum) The Mumbai Tribunal held fees paid to a US based firm of solicitors for legal services rendered to an Indian client will fall under Article 15 "Independent Personal Service" and not under Article 12 "FIS". IMP Power Ltd. vs. ITO Range 3(2)(1) (Mumbai) 9 SOT 156 (ITAT Mum) Among other issues, issue arose in respect of legal fees outside India to a UK based firm of solicitors in connection with legal proceedings in UK and claimed the same as business expenditure. Assessing officer disallowed the expenditure under section 40(a)(i) as it was paid without TDS. Assessee company argued that the fees were paid outside India, the services were being rendered outside India, payee firm did not have office or agent in India hence income does not accrue in India. Therefore the fees paid were not liable to tax in India.

116.

44

Accepting these reasoning ITAT held that there was no obligation to withheld tax in India and claim of Assessee was allowed.

Article: Tax Credit

117. CIT vs. Best and Crompton Engineering Ltd. 284 ITR 225 (Mad.)

During A.Y. 1981-82 Best & Crompton Eng. Ltd. (B&C) earned income in Iran and paid tax in Iran Assessing officer rectified the order and allowed tax relief under section 91 after considering weighted deduction under section 35B, whereas B & C was claiming the relief before weighted deduction under section 35B. Court held that 'income' under section 91 is not exact quantum or measure of the income but income as understood under commercial sense, hence the Iranian income was taxed and deduction u/s. 91 should be allowed before considering deduction u/s. 35B.

118.

Joint CIT vs. Digital Equipments India Ltd. [Tax credit for foreign tax] Mum (ITAT) 93TTJ 478 Digital Equipment India Ltd. filed its income tax return declaring the loss for A.Y. 1993-94, which included income which was also subjected to tax in US AO did not allow the credit for the taxes paid in US. CIT(A) ordered to grant refund to the assessee company by giving credit for the taxes paid in US. Tribunal held that the foreign tax credit in respect of the income tax paid in US cannot exceed Indian income tax liability in view of the article 25(2)(a) of India US DTAA. Wipro Ltd. vs. DCIT [Tax credit on income earned outside India-unit exempt U/s 10A] (Bang. ITAT ) 96 TTJ 211 Among many other issues in this case the issue relating to credit for taxes paid in USA by Wipro was considered. Wipro earned income in USA and paid taxes in USA, however the income was exempted under section 10A/80 HHE of Income-tax Act, in India. The issue arose was whether the tax credit was available to the assessee company. ITAT upheld the claim of Wipro. The matter was remanded back to the Assessing Officer to verify that the income was included in the return of income filed and the taxes were in fact paid in USA.

119.

Article 24: Non-Discrimination

120. Chohung Bank vs. DDIT (Intl. Tax) 6 SOT 144 (Mum.) Chohung Bank, (CB) a Korean Banking company having branch in India, was involved in normal banking business. CB claimed that the tax rate applicable to Indian Companies should be applied and not the higher rate applicable to foreign companies applying the article 25 of the DTAA. Issue was whether CB carried out 'same activities' or 'similar activities', was it under the 'same circumstances' and, therefore whether article 25 would apply. Tribunal held levy of tax on CB at rates applicable to non domestic companies was justified.

45

121.

JCIT vs. Sakura Bank Ltd. 6SOT 684 (Mum ITAT) Sakura Bank Ltd.(SKL) a Japanese Bank operating in India contended that the rate of tax in its case should be the same rate at which Indian companies were taxed in India applying the India Japan DTAA non discrimination clause. The Assessing Officer accepted the plea and passed the order to levy tax at 50% instead of 65% applicable to foreign company. SKL filed appeal for applying rate of tax at 45% applicable to domestic companies in which public are substantially interested. CIT(A) allowed the appeal. The revenue filed appeal before the CIT(A) order, meanwhile there was retrospective amendment under section 90 inserted by Finance Act 2001 by which higher rate of tax was to be applied. Issue arose whether Tribunal has power of enhancement. Held it has no power of enhancement but it can remand the matter to CIT(A) or assessing officer for dealing with matter in accordance with the law, which would result in enhancement. Metchem Canada Inc [2006][Non-discrimination clause-Section 44C India-Canada DTAA] 5 SOT 121 (MumT) [30.09.2005] Section 44C of the Income-tax Act, 1961, read with India-Canada Double Taxation Avoidance Agreement - Non-residents - Head office expenditure in case of - Assessment years 1993-94, 1994-95 and 1996-97 - Whether limitation on deduction of head office expenditure as set out in section 44C would not apply in case of non-resident companies governed by India-Canada Double Taxation Avoidance Agreement, particularly in light of non-discrimination clause in said DTAA - Held, yes Section 37(1), read with section 44C, of the Income-tax Act, 1961 - Business expenditure Allowability of - Assessment years 1993-94, 1994-95 and 1996-97 - Whether where section 44C is held to be not applicable in matter of a non-resident company, head office expenses incurred by non-resident company to the extent same can be fairly allocated to permanent establishment are admissible as deduction under section 37(1) - Held, yes

122.

123.

ABN Amro Bank [Non-discrimination & definition of tax does not include interest] (2005) 97 ITD 1 (Kol) (TM): 96 TTJ 1041 (i) Sub-s. (2) of s. 90 provides for application of beneficial provisions of the agreement in contrast to the contrary provisions of the IT Act, 1961. It has, however, to be borne in mind that in the event of there being no conflict between the provisions of the DTAA and the IT Act, 1961, the effect shall have to be given to the provisions of the IT Act, 1961. Explanation to s. 90 inserted retrospectively w .e .f . 1st April, 1962, specifically provides that the charge of tax in respect of the foreign company at the rate higher than the rate at which a domestic company is chargeable shall not be regarded as less favourable charge. In the DTAA, there is no definition of "less favourable charge". Therefore, the Explanation to s. 90 cannot be said to be in conflict with the provisions of the DTAA. Accordingly, the decision of the CIT(A) in regard to the applicability of the rate of tax as applicable in the case of foreign companies in the case of the appellant is upheld. Article 25 of the DTAA is not attracted in this. A sum chargeable under this Act (remuneration in this case) which is payable either outside India or in India to a non-resident, is not allowable as a deduction because of the provision of s. 40(a)(i) if the tax has not been deducted or after deduction has not been paid before the expiry of the time prescribed under s. (1) of s. 200 and in accordance with the other provisions of Chapter XVII-B When a deduction is not allowable because of the statutory provisions, it would make no difference whether the same was claimed or not by the assessee. Because as per the proviso to s. 40(a)(I) such sum has to be allowed as a 46

(ii)

(iii)

deduction in computing the income of the previous year in which such tax deduction at sources has been paid in subsequent year. On a bare reading of the provision, it is evident such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid if tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-s. (1) of s. 200. No restriction is placed for allowability of deduction of the remuneration paid in the subsequent year that it should have been claimed in the earlier year. The term tax has been defined vide art. 3(d) of the DTAA to mean Indian tax or Netherlands tax as the context requires, but does not include any amount which is payable in respect of any default or mission in relation to the taxes to which this convention applies or which represents a penalty imposed relating to this tax. By this definition the interest paid cannot be treated or equated to a tax payment. The assessee committed a default and an omission in relation to the tax by not deducting the same within the prescribed time under the IT Act. The interest was thus payable for default or omission in relation to the tax deducted at source. Therefore, on a combined reading of the definition of tax in article 3(d) of the DTAA in conjunction with the provisions of ss. 192 and 195, the interest would not be an allowable deduction.

124.

Credit Llyonnais [Non-discrimination] 94 ITD 401 (Mum)] As far as the provisions of the IT Act are concerned, the assessee-company being admittedly a foreign company within meanings of that expression under s. 2(23A) of the Act is not eligible for deduction under s. 80M. The assessee's contention is that in view of the provisions of art. 21 of the applicable India France Double Taxation Avoidance Agreement (DTAA) regarding non-discrimination and in view of the fact that provisions of s. 80M seek to discriminate against foreign companies by allowing this deduction only for domestic companies, the deduction under s. 80M is required to be extended to the foreign companies covered by the India France DTAA. For the reasons set out above, we are of the considered view that the provisions of art. 21 only deal with the cases of discrimination on the ground of nationality and non-availability of deduction under s. 80M to the foreign companies, i.e., companies which are not domestic companies, have nothing to do with nationality of a company.

125.

Herbalife International India (P) Ltd. vs. ACIT Range 12 New Delhi, 101 ITD 450 (ITAT Delhi) Herbalife International of America, (H USA) had 100% subsidiary of Herbalife International India (P) Ltd. (H India) in India, which was set up to manufacture herbal products on contract basis. H USA have presence in 58 countries and have set high standard of product testing and personal well being products. H India was to pay administrative and general expenses as reimbursement to H USA for data processing services, record keeping, distributor/supervisor information, order shipment processing and other indirect administrative services etc. which was allocated to all its subsidiaries on scientific basis. Administrative fees payable was US$ 1,000,000 for the period 1-1-2000 to 31-12-2000 and US$ 250,000 for 1-1-2001 to 31-3-2001. Assessing Officer disallowed the administrative fees payable for the period 1-1- 2000 to 31-32000 being prior period expense, and disallowed the administrative fees under section 40(a)(i) as TDS was not deducted. Based on the fact that the RBI permission was received on 30-62000 the fees paid the period 1-1- 2000 to 31-3-2000 was considered as accrued during the year by the Tribunal. Question whether the sum paid was chargeable to tax under article 47

12(4)being fees for included services was considered as inappropriate. Tribunal held that then existed section 40(a)(i) was discriminatory under Article 26(3) Non discrimination of India US DTAA, and allowed the deduction for the administrative expenses remitted without deduction of tax.

Section 44C
126. British Bank of Middle East vs. JCIT[Section 44C-when applicable] [2005] 4 SOT 122 (Mum.) Facts The assessee is a branch of a foreign bank. The A.O. disallowed the expenses incurred abroad on mobilization of NRI deposits, treating the same as " Head Office Expenditure" u/s 44C. The CIT (A) upheld the disallowance. Further, the A.O. disallowed the salaries of expatriate employees posted in India by treating the same as H. O. expenses u/s 44C. The CIT(A) allowed the assessees claim. Decision On appeal, the Tribunal held as follows: (i) The provisions of section 44C would hit only such expenditure which is not capable of being allocable to any particular profit centre and which is required to be allocated on some general basis. The expenses on mobilization of NRI deposits cannot be said to fall in this category because these expenses are for purpose of India specific operations where non-resident Indian deposits are of relevance. Therefore, expenditure incurred by assessee abroad on mobilisation of NRI deposits would not fall under scope of head office expenditure u/s 44C. (ii) Since expatriate employees in question were working exclusively for India operations, these expenses could not be treated as head office expenses and had to be allowed in computation of income of Indian operations which was taxable in India. CIT vs. Deutsche Bank AG 205 CTR 28(Bom) Deutsche Bank filed the return of income claiming entire head office expenditure. The assessee claimed that section 44C was not applicable as one of the three parameters mentioned in clause (a), (b) and (c) of section 44C was not attracted, hence the computation fails and full deduction should be admissible under section 37(i) Bombay High Court held in favour of the assessee Bank and entire deduction was allowed.

127.

Section 44BB
128. ARB Inc. vs. JCIT (Delhi ITAT) 93 TTJ 608[Meaning of production U/s 44BB] US Company received a contract from GAIL for laying the pipeline through horizontal directional drilling. Invoking the provisions of section 44BB the assessee applied the tax rate 10 per cent on the total receipts. Before the AO assessee contended that a) pipeline was used for the purpose of transportation of natural gas, which falls within the meaning of 'mineral oil' for the purposes of section 44BB, and b) GAIL was processing the natural gas to produce LPG etc. Tribunal upheld the order of the Assessing Officer by stating that the meaning of production used in section 44BB would include only production by mining process and would not include production of LPG, propane, butane etc.as well as CNG by post mining process.

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129.

ONGC vs. ACIT Circle-I, Dehradun 9 SOT 8 (Delhi ITAT) Baker Hughes Process System, a UK company rendered services to ONGC in connection with assessment of internal damages of CPI units of SHG platform. The services were rendered in connection with assessing feasibility of water for human consumption which was an activity wholly unrelated to prospecting of mineral oil. ONGC filed the return in representative capacity and offered the revenue receipt as taxable as per provisions of section 44BB, as its profit from business of exploration etc., of mineral oil. Assessing Officer held that the services were covered by section 115A, and services were covered by section 44D recd with section 115A, and services were not in connection with oil exploration. ITAT upheld the Assessing officers order.

Exemption U/s 10(4)-NRE Interest

130. Rachpal Singh vs. ITO (Amritsar ITAT) 93 ITR 283[Exemption u/s 10(4)-NRE int.] Assessee filed the return of income claiming the interest on NRE bank deposits as exempt under section 10(4). The return was accepted under section 143(1), thereafter the AO issued show cause notice under section 154 proposing to add interest on FDR in NRE account as his status as per return filed was resident and therefore the income was not exempted under 10(4). Assessee agreed for the addition, accordingly the AO added the interest to the total income. On appeal CIT(A) did not accept the additional evidence by way of bank certificate showing that money kept in NRE account was as per guidelines of the RBI and there was nothing on the record to show that the assessee was resident within the meaning of FERA. Tribunal held that the certificate went to the very root of the matter and it ought to have been accepted as evidence. For the purposes of exemption under section 10(4) the status under FERA was important and not under Income-tax Act.

Specific provision v/s General Provision

131. Hindalco Industries Ltd. vs. ITO 91 ITD 64 (Mum ITAT) [S.9 (1)(vii) v/s 9(1)(i)] Hindalco Ltd. entered into agreement with Raytheon Engineers and Constructors Inc. USA, (US Co.) for conducting study and submission of techno economic feasibility report for setting up a huge steel plant in 1990. Hindalco requested US Co to provide updated report for a consideration of US $ 25,000. ITO (TDS) ordered to deduct 20% TDS as per DTAA and observed that original fees was also subjected to TDS. Assessee contended the services were rendered outside India. The legislature has categorized the specific business separately in section 9(1)(vii) and therefore the specific provision has been made and so general provisions would not apply. As a result there was no business connection of the US Co. in India therefore the technical services could not be taxed. CIT (A) confirmed the action of the ITO. Tribunal upheld the ITO's order, following the Madras High Court decision in case of CIT vs. Copes Vulcan nc. 167 ITR 884. Madras High Court in this case held, that income by way of fees for technical services whether arising out of business connection or not will have to be treated as coming only under section 9(1)(i) and not under 9(1)(vii). 132. Copes Vulcan Inc [Specific over general provision] [167-ITR -0884 MAD

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Sec. 9(1)(i) refers to all income accruing or arising whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset situate in India. Sec. 9(1)(vii) refers to income by way of fees for technical services payable by the Govt. or a resident company or non-resident company in certain circumstances. For the purpose of appreciating the relevant scope of S. 9(1)(i) and S. 9(1)(vii), the proviso to S. 9(1)(vii) cannot be looked into. As already stated, S. 9(1)(i) is general in nature and S. 9(1)(vii) refers to a particular type of income and is a special provision dealing with fees for technical services rendered by the foreign company. The technical services may be rendered as a result of a business connection or otherwise. Having regard to the language used in S. 9(1)(vii), it is not possible to construe that provision as referring to income by way of fees for technical services in cases not involving business connection. Whether there is a business connection or not, any income by way of fees for technical services should, therefore, be taken to have been covered by the provision in S. 9(1)(vii). When there is a special provision dealing with a special type of income, such a provision could exclude a general provision dealing with income accruing or arising out of any businesses connection. Since S. 9(1)(vii) will comprehend income by way of fees for technical services rendered as a result of business connection or otherwise, it is not possible to apply the provision in S. 9(1)(i) merely because S. 9(1)(vii) stands excluded as a result of the proviso. If such a contention as is put forward by the Revenue is accepted, then in respect of cases arising after April 1, 1976, when the proviso will have no application, there will be two provisions operating in the same field in respect of fees technical services. Such a construction should normally be avoided. Therefore, the income by way of fees for technical services either arising out of business connection or not will have to be treated as coming only under S. 9(1)(vii) and not under S. 9(1)(i). In this view, the view taken by the Tribunal in this case is accepted. Hence it is not necessary to direct a reference in this case.

Miscellaneous
133. Briggs of Boston (India) Pvt. Ltd. (AAR) 145 Taxman 400 [Bonus shares-not dividend] Indian company which is 100% subsidiary of UK company, intend to capitalize its free reserves by allotting fully paid redeemable preference shares as bonus. Issue was whether it would be required to deduct tax. Following Supreme Court Judgment in case of Dalmia Cement, AAR held that it will not be 'dividend' in terms of section 2(22) and the Indian company is not required to deduct tax on allotment of bonus shares. 134. Madura Courts Pvt. Ltd. (AAR) 145 Taxman 366 [Deemed dividend U/s 2(22)(c)] CHL, a UK company is main holding company of UK companies namely CFL, CPL & TTJ. JPL, another UK company is subsidiary of CPL. JPC is a major shareholder of Indian Company MCPL. MCPL proposes to give loan to CFL, which is not a registered shareholder of MCPL, out of its free reserves. Loan granted to a group company which is not a registered shareholder of Indian company and which is also not a member or partner of its holding company would be deemed as dividend under section 2(22)(c). AAR after considering the details of shareholding held that essential condition of third requirement of 2(22)(c) is not satisfied therefore it would not be deemed as dividend.

135.

Board of Control for Cricket in India [Order U/s 195(2) & Revision U/s 263] vs. DCIT (exemption) 97 TTJ 751 (ITAT Mum)

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Board of Control for Cricket in India (BCCI) paid guarantee money to Australian Cricket Board, without deduction of tax u/s. 195 on the basis of order u/s. 195(2) passed by the Assessing Officer. Director issued show cause notice u/s. 263, issue arouse whether order u/s 195(2) is subject to revision u/s. 263. ITAT held it is 'order' subject to revision u/s. 263. However since the amount was remitted by BCCI, it cannot be asked to do impossible thing, hence on the facts of the case the order u/s. 263 was set aside. 136. Royal Jordanians Airlines [Immunity from taxation to any Sovereign State] vs. DCIT & Another vs 97 TTJ 434 (ITAT Delhi) ('SB') Royal Jordanians Airlines (RJA) claimed sovereign immunity following the decision of ITAT in case of Iraqi Airways vs. IAC 23 ITD 115, for A.Y. 1995-96 to 2000-01. Revenue contended that there is no immunity from taxation to any Sovereign State unless there is any specific exemption. RJA being company under Jordanian Law, it is a company under Income Tax Act u/s. 2(17) & person u/s. 2(31). RJA held to be liable to taxation in the status of Foreign Company. 137. Tide Water Marine International Inc. v/s. DCIT 97 TTJ 130 (ITAT Delhi) Proceeding u/s. 147 was initiated in case of Mr. Greer Robert, a non resident. Notice u/s. 148 was issued to Tide Water Marine International Inc.(TWMII) treating it as agent of the non resident assessee & the assessment was completed & penalty u/s. 271(1)(c) was levied. TWMII raised question of validity of assessment which was pure question of law which was allowed to be raised as additional ground before ITAT. Tribunal held that since the notice u/s. 163 was issued beyond the period prescribed u/s. 149(3), it was invalid & consequent reassessment was held as null & void, penalty based on such order cannot be sustained. 138. CIT vs. N. P. Methew (Ker.) [Returning NRI-Chapter XII A-concessional tax] 147 Taxman 670 N. P. Methew, was a non resident during the A. Y. 1991-92, at that time he had invested into various bank deposits. When in subsequent year he returned to India, he claimed concessional rate of tax applying provisions of Chapter XII-A. He filed all necessary declarations and complied with all formalities, the Assessing Officer did not allow the claim. Since there was no dispute that the income was arising out of the foreign exchange asset, CIT(A) and ITAT ruled in favour of the assessee, the Court also upheld the concessional rate of tax to the returning non resident. 139. Maneklal D. Shah v. P.K. Gupta [2004] 267 ITR 340 (Bom.). A reasoned decision is not only for the purpose of showing that the citizen is receiving justice but also a valid discipline for the authority itself - The Court observed that giving reasons is an essential element of administration of justice. Jayshree Tea & Industries Ltd. 145 Taxman 516 (AAR) [Interest payable to NR taxable] Indian company had taken interest-bearing loan from Singapore Bank which does not have permanent establishment in India. Issue was whether interest payable to non resident bank will constitute income in its hands applying Article 11 of India Singapore DTAA. AAR held that interest income was liable to tax in India. It was further held that jurisdiction of AAR under the amended provision was not affected by the fact that tax was borne by the Indian company.

140.

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141.

AFT Trust Sub-I Vs Chairman, CBDT, 144 Taxman 907 (Delhi) [Speaking Order] Petitioner entered into agreements for leasing agreement dated 18-10-1999, for leasing of two aircraft and applied to Central Government for approval under section 10(15A) of Income-tax Act 1961. The approval was denied without passing a speaking order. In response to court petition Delhi High Court quashed the CBDT orders and directed the petitioners to move fresh application within a period of four weeks, which Central Government shall decide within period of six weeks thereafter by passing a speaking order.

142.

Universities Superannuation Scheme Ltd. (AAR) 194 CTR 289[Sec. 115AD v. 48] Applicant a UK company registered as FII with SEBI. incurred long-term capital losses of Rs. 12.94 crores for A. Y. 2003-04. The applicant sought ruling to find, whether second proviso to section 48 would be available as against section 115AD(3), in such a case the loss would have to be worked out to Rs. 17.39 crores. Applicant argued that first and second proviso to section 48 are applicable to residents as well as to non residents, including FII who are also non residents. Section 115AD provide special method of computation and special rate of tax for FIIs. AAR held that there is no merit in the argument that in a year of gain section 115AD applies and in a year of loss section 48 applies. Section 115AD would be applicable irrespective of the result. Applicant argued that it would result in discrimination, which is prohibited under article 26. AAR ruled that the provision of article 26, non-discrimination is not attracted as the article forbids discrimination based on nationality and not based on residential status. AAR held that provisions of section 115AD would apply and section 48 is not applicable.

143.

JCIT vs. Steelco Gujarat Ltd. 99 ITD 408 (Ahd.) Steelco Gujarat Ltd. (SGL) opened received a contribution form NRI promoters, which was credited to SGL account in Japan. SGL opened a L/ C for import of machinery and lien was created for equivalent amount in that account. SGL earned interest on the foreign currency FD and paid interest on the L/C. Issue arose whether the interest received on FD was chargeable to tax or it will be capital receipt, applying Tuticorin Alkalies decision. Tribunal applied Supreme courts larger bench decision in the case of Autokast Ltd. and held the same to be taxable. Ordered the Assessing officer to allow deduction for interest paid after verification.

144.

Certain facts about DTAA which India has signed India-Spain, UK, US-DTAA excludes Managerial services from the definition of FTS Bangladesh,Brazil,Greece,Indonesia,Libya,Mauritius,Nepal,Phillipines,Sri Lanka,Syria,Thailand,UAE,UAR- No Article on FTS(Not taxable in India unless has a PE in India-Techniskill AAR ) Fees for Included Services-Make Available-Direct-Australia,Canada,Cyprus, Malta, Netherland,Portugal, Finland, Singapore, USA, UK and Due to MFNBelgium,France,Israel,Kazakhstan,Spain, Sweden ( because of MFN one can get away with Service PE clause)

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