1. AAR No. 744 of 2007 dt. 30th April 2008 in case of Applicant Know Werx Education (India) Private Ltd.

Facts

M/s Know Werx Education (India) Private Limited, is engaged in promoting professional examinations/certification programmes of foreign institutes, societies, professional bodies, etc., of international repute, which do not have any establishment of their own in India.  In the course of this activity, the applicant has signed an agreement with APICS which is a non-profit making body, and offers three certification programmes, namely, CPIM, CIRM and CSCP.  The applicant is in the process of signing another agreement with AST&L which is also a non-profit making body and offers its own certification programme known as CTL programme. Apart from this, the applicant carries on other activities as well, such as, corporate training, open public training, management consultancy, publishing and  trading in educational material, etc.  So far as promotion of professional examination/ certification programmes of foreign entities is concerned, the applicant will act as their agent; it will collect registration forms and fees from the individuals in India, who wish to register themselves for the examination; and pass them on to the foreign entity after deducting its administrative cost and commission.  The foreign entity will conduct examinations either through the applicant or through other entities in India.  The evaluation of answer sheets and award of certificates will be done by those foreign entities and they will send certificates to the applicant for local distribution to the successful candidates.  In the light of abovementioned facts, the applicant has sought advance ruling of this Authority in respect of APICS and AST&L on the following questions:

Questions

1. Questions framed by the applicant were reframed by the authority as under:

a) Whether the examination fee collected by the applicant on behalf of two professional organizations in USA, namely, APICS and AST&L and remitted to those two organizations is liable to be treated as the ‘income’ of the said entities liable to be taxed in India?

b) If the answer is in affirmative, how that income has to be classified – such as business income, income from royalty, technical services?

2. Whether the applicant has a legal obligation to deduct tax at source in relation thereto under the relevant provisions of Income-tax Act, 1961 and if so at what rate?

Contention of the revenue

1. The Commissioner of Income-tax, Mumbai in his initial comments, stated that as APICS & AST&L were not tax residents of USA, they could not avail tax benefits under the DTAA. The income by way of examination fees would be taxable in India as per the provisions of the domestic law. This income will be in the nature of business income which would accrue or arise in India. As such, tax shall be liable to be deducted at source under section 195(1) of the Act.

2. Faced with the failure of the ground as initially proposed, department raised further plea thereafter to the effect that applicant constituted business connection in India for APICS so as to attract provisions of section 9(1)(i) and further contended that applicant be treated as Permanent Establishment of APICS so as to attract Article 7(1) of the tax treaty between India and USA

Contention of the applicant and argument before the authority

1. The applicant contended that APICS and AST&L are exempt from income-tax in USA. If any taxes are deducted at source in India out of the examination fees paid to them, they would not be able to get any offset under the agreement for avoidance of double taxation between India and USA (DTAA).  As such, no deduction of tax at source should be made under the Income-tax Act, 1961 (the Act) on such income.

2. According to section 5 of the Income-tax Act, 1961 (ITA), the total income of a non-resident includes all income received or deemed to be received in India by him or on his behalf. It also includes income, which accrues or arises or is deemed to accrue or arise to him in India.  ‘Accrue’, ‘arise’ and ‘is received’ are three distinct expressions used in this sub-section.  So far as receipt of income is concerned, there can be no difficulty; it conveys a clear and distinct meaning. The income in the form of examination fees is received in India by the applicant and remitted to the non-resident entity abroad. The said income is undisputedly business income.  There is no controversy about the nature of this income.

3. It is further seen that clause (a) of sub-section (2) of section 5 of the Act not only includes income received by the assessee himself, but also income received on his behalf. The expression ‘on behalf of’ has a clear meaning which does not admit of any doubt.  The applicant does not merely act mechanically in collecting and transmitting examination fees, or acts as a mere conduit, but it performs a number of important functions for APICS by promoting and advertising their examinations in India, collecting filled in registration forms and fees from candidates, assisting APICS in selecting suitable places for conducting examinations, etc. Thus there cannot be any doubt that the applicant receives income in India on behalf of the APICS as their agent. Similar will be the position in respect of AST&L

4. Looked purely from the perspective of sections 4 and 5 of the Act, the examination fees collected on behalf of APICS and AST&L would be taxable under the Act. But there is an agreement with USA on avoidance of double taxation.

5. The applicant stated in the application that APICS and AST&L were non-profit making professional organizations and had been determined by the Internal Revenue Service (IRS), Department of Treasury, USA as ‘tax exempt organizations’. It emerged during the subsequent arguments that both APICS and AST&L are corporations incorporated in USA. As such, these are not ‘transparent entities’ and are liable to pay federal income-tax in USA. But these have been exempted from payment of tax under section 501 (c) (6) under the Internal Revenue Code (IRC), by virtue of their belonging to certain specified categories indicated in the above provision.  Such an exemption is permissible under paragraph 2 of article 1 of the DTAA.  This makes it clear that APICS and AST&L are tax residents of USA and the provision of the DTAA would be attracted in this case.

6. Having realized this, the learned counsel for the Revenue advanced two new pleas.  He first contended that the applicant constituted business connection in India for APICS.  Since APICS earned examination fees through this business connection, the same would be chargeable to tax in India in terms of section 9 of the Act. However Authority opined and ruled that the income in question is actually received in India as per sub-section (2)(a) of Section 5,  instead of accruing or arising or deemed to accrue or arise in India.  As such, section 9 would not be attracted and the question of business connection would not arise.

7. Learned counsel for the Revenue, then stated that the applicant should be treated as permanent establishment of APICS.  Thus the income earned by APICS in the form of examination fee would be taxable in India in view of the stipulation contained in paragraph 1 of article 7 of the DTAA. However Authority was of the opinion that the applicant is not a part of APICS.  It does not conclude any contracts on behalf of APICS.  The acceptance of candidature of an individual for a certification examination is solely done by APICS and applicant does not in any way bind APICS in the conduct of APICS examination programme in India. Similar will be the position in respect of AST&L. The applicant thus cannot be regarded as a dependent agent of APICS or AST&L under paragraph 4 of article 5. It is seen that the applicant enjoys an independent status.  As stated by the applicant, there is no financial, managerial or any other type of participation between it and APICS.   It carries on a variety of activities as noted above, besides promoting examinations of APICS and AST&L. So far as promotion of examination is concerned, it has engaged itself into business relationship with APICS, is in the process of forging such relationship with AST&L, and is open to having such relationship with other foreign entities. The applicant is not subject to any control of APICS with regard to the manner in which it shall carry out its activities with regard to promotion of the certificate examination.  Finally Authority was of the view that in terms of paragraph 5 of article 5 the applicant cannot be deemed to be a permanent establishment of APICS and /or AST&L in India.

8. Authority referred to the provisions of section 4 and the general scheme of Chapter XVII, before coming to section 195, to determine the liability to deduct tax by the applicant. Section 4 says that in respect of income chargeable under sub-section (1), income-tax shall be deducted at source or paid in advance. Section 190 states that notwithstanding regular assessment later, tax on such income shall be payable by deduction at source or by advance payment. Various sections of Chapter XVII deal with deduction of tax at source in relation to different types of income. Section 195 requires that any person who is paying any sum chargeable under the Act, inter alia, to a foreign company shall at the time of making payment deduct income-tax thereon at the applicable rates. Since Authority held that no tax is attracted on payment of examination fees being made to APICS & AST&L by virtue of paragraph 1 of article 7 of the DTAA, it stands to reason that no deduction of taxes need be made from such payments. 

Ruling

In the light of the foregoing discussion, Authority ruled that the applicant is not required to either deduct any income-tax or to pay any such tax on the examination fees collected by it for APICS and AST&L and remitted to them as the same is not taxable in India. Accordingly, part (a) of question no. 1 is answered in the negative. As regards part (b) of the said question, the nature of income is business income.  Question No. 2 is also answered in the negative.

2. AAR No. 761 of 2007 dt. 30th April 2008 in case of applicant, Kern-Liebers International GmbH

Facts

1. The applicant acquired 26% stake in an Indian company, namely, M/s Stump, Schuele and Somappa Pvt. Ltd., Bangalore (SSS Ltd.) during financial year 1964-65

2. In course of time bonus shares were allotted and it also subscribed to the right issues

3. On sale of shares, purchaser approached the Assessing Officer u/s 195(2) of the Income-tax Act, 1961 (ITA) for passing an order in regard to the deduction of tax at source. Similarly the applicant also filed an application before the Assistant Commissioner of Income Tax (International Taxation), Bangalore for determination of the appropriate tax which needs to be deducted.

4. The ITO passed an order taking the cost of acquisition of the bonus shares as ‘nil’

Questions

Applicant filed an application to obtain a ruling on following questions

1. In case of bonus shares acquired before April 1, 1981 whether fair market value prevailing on April 1, 1981 can be taken as cost of acquisition in view of provisions of section 55(2)(aa)(iiia) read with section 55(2)(b) of the Income-tax Act, 1961 for the purpose of computing capital gains?

2. Whether the applicant is required to file a return under section 139(1) for claiming refund of taxes deducted in excess by the Indian buyer while remitting sale proceeds of shares in SSS Limited?

Contention of the department

The Director of Income Tax (International Taxation), Bangalore had in his comments pointed out that the question raised in the application involved determination of fair market value of property within the meaning of clause (ii) of the proviso to section 245R(2) of the Income-tax Act and therefore the advance ruling cannot be sought.

Contention of the applicant

1. Under section 55(2)(aa)(B), the bonus shares allotted without payment of any consideration is an additional financial asset that falls within Part (B) of clause (aa) and therefore in the normal course the cost of acquisition shall be taken to be ‘nil’. However in relation to clause (aa) asset, that principle of computation stands excluded by the phrase “subject to the provisions of sub-clauses (i) and (ii) of clause (b)”. The expression was introduced to extend the benefit of deduction of deemed cost of acquisition in respect of a capital asset of the nature specified in clause (aa), if it were acquired before 1st April 1981. In support of his contention the learned counsel for the applicant drew attention to a recent decision of the Income Tax Appellate Tribunal reported at 281 ITR 18.

2. It is obvious that the Order passed by the ITO under section 195(2) read with section 154 of the Income-tax Act amounts to tentative fixation of tax liability and its subject to final view taken in the course of regular assessment (vide Transmission Corporation of A.P. Ltd vs. CIT)*.

Ruling

Authority observed that what we are called upon to decide is the principle and the basis on which the cost of acquisition of bonus shares has to be computed. We are of the view that the answer to the question raised does not involve any exercise as to the valuation and determination of fair market value of the property

2. Ruled that the fair market value prevailing on 1st April 1981 ought to be taken as the cost of acquisition in the case of bonus shares held by the applicant on 1-4-1981.

3. As the legal position as regards the first question has been clarified, the applicant can adopt the normal procedure by filing a return and claiming refund under section 139 of the Act in the prescribed form.