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1. An
agreement for laying pipelines under the sea and constructing the structures –
India-Mauritius DTAA – technical services, integral part of the project – ‘fixed
place of business’ should be in existence for fairly long time – applicant was
in India for less than 9 months – No PE – Not liable to pay tax in India.
The applicant entered into an
agreement on 4th December 2007 with Hindustan Oil Exploration Company Ltd. (“HOEC”)
for laying pipelines under the sea and constructing the structures inclusive
of pre-commissioning of pipelines for a fixed and lump sum consideration of US
$ 59,174,200. The questions arose whether;
a) the contract price
receivable by the applicant was liable to taxation in India under ITA or DTAA
between India & Mauritius?
b) If answer to (a) above is
affirmative, to what extent are the amounts attributable to the operations
carried out in India and accordingly taxable in India?
c) If answer to (a) above is
affirmative, whether the activities of the applicant are covered under section
44BB of ITA and whether the applicant can pay presumptive tax on the
attributable amount?
d) If answer to (a) above is
affirmative, whether tax at the rate of 4.223% (10% of 42.23%) can be withheld
at source on the lump sum contract price which is attributable to operations
in India?
The payment received by the
applicant under the contract cannot be constituted as ‘fee for technical
services’ as whatever technical services are provided, were only integral to
the performance of the project work. In order to constitute PE, the fixed
place of business must be in existence for a fairly long time. The question
arises as to which date shall be taken as starting of the project for the
period of 9 months as envisaged by clause (i) of article 5(2) of
Indo-Mauritius Treaty. Date of signing the contract cannot be considered as
material date as thereafter the contractor submitted detailed programme of
work for approval. Preliminary work undertaken outside India cannot be
considered for identifying the starting point. The preparatory stages leading
to the actual commencement of the work such as gathering the equipment and
arranging the infrastructure for carrying out the work in full swing shall
fall within the ambit of the project duration, which began some time in
October 2008. The project ended sometime in April 2009 when the equipments are
demobilized and close out report is made. Thus in any case the approximate
duration of the project will not exceed 6 to 7 months and there does not exist
any PE in India. As the answer to first question is negative, the other
questions need not be answered. It is however open to the department to
inquire whether the project work was closed by March-April 2009.
Cal Dive Marine Construction
(Mauritius) Ltd., AAR No. 789 dt. 26th June 2009 [2009-TIOL-16-ARA-IT]
2. Apprehension of price
manipulation is real even in international transactions between partners and
firm, who are associated persons – transfer pricing provisions should apply to
such transaction
The applicant M/s. Canoro
Resources Ltd. is a company registered in Canada. It is engaged in the
business of exploration and production of petroleum and natural gas, mainly in
Canada and India. In India it holds participating interest in three oil
blocks. Of these only Amguri block has started producing oil and gas. The
applicant has entered into separate Production Sharing Contracts with the
Government of India and the Assam Company Ltd. in which it holds 60%
participating interest and is also the operator.
The applicant proposes to
restructure its business in India, to attract investment, by transferring its
participating interest in Amguri block to a partnership firm to be formed in
Canada between it and its wholly owned subsidiary.
Revenue contends that the
proposed restructuring is merely a device for avoidance of tax. However has
not shown how it is a tax avoidance device. AAR noticed that the applicant has
offered to pay tax on the proposed transaction. The applicant may exit from
the proposed partnership firm in future, but it will not render the present
transaction as tax avoidance device as whenever the firm transfers its
interest it would be liable to capital gains tax in India.
The issue is the mode of
computation of income on transfer of asset to the partnership firm. AAR
observed that however the wordings of section 45(3) are wide enough to cover
an international transaction, sections 92 to 92F apply exclusively to
international transactions carried out between associated persons, to tackle
the issue of price manipulation associated with international transactions.
The apprehension of price manipulation is real even in international
transactions between partners and firm, who are associated persons. Thus the
value of consideration on transfer shall be determined on the basis of arm’s
length price.
AAR ruled that;
a) The proposed partnership
firm can be assessed as a firm under ITA, provided the requirements of
section 187 are complied with.
b) The firm shall be liable
to tax @ 30% plus applicable surcharge and cess in accordance with paragraph
(c) of the First Schedule of Finance Act, 2008.
c) The residential status
of the firm can be determined by the assessing officer at the relevant point
of time.
d) If the proposed
partnership is assessed as a firm, then the share of the partners shall not
be included in the total income of the partners.
e) The proposed transfer of
the participating interest in Amguri block shall be regarded as an
international transaction between two associated enterprises and resulting
capital gains can be assessed in accordance with the transfer pricing
provision and the provisions of section 45(3) would not prevail over it.
f) The provisions of
Article 24 (non discrimination) would not be attracted as article does not
apply vis-à-vis residential status but vis-à-vis nationals.
Canoro Resources Ltd. AAR No.
779 dt. 23rd April 2009 [(2009) 223 CTR (AAR) 339, (2009) 31 ITR 2(AAR),
(2009) 180 TAXMAN 220]
3. End to end international
long distance telecommunication services – India-UK DTAA – not a royalty – not a
fee for technical services – no permanent establishment – no tax payable in
India – no TDS
The applicant, Cable &
Wireless Networks India Private Ltd. is engaged in the business of providing
national long distance (NLD) & international long distance (ILD)
telecommunication services in India. The applicant proposes to enter into an
agreement with M/s. Cable & Wireless UK (C&W UK) so that in case of ILD
services, the applicant would provide the Indian leg of the service by using
the network & equipments of itself or other domestic operators and
international leg of the service would be provided by C&W UK. The questions
put before the authority for ruling are;
a) whether the amounts
payable by the applicant to C&W UK would be in the nature of “fees for
technical services” (FTS) under Explanation 2 to clause (vii) of section
9(1) of ITA or under Article 13 of India-UK DTAA?
b) Whether the amount
payable would be in the nature of “royalty” under Explanation 2 to clause
(vi) of section 9(1) of ITA or under Article 13 of India-UK DTAA?
c) Whether C&W UK has a
Permanent Establishment (PE) in India under article 5 of the treaty?
d) Whether income derived
by C&W UK will be chargeable to tax in India? If not would such payment
suffer withholding tax under section 195 of ITA, and if yes, at what rate?
C&W UK is not providing any
technical, managerial or consultancy services, nor it is providing services of
its technical or other personnel; therefore it would not amount to FTS u/s
9(1)(vii) of ITA. Also it does not make available any technical knowledge,
skill or experience as per Article 13(4) of DTAA between India & UK.
The payment to C&W UK is for
the use of standard services and not for the use of secret process or for the
use of any intellectual property or equipment. There is no stipulation for
provision of any equipment or payment for the same.
Applicant & branch office of
Cable & Wireless India Ltd., a group company, are separate entities which
perform different types of services. Also presently it cannot be said that C&W
UK would be deputing personnel to provide technical & maintenance support. The
applicant negotiates & concludes contract in its independent capacity. The
contracts entered into by the applicant with C&W UK and with Indian customers
are on principal to principal basis and the breach of one type of contract
does not affect the rights and obligations arising under other type of
contract. Thus C&W UK does not have any PE in India.
Since the income is not
chargeable to tax in India, there is no question of any deduction at source
u/s 195.
Cable & Wireless Networks
India Pvt. Ltd. AAR No. 786 of 2008 dt. 30th June 2009 [2009-TIOL-17-ARA-IT]
4. India-Australia DTAA –
non resident enters into multiple contracts with ONGC – Service PE – Duration of
totality of services furnished under different contracts to be aggregated for
determining PE under DTAA and not contract-wise – Royalty income not to be split
up to allocate a part to work done in Australia
Applicant is engaged in the
business of providing professional services to energy and resource industries.
It enters into agreement with ONGC for reviewing and providing technical
services in relation to various engineering contracts. It deputes its
personnel to work closely with ONGC personnel. Various teams of applicant
visits India for different periods in relation to execution of different
contracts. The income is taxable largely under two heads, of royalties and
business profits attributable to PE.
Applicant insists
contract-wise counting of period of stay of its personnel for determining the
question of Service PE. However it was held that expression ‘services’ in
clause (c) of Article 5(3) of the DTAA cannot be treated in a truncated manner
as all the contracts were with one party and related to redevelopment of
Bombay High South and North off-shore Oil Fields. The activities were to be
carried out in and around Mumbai. Thus from geographical and commercial point
of view also, the services cannot be dissociated from each other for the
purposes of Article 5(3)(c) and the duration of totality of services furnished
under various contracts between the same parties during the 12 months period
has to be taken into account. If so, the yardstick of 91 days stands
satisfied, and income attributable to the PE will be taxable in India.
For determining whether any
part of income shall be taxable as royalty or fees for technical services,
DTAA does not have specific provision for fees for technical services and also
the scope of royalties is narrower. Payment shall be considered as royalties
under Clause (g) of Article 12(3) if rendering of services makes available
technical knowledge, experience, skills, know-how or processes or there is
transfer of technical plan or design. Mere rendering of technical services is
not sufficient, the essence of clause (g) is transfer of technical know-how
[ref: Intertek Services India (P) Ltd.].
As regards clause (c) of
Article 12(3), corresponding provision of Income Tax Act is narrower and the
payment shall be taxed as royalties if there is “imparting of any information
concerning the technical, industrial, commercial or scientific knowledge,
experience or skill” There is provision of valuable information or input,
there is no imparting of such information that constitutes royalty. Also
services involve modification of designs which was then transferred to the
ONGC. However widely the expression ‘technical plan or design’ is understood,
it cannot be said that any technical plan or design was evolved by the
applicant and transferred to ONGC.
There was transfer of
technical plan/design only in the case of contract no. (5), which took place
in India. Though the bulk of the work was done from Australia, there is
sufficient territorial nexus with India and the profits derived from this
contract are liable to be taxed under section 5(2) read with section 9(1)(vi)
of ITA on gross basis at 15% and it is not permissible to split up such
royalty income by allocating part of it to work done in Australia.
Worley Parson Services Pvt.
Ltd. AAR 748 dt. 23rd April 2009 [(2009) 223 CTR (AAR) 209, (2009) 313 ITR 74
(AAR), (2009) 180 TAXMAN 296]
5. India-Singapore DTAA –
Applicant is a sub-contractor of a contractor who gets major contract for
modernization of Delhi Airport – contract involves supplies of goods fabricated
abroad and payment for the same is made outside India and design & erection of
structural steel work in India – Assessee seeks ruling whether its income is
deemed to arise in India – held, since the applicant fails to furnish the
logical sequence of the transactions and lack of documents lead to dismissal of
application
DIAL appointed L&T as an EPC
contractor for new Terminal Building at Delhi Airport. L&T entered into an
agreement with the applicant for off-shore supplies outside India, onshore
supplies from India and design, detailing, painting and erection of the PTB
and Fore Courts. The applicant undertook only the off-shore supplies relating
to overseas fabricated items which envisaged supply, fabrication and delivery
outside India and it sub contracted other two items to Geodesic Techniques
Pvt. Ltd. The applicant’s project office is sharing space with Geodesic
Techniques Pvt. Ltd. This project office merely receives communication and
handles the calls. There are two site engineers visiting the site at airport
and monitoring the progress. It is contended that it is not a permanent
establishment and it has not played any role in connection with off-shore
supplies from out of India. Also the applicant has no business connection out
of which income accrues or arises. The questions arose
a) whether in case of
off-shore sale by a non resident to a resident, if the consideration is
received abroad and the property for the goods passes outside India, the
income accrues or arises or deemed to accrue or arise outside India?
b) whether in case of
transaction of sale of goods, by non resident to resident as a part of
composite contract involving various operations within India and outside
India, the income by the non resident (off-shore) shall be deemed to accrue
or arise in India or accrues or arises in India through or from any business
connection in India?
The authority observes that
the first question is general in nature and like legal a proposition culled
out from decided cases. If sale of goods took place outside India and title to
the goods passed at the port of shipment or while goods were on high-seas and
the consideration was received abroad, the income does not accrue or arise or
deemed to accrue or arise in India
For answering the second
question, the operations that took place in India have not been specified. The
question has been apparently framed as an alternative argument that in case
the first question is answered against the applicant, only the operations in
India attributable to the business connection in India would be liable to be
taxed under ITA and if there is no permanent establishment to which Indian
operations can be attributed, then under DTAA, even that portion of business
profits would not be liable to tax.
From the main agreement it is
not clear as to who is the exporter and what is the role played, point of time
of transfer of ownership, payment, etc. Also the agreement contemplates
high-seas purchase contract between L&T and DIAL, the applicant being no party
to such contract. Thus the contention of the applicant as to sale of goods,
transfer of property and payment is unsubstantiated.
Although the applicant was
given opportunity to place all the relevant documents but it did not avail the
chances and thus the authority has dismissed the application for lack of
information.
M/s Yongnam Engineering &
Construction (Pte.) Ltd., AAR No. 783 dt. 17th June 2009 [2009-TIOL-15-ARA-IT]
6. India-USA DTAA – Is TDS
deductible on annual fee paid by SREHT to Harvard Medical International USA,
especially when both are not liable to tax in their respective countries – on
the basis of facts available, this question cannot be answered
SREHT, the applicant, ran two
institutions, namely Sri Ramachandra Medical College and Research Institute
which enjoyed the status of a deemed university and Sri Ramachandra Hospital,
a University hospital. The applicant entered into an agreement with the
Harvard Medical International, Massachusetts, USA (HMI), for transfer of
knowledge and experience in the field of medical sciences. Both, the applicant
and HMI are exempt from tax in their respective countries.
HMI is to render educational
and teaching services to the applicant. The services which form part of annual
plan are called ‘deliverables’ for which an annual fee of US $ 250,000 is
payable and additional services are called ‘additional deliverables’ HMI also
grants non-exclusive, non-transferable licence to the applicant for use of HMI
name, marks, logos and designs. If fee paid includes consideration for use of
intellectual property, it will be taxable. Workshops and seminars are
conducted where generally, the speakers are from HMI. These activities could
be regarded as teaching in or by educational institution as in paragraph 5(c)
of Article 12 if faculties are from HMI, participants who benefit are pursuing
medical courses in applicant’s institution and workshop is substantially
connected with the course. Principal of Dental college visited Harvard Medical
school in order to promote exchanges between the two institutes and students
went to Harvard Medical School for doing clerkship. As regards tuition fees of
scholars, it is covered by example 10 of MOU. Teleconferencing & e-learning
and payment to faculty members for teaching through teleconferencing &
e-learning are part of teaching methodology and would be covered under Article
12(5)(c).
As applicant makes lump sum
payment for all the services like CME Programmes, Faculty-Student Exchanges,
Telemedicine and other additional services, it is not possible to say what
amount is relatable to teaching in or by educational institution. It depends
on further scrutiny by appropriate authority. The applicant may make
application to AO u/s. 195 and upon determination of amount which is
chargeable to tax, may deduct tax on such portion of the payment.
Sri Ramachandra Educational
and Health Trust (SREHT), AAR 673 dt. 29th May 2009 [(2009) 224 CTR (AAR) 225]
7. Indo-Korean DTAA –
Applicant has an LO – enters into agreement with Indian Co. for
telecommunication services – Is LO a PE? – as long as LO does only auxiliary
work for head office, it is not a PE – also covered under exclusionary provision
of Article 5(4) of DTAA.
The applicant has a Liaison
office (LO) of a Korean company in India. It is set up as per approval granted
by RBI for a period of three years for the purpose of liaisoning activities,
which was extended by RBI for a further period of three years on the basis of
activities undertaken by it. The applicant enters into an agreement with an
Indian telecommunication company to interconnect with each other and to
purchase and provide the services by a date confirmed between them. As per the
agreement, the applicant shall bear the investment cost, the connection and
maintenance of the connecting facilities between its Network and Indian
Company’s Foreign POP. Similarly, Indian Company shall bear the investment
cost, the provisioning and maintenance of connecting facilities in India and
of its Foreign POP as well as for the connection between them. Each party will
send the other party an invoice of all traffic terminated on its side during
each calendar month The question put before the authority is whether LO is a
PE?
The counsel for the Revenue
argued that, in order to determine whether LO is a PE, it is required to
obtain detailed information on the role played by LO and or its employees in
the technical analysis or execution of the project. Also irrespective of the
question of PE, the agreement may be taxable in India in terms of section 5(2)
read with sections 9(1)(vi), 9(1)(vii) of the Act and Article 13 of the DTAA;
which question is not put before the authority for ruling.
The authority held that as
per statutory provisions & tax treaty, the activities of LO are much
restricted to act as a communication channel between the head office and
parties in India and undertake only supporting, aiding or auxiliary
activities.
As per Article 5(4)(d),
collecting information is considered as auxiliary activity, unless collecting
the information is the primary purpose of the enterprise. In the instant case
LO is collecting host of information concerning various Indian companies only
as auxiliary activities. LO has nothing to do with telecommunication services
and network and contracts connected therewith. Thus LO cannot be considered as
PE in terms of Article 5(4)(d) of the treaty.
However if the activities of
the liaison office are enlarged beyond the parameters fixed by RBI or if any
concrete material is found which substantially impact the applicant’s version
of facts, it is open to the department to take appropriate steps under law.
M/s. K. T. Corporation, AAR
No. 791 dt. 29th May 2009 [ (2009) 181 TAXMAN 94]
8. Mere collaborative effort
for successful performance of project is not sufficient to constitute an AOP –
sale of equipment and materials took place outside India and income in relation
thereto cannot be said to accrue in India
The applicant is a company
incorporated in Korea engaged in the business of power stations. Power Grid
Corporation of India Ltd. gave a contract to the applicant for the execution
of the works related to 800KV/400KV Tehri Pooling Station Package. The
applicant was permitted to assign any portion of the Contract either in full
or in part to L&T, in which event Power Grid will enter into a separate
contract with L&T. The applicant was awarded off-shore contract covering all
the works to be performed outside India including supply of all off-shore
equipment and materials on CIF Indian port of disembarkation basis and L&T to
perform onshore supply and services contract. The question arises as to
a) whether the amounts
received/receivable by the applicant for off-shore supply of equipments,
materials, co-ordination and overall responsibility are liable to tax in
India under ITA or tax treaty?
b) If the answer to (a)
above is affirmative, in view of Explanation (a) to section 9(1)(i) of the
Act and/or Article 7(1) of the India-Korea treaty, to what extent are the
amounts reasonably attributable to the operations carried out in India and
accordingly taxable in India?
c) Whether the applicant
together with L&T can be said to constitute an AOP and assessed as such
under ITA?
The AAR observed that mere
collaborative effort and overall responsibility assumed by the applicant for
successful performance of the project is not sufficient to constitute an AOP.
The contracts, obligations and payments under the contracts are separate and
independent of each other. Thus, the individual identity of each party doing
the part of the work entrusted to it is preserved, notwithstanding the
co-ordination between the two and the overall responsibility of the applicant.
The requisite cohesion, unity of action and common objective of sharing the
revenue or profit are lacking. Thus it cannot be constituted as an AOP.
The title to the goods in
case of off-shore supply contract shall pass on to Power Grid at FOB Port of
shipment with the negotiation of shipping documents which was evidenced by the
fact that bill of entry, insurance policy, etc. contained the name of Power
Grid. Thus income in relation thereto cannot be said to accrue or arise in
India.
The AAR ruled that the
applicant does not have a PE within the specific description of Article 5(3)
of DTAA. If in light of further inquiry that may be made, the Department comes
to the conclusion that there is a PE, the income to the extent attributable to
the operations of PE can be subjected to tax in India.
M/s. Hyosung Corporation AAR
No. 773 dt. 17th June, 2009 [2009-TIOL-14-ARA-IT]
9. Subscription fee
collected for accessing database located outside India – computer database falls
within the meaning of literary work – Not a Royalty – Business income taxable in
India only if there is PE – No withholding Tax – No returns
‘FactSet’ a company
incorporated in USA maintains a ‘database’ outside India of financial and
economic information of companies world-wide. FactSet enters into a Master
Client License Agreement with its customers under which it grants limited,
non-exclusive, non-transferable rights to use its databases, software tools,
etc. for which it receives subscription fees outside India.
The ruling is sought on
following questions
a) With respect to
subscription fees, whether FactSet is taxable in India under Income-tax Act
(ITA) or under DTAA between India & USA?
b) If not taxable in India,
whether its customers are required to withhold taxes u/s. 195?
c) Assuming the applicant
has no other taxable income in India, will it be absolved from filing a tax
return in India u/s. 139?
The database is intellectual
property of the applicant and copyright attaches to it. The applicant grants
only the non exclusive access right to the customer and several restrictions
are placed on the licensee so that he cannot distribute the data downloaded by
it to others. Thus subscription fees received does not fall within the scope
of clause (v) of Explanation (2) to section 9(1)(vi) of the Act and does not
constitute ‘royalty’ or u/s. 9(1)(vii) of ITA as ‘fees for technical services’
or under India-USA DTAA.
Also the applicant states
that it does not carry on its business operations through any PE in India and
there is no agent in India acting on behalf of the applicant and having an
authority to conclude the contract. Thus it cannot be taxed as business income
in view of Article 7 of India-USA DTAA.
At present, there is no
obligation to file the return in view of the finding that there is no royalty
income and on the facts stated by the applicant, there is no PE.
Factset Research Systems Inc.
AAR No. 787 dt. 30th June 2009 [2009-TIOL-18-ARA-IT]
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