1. Fruit based drink mixes/concentrates derived from fruit juice – business of processing, preservation and packaging of fruits or vegetables – eligible for deduction u/s 80IB(11A)

a) The applicant, a non-resident Indian is engaged into the business of squeezing of juice from fruits and vegetables, extracting oil, emulsifying, homogenizing and/or spray drying it; adding preservatives and other additives and packaging in compatible packs. The question before the authority is whether the profits from the business of the applicant is eligible for deduction u/s 80IB(11A)

b) In section 80IB(11A), the words processing and preservation are used side by side. Processing may be for the purpose of preservation, however processing is ought not to be confined only to preservation. The expression cannot be confined to minimal processing that would not change the identity of the fruit. If the benefits are not extended to the derivatives from the fruits, the benefit intended to be given to agro-processing industries will operate in a very limited sphere. Thus authority held that the applicant is entitled to the benefit of deduction provided she satisfies other conditions. Thus question is answered in affirmative.
Mrs. Delna Rustum Boyce, A.A.R. No. 824 dt. 28th October 2009 [2009-TIOL-26-ARA-IT]; (2001) 185 Taxman 180 (AAR - New Delhi)

2. Income tax – Sec 44BB – Applicant is a tax resident of Poland – provides onshore seismic data acquisition and other related services to oil and gas industry – seeks advance ruling on whether the income from its such activities falls within the ambit of Sec 44BB of the I-T Act, 1961

a) Applicant has been providing the seismic data acquisition, processing and interpretation services to various oil and gas exploration and production companies in India. ONGC figures in its list of customers. It contends that its activities related to seismic data acquisition clearly fall within the ambit of Section 44BB of the Income Tax Act, 1961 and therefore the computation of income should be done in terms of that Section.

b) Revenue contended that the services rendered by the applicant can be considered u/s 44BB only if they are not covered under explanation 2 to section 9(1)(vii) of the Act.

c) AAR observed that applicant neatly fits into the Sec 44BB and all the ingredients of that section are satisfied to attract the first part of the Sec 44BB.

d) The existence of the PE is a common feature both in Sec 44DA as well as Sec 44BB. Though there is an explicit reference to PE under Sec 44DA, what is important is the nature of the business and it is that factor which serves as an indicator to apply one of the two sections. If the business is of the specific nature as envisaged by Sec 44BB, the computation provision therein would prevail over the computation provision of Sec 44DA and therefore income has to be computed in terms of Sec 44BB.

Geofizyka Torun SP. ZO.O., A.A.R.

No. 813 of 2009 dt. 7th December 2009 [2009-TIOL-31-ARA-IT]

3. Income tax S. 45, 48, 92 – whether transfer of shares of Indian subsidiaries of an American company, Dana Corporation, without consideration, in a scheme approved for bankruptcy proceedings in an American court, will attract capital gains – No; even transfer pricing provisions cannot be invoked as there is no income

a) Applicant argued that under the Bankruptcy proceedings liabilities taken over by new company DHC from Dana Corporation (DC) were more than the assets. That the transfer of Indian company’s shares to the new corporation were without consideration.

b) In the absence of any consideration, computational provisions u/s 48 fails and therefore charging provision u/s 45 cannot be invoked. It was further argued that fair market value of the shares in question could not be taken as representing the amount of consideration for the transfer of shares. Since there is no income chargeable under the ITA, computational provisions of sec. 92 cannot be made applicable.

c) Revenue contended that taking over of liabilities by DHC can be taken as the consideration for the transfer of shares and that transfer includes even transfer by operation of Law and or under the orders of Court.

d) As the transfer of shares is for fair consideration, it cannot be said that there is no income even if such a consideration is not identifiable or indeterminable.

e) An arm’s length price can be arrived at by taking resort to the transfer pricing provisions u/s 92, computational provisions does not fail.

f) Referring to number of decisions including Supreme Court’s decision in CIT vs. B.C.Srinivasa Setty and Sunil Siddharthbhai vs. CIT, Ahmedabad, AAR observed that the profit or gains or the full value of consideration cannot be arrived on a notional basis or hypothetical basis, the profit or gains to the transferor must be distinctly and clearly identifiable component of the transaction and that hypothetical benefit cannot be presumed and hence cannot be taxed u/s 45.

g) One cannot find the consideration by means of conjectures and assumptions. When the entire assets and liabilities of DC have been taken over by DHC in order to reorganize the business it is difficult to envisage the proportion of liabilities that constitutes consideration for transfer notwithstanding the fact that such consideration was never defined nor identified.

h) If charge u/s 45 fails to operate for want of consideration or determinable consideration, obviously the provisions of sec.92 etc. do not come to the aid of the revenue as sec. 92 is not an independent charging provision, but a machinery for the computation of income from an international transaction, which is charged to tax elsewhere under the Act.

i) The income if at all is chargeable to tax, it is taxable under the head “Capital Gains”, failing which sec. 92 does not come to the aid of revenue. The expression “income” in sec. 92 is not used in a sense wider than or different from its scope and connotation elsewhere in the Act. Sec. 92 obviously is not intended to bring in a new head of income or to charge the tax on income which is not otherwise chargeable under the Act and hence there is no income chargeable to tax either u/s 45 or u/s 92.

Dana Corporation, AAR No. 788 of 2008 dt. 30th November 2009 [2009-TIOL-29-ARA-IT]; (2009) 32 DTR 1 (AAR)

4. India-Japan DTAA – Applicant received royalty income – amendment by protocol in tax rate on royalty (TDS rate) in DTAA from 24.2.06 – new rate applicable from AY 2008-09

a) Applicant is a Japanese company engaged in construction architectural services, provides architectural and civil engineering services to its Indian subsidiary. It receives royalty payments for transferring technical knowhow. Article III of the protocol amended India-Japan DTAA to reduce maximum TDS rate to 10%, from 24-2-2006. The question arose as to the date of applicability of new rate.

b) AAR observed that it is clear from the wordings of the Article V [para 2(b)] of the protocol amending the Article 12 of the Indo-Japan DTAA that the rate of tax of 10% will be applicable from the previous year beginning on or after 1-4-2007, on any royalty income earned in India by Japanese company.

M/s Sumitomo Mitsui Construction Co Ltd. AAR No. 830 of 2009 dt. 20th November 2009 [2009-TIOL-28 -ARA-IT]

5. India-USA DTAA – Consideration for Technology transfer / technical know-how and the services connected, liable to be taxed as royalty –

a) The applicant, a company incorporated in USA entered into a technology transfer agreement with CEAT Ltd., an Indian company; to

i. grant a perpetual irrevocable right to use the know-how;

ii. transfer the ownership in tread and side-wall designs and patterns required for manufacture of radial tyres

iii. provide consultancy and assistance including training services

b) The questions put before the authority were

1. Whether consideration for transfer of documentation payable by CEAT Ltd. to the applicant is exigible to tax under Income Tax Act, 1961 (ITA)?

2. Whether the consideration for consultancy and assistance receivable by the applicant from CEAT Ltd. is taxable in India under ITA?

3. If taxable wholly or partly, at what rate and on how much remittance tax needs to be withheld u/s 195 of ITA?

c) Applicant contended that the know-how transferred in the shape of technical documentation and designs, will be considered as ‘plant’ and thus not liable to taxation in India, either u/s 5 or u/s 9(1)(i) of ITA, as plant and consideration were transferred outside India and also clauses 9(1)(vi) & 9(1)(vii) have no application. Also relying on clause (a) of para 5 of Article 12 of Indo-US DTAA, the consideration received towards consultancy and assistance does not amount to ‘fees for included services.’

d) There is transfer of right to use, including the requisites to effectively utilize it. Thus the authority ruled that technology / know-how transfer gets covered under sub-clauses (i), (ii) and (iv) of Explanation 2 to section 9(1)(vi) and the services connected with those items fall under sub-clause (vi).

e) The theory of territorial nexus cannot possibly be invoked as the technical know-how embodied in various documents is received in India from time to time and is put to use in India with the assistance and advice offered by the technical personnel of the applicant deputed to India.

f) The essential nature of transaction is not the sale of property, but conferment of right to use the technical know-how not merely for the plant that is being set up but also for similar plants in the future. Secondly, the plethora of technical services to be rendered by the applicant in the form of consultancy, assistance and training cannot be regarded as merely ancillary & subsidiary and also the ingredient of inextricable link will also be missing, if the applicant’s contention is to be accepted that only the sale of technical documentation is involved.

g) Tax shall be deducted @ 10% in accordance with the provision of S.115A ( 1) of ITA.

h) Tax shall be deducted on the amount receivable under the contract less the consideration for the transfer of ownership in Tread and Sidewall design/pattern.

M/s International Tire Engineering Resources LLC, A.A.R. NO. 804 OF 2009 dt. October 28, 2009, [2009-TIOL-25-ARA-IT]

6. India-US DTAA – Applicant enters into agreement with DRDO for commercialisation of technologies in defence-related areas – also enters into an agreement with the University of Texas to provide certain managerial, technical and consultancy services – is such services liable to tax as FTS u/s 9(1)(vii) of the Act 1961or as fees for included services under Article 12(4)(b) of the Indo-US DTAA.

a) Applicant enters into MoU with Defence Research Development Organisation (DRDO) for assisting it in identification and business development of competitive global technologies from its inventory of existing defence-related innovations; jointly initiates ‘Accelerated Technology Assessment and Commercialisation’ Programme for two years. Applicant enters into second agreement with UT(IC2) of University of Texas which has specialisation in helping out commercialisation of technological innovation. The university is to carry out lab nomination, global screening of nominated technologies, Quickscan, and Commercial assessment and also provide Programme Manager to design and implement the programme.

b) Income shall be deemed to accrue or arise in India u/s 9(1)(vii)(b) of the ITA and also under Article 12(4)(b) of the DTAA and therefore applicant is taxable to deduct tax u/s 195.

c) AAR observed that the services might be covered u/s 9(1)(vii) of the Act, however under the treaty vital question is whether technical or consultancy services rendered by university, make available technical knowledge, experience, skill, etc.

d) The principle involved in technology commercialisation and making the participants familiar with various aspects of the programme does not prima-facie amount to making available technical knowledge, experience, skill, etc.

e) Acting as a facilitator and technical consultant for the purpose of commercialisation of identified technologies, screening and assessment of technologies by deploying the expertise & resources which university has and preparing technical reports including market analysis, expression of opinion, formation of recommendation and rendering assistance in connection with the programme of study do not really make available the technical knowledge or knowhow.

f) The services/activities provided by University to DRDO pursuant to agreement with FICCI, do not fall within the purview of Article 12(4)(b) of the DTAA and payment received under the agreement are not liable to be taxed as fees for technical services under ITA nor it can be taxed under Article 12(4)(b) of the Indo-US DTAA. As the University does not have any PE in India, even it cannot be taxed as Business income in India.

Federation Of Indian Chambers Of Commerce And Industries, A.A.R. No. 811 of 2009 dt. 30th November 2009 [2009-TIOL-30-ARA-IT]

7. State owned power distribution company – s. 115JB – additions made to the book profit on account of interest and prior period expenses unsustainable, but AO to redo the assessment in light of the material which has been placed before the authority for the first time

a) The applicant is a Government company engaged in the business of power distribution in the state of Rajasthan. The assessing officer (AO) invoked section 115JB of ITA and made an addition on account of interest and prior period expenses.

b) The question arose as to whether interest paid to RRVPN, on the amount of FDR loan raised by RRVPN from financial institutions on behalf of assessee company is allowable to the assessee company. On the basis of the facts presented by the applicant with the supporting documents it is prima facie evident that the loans taken by RRVPN were for the business purpose of the applicant and it was the liability of the applicant to bear the interest liability. Thus AAR ruled that it deserved to be allowed u/s 36(1)(iii), however AO to redo the assessment subject to the verification of factual details which has been placed before the authority for the first time.

c) Whether the amount debited under the head “prior period expenses” can be added back for the purpose of book profit u/s 115JB. Applicant maintaining mercantile system of accounting could not provide certain expenses in the books of accounts on account of its ascertainability, now provided the expenses as “prior period expenses” during the period under consideration. Thus prima facie applicant is entitled to such relief and addition to the book profit cannot be sustained subject to the verification of factual position as stated by the applicant that it has received demand notices on the basis of which it has provided the liability.

d) Whether the application of MAT provision u/s 115JB is justified and whether the depreciation which is nowhere debited in the books of accounts but arrived at during assessment proceedings by AO can be added back for the purpose of book profit. Applicant has stated that it has provided the depreciation as per the Companies Act, 1956 read with principles contained in the statutory rules framed under the Electricity (Supply) Act. In such circumstances such a diversion from the Companies Act in providing depreciation and not following the accounting standard 12 deserved proper consideration by AO and the appellant authority and therefore additions made to profits on account of depreciation is not sustainable.

Jodhpur Vidhyut Vitran Nigam Limited, A.A.R. No. 801 dt. 20th November 2009 [2009-TIOL-27-ARA-IT]