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1. Bad Debts – Provision –
S. 36(1)(vii)
I-T – Provision for bad debts
– If enactment is expressed in language which is fairly capable of either
interpretation, it ought to be construed as prospective only; Debit in
appropriation account would not by itself disentitle applicant from claiming
deduction
1. Facts
a) The applicant, Rural
Electrification Corporation Ltd. is a public sector undertaking and is
engaged in the business of providing long-term finance primarily to State
Electricity Boards for the purpose of transmission, distribution and
generation of electricity.
b) For the A.Y. 1997-98,
the applicant claimed a deduction of Rs. 34.57 crores. The opening balance
of special reserve was Rs. 272.79 crores and during the year Rs. 36 crores
was transferred to special reserve account. Applicant transferred Rs. 257.05
crores to general reserve.
c) Revenue had, all along
in the past, accepted the applicant to be an eligible financial corporation
and allowed deduction u/s 36(1)(viii) of the Act on the profits derived from
the business of long-term finance for rural electrification.
d) The Act was amended
w.e.f. 1-4-1998 to replace the phrase “in respect of any special reserve
created” with “in respect of any special reserve created and maintained”.
2. Questions
Whether the Income-tax
Authorities are justified in making / confirming the disallowance
d) u/s 36(1)(viii) of the
Income-tax Act (ITA), amounting to Rs. 34,57,00,000/- as per provisions of
that section as it stood at the material point of time
e) of Rs. 2.65 crores u/s
36(1)(viia) of the Income-tax Act pertaining to the provision for bad and
doubtful debts in spite of the fact that reserve for the same has also been
created.
3. Discussion and
conclusion
a) The Legislature had
amended section 36(1)(viii) and intended to confer the benefit under that
section only if that special reserve is created and maintained. The
consequence of withdrawing the amount from the special reserve in the
previous year, in respect of which deduction was claimed earlier, shall be
deemed to have been profits and gains of the business and are chargeable to
income-tax u/s 41(4A).
b) Going by the plain
language of the section as it stood at the relevant point of time, it can be
seen that creation of a special reserve was sufficient to entitle the
assessee to claim the benefit under section 36(1)( viii) of the Income-tax
Act and that the word “and maintained” was inserted only with effect from
1-4-1998 and it is not given any retrospective effect either expressly or
impliedly.
c) Learned counsel for
Revenue contended that the amendment is only clarificatory in nature as
otherwise, the second proviso will be practically rendered infructuous
because an assessee could, just before the special reserve bloats up to the
ceiling limit of 200 per cent of paid-up capital, withdraw the amount from
the special reserve and transfer the same to the general reserve. Therefore
even under the un-amended clause (viii), the special reserve shall not only
be created but continue to be maintained so that the restriction under the
second proviso could be effectively enforced.
d) It is well-settled that
an amending provision is regarded as clarificatory or declaratory when the
same is introduced to clear the doubts or ambiguity as regards its meaning
in order to avoid unintended consequences. In the instant case, there is no
ambiguity in the earlier provision of section 36(1)(viii) as the only
requirement for claiming the deduction was the creation of the special
reserve and the proviso to take care of the computational aspect. This very
scheme had been existing right from the inception of the Act. Moreover, in
the absence of clear words indicating that the amendment was clarificatory,
it would not be so construed when the preamended provision was clear and
unambiguous. Reference: Sakura vs. Tanoji, AIR 1985 1277.
e) AAR observed that merely
because the objective of the provision will be better served, it is not
permissible to read words into a provision which is otherwise clear. It is
well settled principle that “when enactment is expressed in language which
is fairly capable of either interpretation, it ought to be construed as
prospective only.
f) In relation to 2nd
question AAR observed that mere debit in the appropriation account by the
assessee will not disentitle him from claiming deduction when the same is
permissible to it u/s 36(1)(viia)(c) as bad debts. Also in substance,
provision though named as “Reserve” does not change the entitlement of
deduction as expenses to the assessee.
4. Ruling
a) Question No. 1: It was
not legally proper on the part of the Revenue to disallow the deduction
claimed u/s 36(1)(viii) of the Act
b) Question No. 2: It was
not legally proper on the part of the Revenue to disallow the deduction
claimed u/s 36(1)(viia)(c) of the Act
c) It is made clear that
this ruling will not cover the aspect regarding computation of the
deductible amount which is said to be pending before the ITAT.
M/s Rural Electrification
Corporation Ltd (Dated: March 31, 2009) A.A.R. No. 759 of 2007
(2009-TIOL-09-ARA-IT)
2. Capital Gains –
Non-resident – Computation – Applicability – S. 112(1)
Proviso to section 112(1) –
Proviso to section 48 – Section 55(2) – Tax payable in long term capital gains
on sale of Indian Co. shares will be 10% – Timken France SAS followed -
deduction is admissible under Sec. 48 on account of legal expenses in relation
to transfer of shares
1. Facts
a) The applicant, M/s.
Compagnie Financiere Hamon S.A., is a non-resident company incorporated in
France and is engaged in the business of project engineering, construction
and management.
b) In view of an expansion
project, it entered into a joint venture agreement with an Indian company
and their promoters and subscribed to 29,95,000 equity shares of the
company.
c) In the course of
operations of the Indian company, various disputes arose and it was agreed
under Memorandum of Settlement and directed by Company Law Board (CLB) that
25 lakh shares be sold to two of the promoters @ Rs. 65 per share and
balance 4,95,000 shares be retained by the applicant.
d) Legal expenses
equivalent to Rs. 89,02,063 were incurred by the applicant in the course of
pursuing disputes before CLB.
2. Questions
a) Whether on the stated
facts and in law, the tax payable on the long-term capital gains arising on
the sale of originally purchased shares of the Indian company will be 10% of
the amount of capital gains as per proviso to section 112(1) of the Act?
b) Whether in computing the
capital gains, deduction is admissible under section 48 of the IT Act on
account of legal expenses incurred in relation to transfer of shares?
3. Contention of the
applicant
a) Relying on the ruling of
the Authority in the case of Timken France SAS, the applicant contends that
second proviso to section 112(1) is attracted and therefore, the rate of 10
(ten) per cent specified therein would apply.
b) As regards the second
question, the applicant contended that legal expenses incurred is in
connection with the transfer of shares and has claimed the deduction of
these legal expenses under the 1st clause of section 48 of the Act.
4. Contention of the
Department
Revenue contends that the
applicant cannot avail of the lower rate of 10 (ten) per cent envisaged by
section 112 of the Act inasmuch as the 2nd proviso to section 48 of the Act
is not applicable to a non-resident. Further two decisions of the authority
in favour of the applicant are likely to be contested before the Apex Court
and also department need not follow the rulings of the authority in earlier
cases.
5. Discussion
a) The authority followed
the ruling in case of Timken France SAS and took the view that the benefit
of the proviso to section 112(1) of the Act could not be denied to
non-residents even if they are entitled to relief in terms of the proviso to
section 48 of the Act and long term capital gains shall be taxable @ 10% and
the first question was answered in the affirmative and in favour of the
applicant.
b) It is clear that the
legal expenses distinctly related to and integrally connected with the
transfer of shares, is admissible for deduction under section 48(i) of the
Act. The expenditure incurred towards legal fees should be in connection
with the transfer of shares. It must be noted that the expression ‘in
connection with such transfer’ is wider and more liberal in meaning than the
phraseology ‘for the transfer.’
c) The AAR considered it
appropriate to leave the issue open for the Assessing Officer to quantify
the admissible amount, as it did not have a clear picture of the expenditure
incurred wholly and exclusively in connection with the transfer of shares.
If the assessee is not in a position to furnish the details of expenditure
towards professional fees to lawyers, the Assessing Officer will allow a
reasonable amount towards this item.
6. Ruling
a) It is held that the
long-term capital gains arising to the applicant on the sale of Indian
Company shares will be 10% of the amount of capital gains as per proviso to
section 112(1) of the Act.
b) The question is answered
in the affirmative subject, however, to the qualifications and observations
recorded in the paragraph (5) above.
Compagnie Financiere Hamon,
dt 4th February 2009, AAR No. 780 of 2008 (2009-TIOL-03-ARA-IT) (2009) 221
CTR (AAR) 734; (2009) 18 DTR 289
3. Capital Gains –
Non-Resident – Computation of Bonus Shares – Ss. 55(2)(aa) 1981, 112(1)
Proviso to section 112(1) –
Proviso to section 48 – Section 55(2) – non-resident selling shares held in
Indian Co – long term capital gains - benefit of proviso to sec. 112(1) cannot
be denied to foreign Cos even if they are entitled to relief under first
proviso to sec. 48 – Timken France SAS followed – Cost of acquisition of bonus
shares may be taken as fair market value prevailing on 1st April, 1981.
1. Facts
a) The applicant, Four Star
Oil & Gas Company, a US Co., holds 22% of share capital of an Indian listed
company. The equity shares held by the applicant consist of original shares,
bonus shares and rights shares.
b) The applicant proposes
to sell its equity interest in the Indian company to two identified buyers
c) The proposed transfer of
shares will be under a private arrangement and will be ‘off market
transactions’.
2. Questions
a) Whether the long-term
capital gains arising on the proposed sale of shares held in an Indian
listed company by Four Star Oil & Gas Company (hereinafter referred to as
the “Applicant”) will be taxable at the rate of 10 per cent as per the
proviso to section 112(1) of the Income-tax Act, 1961
b) Whether the applicant
can avail the option of substituting Fair Market Value on April 1, 1981 as
the cost of acquisition for the bonus shares allotted to it prior to April,
1981 as per the provisions of section 55(2)(b)(i) of the Act.
3. Arguments & Ruling
a) Authority followed the
decision in case of Timken France, SAS and held that proviso to section
112(1) is a special provision and there is no warrant to limit the
beneficial rate of 10% only to resident assessees and it would have been
clearly indicated if non-residents were to be excluded.
b) The phrase in section
112(1) “…before giving effect to the provisions of second proviso to section
48” means before giving effect to the 2nd proviso wherever it is applicable,
but, the non-applicability of the 2nd proviso will not preclude the
applicant to avail the relief of lower rate of tax and the first question
was answered in affirmative i.e. in favour of the applicant.
c) The bonus shares
allotted without payment of consideration is an additional financial asset
that falls within part (B) of clause (aa) of section 55(2) and, therefore in
the normal course, the cost of acquisition shall be taken to be ‘nil’ in
view of stipulations in sub-clause (iiia).
d) But, the Authority is of
the view that 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)”. Thus, in the case of a capital asset answering the
description given in sub-clauses (i) and (ii) of clause (b), the rules of
computation laid down by those sub-clauses of clause (b) would prevail over
the rules in the preceding sub-clause (aa).
e) Therefore in view of
clause (b) of section 55(2), the cost of acquisition of the capital asset
acquired before 1st April 1981 can be taken as fair market value of that
asset as on 1st April, 1981.
f) Accordingly, the
Authority holds that the fair market value prevailing on April 1, 1981 ought
to be taken as the cost of acquisition in the case of bonus shares held by
the applicant on April 1, 1981.
M/s Four Star Oil & Gas
Co., dt. 31st March 2009, A.A.R. No. 792 of 2008 (2009-TIOL-07-ARA-IT)
(2009) 21 DTR (AAR) 50
4. Deduction at source –
Payment to Non-Resident – Royalty – India & USA DTAA – S. 195
Section 195 of the Income-tax
Act, read with, India-USA DTAA – royalty income – application seeking advance
ruling, rejected on ground that similar issue is pending with Tribunal and any
ruling at this stage may create anomalous situation for applicant to comply
with.
1. Facts
a) Gracemac Corporation, a
wholly owned subsidiary (WOS) of Microsoft Corporation (MS Co) in USA, had
the proprietary right over all the software and other products of MS Co. The
Singapore-based WOS, Microsoft Operations Pte Ltd. (the applicant), was
granted non-exclusive licence to manufacture, reproduce and distribute MS
Co’s products in Asia, including India and has made payment under non
exclusive licencing arrangement to practice in USA.
b) The applicant entered
into an agreement with another WOS, the Microsoft Regional Sales Corporation
(MRSC) which has been selling a wide range of IT products through a
marketing architecture of distributors / re-sellers to Indian customers, to
market the copyrighted software.
2. Question
a) Whether payment received
by MOL Corporation from the applicant for the functions performed in
Singapore under the licence agreement granting manufacturing and
distribution rights to the applicant are in the nature of ‘royalty income’
sourced and arising in India and taxable in India u/s 9(1)(vi) of ITA and/
or under the provisions of DTAA between India and USA, from which tax is
required to be withheld by the applicant?
b) Whether under the
arrangement, the payments made by independent Indian distributors to MRSC
should be regarded as licensing revenues accruing to the applicant which are
taxable as royalty income under the provisions of ITA or DTAA, from which
tax is required to be withheld by the applicant?
3. Contention of the
applicant
It is merely the sale of
copyrighted article akin to product sale and not a right to use copyrights,
therefore not a royalty income.
4. Contention of the
Revenue
The Revenue contended that
the payments were in the nature of royalty income taxable under sec.
9(1)(vi) and also under India-US DTAA, tax should be withheld on payments
made to the USA-based entity.
5. Ruling
a) The proceedings against
Gracemac were initiated in the year 2003. By the date of entering fresh
agreement in the year 2006, even the assessments were concluded against
Gracemac and the payments received from the applicant were subjected to
income tax in the hands of Gracemac. After the adverse order was passed by
the Appellate Commissioner, Gracemac filed the appeal with Tribunal, the
present application was filed in 2008.
b) Any reasonable person in
the position of the applicant should have been fully aware of the
implications relating to withholding of tax.
c) At this stage, if the
application is accepted, it may give rise to the conflicting decisions.
d) It would have been a
different matter if the applicant had approached AAR at the earlier point of
time in initial stages. The applicant cannot as a matter of right seek the
ruling from this Authority.
e) No explanation is
forthcoming for not approaching this Authority at the initial stages and at
the earliest opportunity. In the circumstances, it is just and proper not to
exercise the discretion implicit in section 245 R(2) to take up the
application for hearing on merits.
f) Accordingly, the
Authority held that the application is liable to be rejected under section
245 R(2) of the Act without expressing any view on merits. It is also added
that the mere fact that substantial questions do arise for consideration
does not by itself afford justification to admit the application, in the
peculiar facts and circumstances of the case.
Microsoft Operations Pte.
Ltd., dt 27th February 2009) A.A.R. No. 781 of 2008 (2009-TIOL-05-ARA-IT)
5. Double Tax Agreements –
India & Australia – S. 9(1)(1)(vii)
Indo-Australia DTAA –
engineering services – part of service contract executed outside India –
royalty income – ratio of Apex Court decision in Ishikawajima not applicable –
doctrine of territorial nexus at work – splitting of income not permissible –
entire receipts are taxable in India
1. Facts
a) The applicant,
Worleyparsons Services Pty Ltd., a company incorporated in Australia
provides professional services to the energy and resource Industries.
b) The applicant entered
into a contract with Sterlite Industries (I) Limited in connection with the
setting up of an Alumina Refinery in Orissa.
c) The applicant develops a
set of Basic Engineering Documents at its design centres at Perth –
Australia. However, for the purpose of gathering inputs from Sterlite for
the preparation of designs and documents, the personnel came to India. The
staff of the applicant also visited India to “explain deliverables to the
officers/ engineers of Sterlite” and to help Sterlite test the same.
Therefore, there are three steps involved in the whole process i.e.
collection of data, preparation of deliverables and transfer of deliverables
and testing the same.
d) While the work was
carried out from Australia, 11 employees in all visited India intermittently
for site visits and meetings. The number of days spent by the employees of
the applicant in India was 24 days during the financial year 2003-04 and 70
days during 2004-05.
2. Questions
a) Whether the receipts of
the applicant under the contract with Sterlite are in the nature of
royalties as defined in Article 12 of DTAA between India and Australia?
b) Whether the applicant
does not have a PE in India in respect of this contract ?
c) If answers to (a) and
(b) are in affirmative, the receipts from this contract are taxable only to
the extent of services utilized as well as rendered in India and therefore,
the services outside India is not to be taxed.”
3. Contention of the
applicant
a) The applicant avers that
the collection of data and transfer of deliverables had taken place in
India. However, preparation of deliverables, the crucial activity in the
transaction was done in Perth- Australia.
b) The applicant submits
that the services which were performed mostly outside India are in the
nature of ‘royalty’. The applicant did not have a permanent establishment
(PE) in India for the purpose of this contract and in the absence of PE, the
receipts under the contract with Sterlite are taxable as royalty income at
the rate of 15 per cent on gross basis as per Art. XII of the DTAA between
India and Australia.
c) In view of decision in
case of Ishikawajima- Harima Heavy Industries vs. DIT (288 ITR 408), the
applicant submits that the receipts related to the operations carried out in
Australia cannot be taxed in India. However, the amount worked out on the
basis of man-hours spent by the applicant’s personnel in India can be taxed
in India.
4. Ruling
a) The Supreme Court in the
case of Ishikawajima observed that the services covered by section 9(1)(i)(vii)
should have such a ‘live link’ with India that the entire income from FTS
becomes taxable in India.
b) The transfer of
deliverables took place in India and the staff of the applicant visited
India for ‘transferring and testing’ the basic engineering deliverables
under the Contract. Though the core activities of preparation of designs and
plans took place in Australia, the activities and services undertaken by the
applicant at various stages (both before and after the preparation of
designs and other deliverables) are by no means negligible or insufficient.
In fact, they were essential to carry out the obligations under the
Contract. Hence, it cannot be said that there is no sufficient territorial
nexus for the levy of tax under the Act read with the provisions of the DTAA.
c) It was pointed out that
the width and extent of territorial connection is not really material when
once some of the ingredients relevant to the territorial nexus are found to
be present in India.
d) In case of Ishikawajima,
there were offshore supplies of goods in respect of which title passed
outside the territorial limits of India, and there were offshore engineering
services which were rendered entirely outside India and separate
consideration was fixed for these supplies and services. Thus, a composite
contract consisted of distinct and severable segments, some having
territorial nexus with India, some not having such nexus.
e) However in the instant
case there is a single agreement covering only one particular type of work /
services and part of the work is done in India and part is done outside
India. It does not follow from what has been stated by Supreme Court that
the services or work covered by such agreement should be split up depending
on the actual place of performing them and the profits should be apportioned
accordingly.
f) Finally the Authority
answered the questions (a) and (b) in the affirmative and answered the
question (c) in negative, thereby holding its total receipts taxable in
India as royalty income and the same cannot be split up to exclude the one
attributable to the services provided outside India.
Worley Parsons Services Pty
Ltd, dt. 30th March 2009, A.A.R. No. 749 of 2007 (2009-TIOL-08-ARA-IT)
6. Double Taxation Avoidance
Agreement between India & Australia, Articles 5, 7 & 12; S. 9(1)(vi)
Section 9(1)(vi) read with
Article12(2) of DTAA between India and Australia – Reliance pipeline project –
Basic Engineering and Procurement services provided by Australian company –
services not effectively connected with PE in India – considered as royalties
under Article 12(2) and u/s 9(1)(vi) of ITA and taxed in India on gross basis
– Project Management Services, effectively connected with PE in India and
attributable amount taxed in India as business income under Article 7 of DTAA
1. Facts
a) The applicant, a company
incorporated in Australia is engaged in the business of providing
professional services to the energy and resource industries.
b) Reliance Petroleum Ltd,
an Indian company proposed to lay cross-country pipelines for transportation
of hydro-carbons from Jamnagar to Bhopal and from Goa to Hyderabad.
c) In connection therewith,
the applicant was awarded contract for providing various services viz. (i)
engineering and procurement services, (ii) project management services,
(iii) construction advisory and commissioning advisory services. However,
all the activities contemplated to be performed under these agreements were
not carried out as the contract was terminated in the mid-way. The Phase-I
of first agreement was executed fully and only a portion of the work under
the second agreement was done by the date of termination.
d) The activities
concerning basic engineering services were primarily carried out in Perth,
Australia. According to the applicant, the services done in Perth account
for 80% of the scope of work detailed in the agreement. The procurement
functions relating to phase I were ‘essentially’ performed in India.
e) Employees of the
applicant were present in India for 127 days during the financial year
2001-02 and 241 days during the next year
2. Questions
a) Whether the applicant
forms a permanent establishment (PE) in India due to its nature of
activities and services rendered in India under the contract with Reliance?
b) Whether the services
rendered by applicant are in nature of ‘royalty’ as defined in Article 12 of
the DTAA between India and Australia and are effectively connected to the
above PE?
c) If answers to (a) and
(b) above are in affirmative, the provisions of Paras 1 and 2 of Article 12
of the DTAA between India and Australia shall not apply to receipts of the
applicant under the Reliance contract and only so much of them as are
attributable to such PE in India are taxable in India at the rate of 20%
(plus surcharge, if any) provided in section 115A of the Income-tax Act,
1961?
d) The balance receipts of
the applicant under the Reliance contract are not taxable in India?
3. Arguments and Ruling
a) The scope of work and
services under the 1st Agreement provide for development and transfer of
technical plan and design, rendering of consultancy and technical services
which are ancillary and subsidiary to the supply of scientific, technical or
commercial information / knowledge. On analysis of the nature of activities
it is clear that most of the services fall within the ambit of the latter
part of clause (g) of para 3 of Article 12. More or less similar clauses in
the definition of ’royalty’ contained in Explanation 2 to section 9(1)(vi)
of the Act would be attracted and the royalty income shall be deemed to have
accrued or arisen in India u/s 9(1)(vi). Therefore both the sides agreed
that the services constitute ’royalty’ income within the meaning of Article
12(3) of DTAA as well as section 9(1)(vi) of the Income-tax Act, 1961.
Authority considered the
observations made by the Supreme Court in the case of Ishikawajima to
analyse whether territorial nexus is lacking in the instant case. In the
present case about 20% of the services, which are prerequisites or
components of the services rendered, were performed in India. Though such
activities were done without reference to any permanent establishment and
the major part or most of the services relating to phase I of Basic
Engineering & Procurement (BE&P) Agreement were carried out in Perth, it
afford sufficient territorial nexus to tax the receipts in India. It is not
the extent and magnitude of services rendered in Perth and in India that is
decisive. The territorial nexus vis-à-vis the power of taxation has never
been understood in a narrow sense. In view of the above, the AAR was of the
view that the territorial nexus is real and identifiable in the instant
case.
b) After the basic
engineering phase was over and the basic designs, drawings and procurement
plans were made ready, certain project management services were performed in
India. The applicant’s management and technical personnel stayed in Mumbai
for days together and worked from the office of the local engineering
contractor, namely, Jacobs Engineering Co. The nature of the services
coupled with the calculation of amount payable to the applicant based on
estimated man days at Mumbai would lead to holding that project management
services were effectively connected with the PE located in Mumbai and the
receipts therefrom shall be treated as business income and be taxable only
to the extent they are attributable to the operations of PE in India.
c) The applicant further
submits that in view of section 44D, no deductions are permissible and,
therefore, the portion of receipts attributable to the PE will be taxable on
gross basis @ 20%. In this regard, the stand of the applicant is, though due
to operation of Article 12(4), receipts are to be taxed under Article 7, yet
the receipts will be characterized as royalties.
d) The AAR however, came to
the conclusion that Article 7 read with Article 12(4) is not attracted and
the entire royalty income accruing or arising to the applicant under the 1st
Agreement is liable to be taxed in India under the Income-tax Act, 1961 read
with Article 12(2) of DTAA.
e) In regard to the
computation and the rate of tax, the provisions of the Income-tax Act and
the DTAA governing the royalty income, whichever is more beneficial to the
assessee shall be applied. The rate of tax of 15 per cent specified in
Article 12(2)(b) being lower than the rate prescribed by section 115A of the
Act, the same shall be applied. Hence, the royalty income has to be
subjected to tax at the rate of 15 per cent on the gross amount.
f) However, the payments
received under the Project Management Services Agreement are liable to be
taxed to the extent attributable to PE as business profit and are to be
taxed on net basis at the appropriate rate applicable to business income.
4. Conclusions
a) The services rendered
and the work undertaken by the applicant in terms of the Agreement for Basic
Engineering and Procurement services fall within the scope of “royalties” as
defined in Article 12(3) of the DTAA between India and Australia and the
receipts are taxable in India by virtue of Article 12(2). Under the Act too,
they are so taxable.
b) Though the applicant had
a PE in India, the effective connection between the PE and the royalty
generating services under the BE&P Agreement is not established.
c) The exclusion clause
under Article 12(4) of the DTAA is not attracted in view of the absence of
effective connection between PE and the services, and therefore, the royalty
income is liable to be taxed under Article 12(2) of the DTAA read with
section 9(1)(vi) and other charging provisions of the Act. The question of
attribution of only a part of the income to the PE does not arise as Article
7 which envisages such principle does not apply.
d) The entire receipts
under the BE & P Agreement are liable to be taxed as royalty income on gross
basis and at the rate of 15 per cent However, the receipts from the Project
Management Services agreement, shall be treated as business income and be
taxable only to the extent they are attributable to the operations of PE in
India. The permissible deductions and rate of tax concerning business income
will be applicable.
Worley Parsons Services Pty
Ltd, dt 30th March 2009, A.A.R. No. 747 of 2007 (2009-TIOL-06-ARA-IT) (2009)
21 DTR (AAR) 125
7. Double taxation relief –
Agreement between India and Korea – S. 9(1)(vii)
Section 9(1)(vii) –
applicable if service is rendered to promote insurance business – non-resident
deputes staffer for mutual business – applicant, a resident, partly reimburses
the salary – provision of services of technical personnel is covered u/s
9(1)(vii) and also under Indo-Korea DTAA – no TDS as reimbursement of salary
is not a revenue receipt / income
1. Facts
a) The applicant, an Indian
company, is engaged in the business of non-life insurance and is interested
in building up business relationship with Indian companies, which are
subsidiaries/joint ventures of certain foreign companies.
b) The applicant has, inter
alia, two divisions – one each dealing with the Korean and Japanese segments
in India. In this regard, the applicant is in need of persons from the
respective jurisdictions abroad who are well-versed with the insurance
business practices, foreign language and other related information that
would be of use to the applicant in the expansion of its business
activities.
c) In this connection the
Second Agreement was entered on 13th March 2006 between Hyundai Marine &
Fire Insurance Co. Ltd. Korea (HMFICL / Provider) and the applicant
(Recipient) and Mr. Shin Bong In, (Secondee) has been seconded to engage in
certain specified activities under the supervision and control of the
recipient.
d) The applicant reimburses
HMFICL, only a part of the salary and other benefits payable to the seconded
employee and nothing is payable by it to the secondee. HMFICL continues to
be the employer and deducts tax from the salary payment.
e) The secondee has no
right or authority to conclude any contract on behalf of the recipient and
HMFICL has no PE in India.
2. Question
a) Whether the amount paid
or payable by the applicant to HMFICL is in the nature of income accruing to
M/s. HMFICL in respect of which tax is liable to be deducted at source?
b) If answer to (a) is
affirmative what is the rate at which TDS is liable to be deducted?
c) Whether HMFICL has a
permanent establishment in India and any income can be attributed to it
under Income-tax Act read with DTAA?
3. Contention of the
assessee
The applicant claims that
payment to HMFICL being in the nature of reimbursement of the part salary
and expenses that are payable by HMFICL to the secondee, no income arises to
HMFICL in India and no tax is deductible in India.
4. Contention of the
Revenue
The Revenue argued that the
amount paid by the applicant to HMFICL under the terms of the second
agreement is nothing but fee paid for providing services of technical
personnel to the applicant and the nature of services to be performed by the
seconded employee are essentially technical and consultancy services. It is
therefore submitted that income shall be deemed to accrue to HMFICL in India
both under the provisions of Income-tax Act as well as Article 12 of the
DTAA between India and Korea. Hence, the applicant is liable to deduct tax
at source as per section 195 of the Income-tax Act, 1961. It was further
argued that the seconded employee can be regarded as an agent of HMFICL in
India and therefore the said company has an agency PE in India.
5. Ruling
a) Authority considered
that whether the words “including provision of services of technical or
other personnel” appearing within the definition of FTS u/s. 9(1)(vii), are
to be regarded as integral part of managerial, technical or consultancy
services or to be considered on a standalone basis?
b) HMFICL itself does not
render any service of the nature of managerial, technical or consultancy to
the applicant and it has not deputed its employee to carry out such services
on its behalf. In this factual situation, it is possible to contend that
merely providing the service of a technical person for a specified period in
mutual business interest not as a part of technical or consultancy service
package but independent of it, does not fall within the ambit of S.
9(1)(vii). However, no arguments have been addressed on this aspect and
therefore no opinion is expressed on this debatable issue.
c) As HMFICL does not
render any service of managerial, technical or consultancy nature, inclusive
part of the definition will apply if it is considered as standalone
provision as the seconded employee renders service of technical nature
involving specialized knowledge and expertise in insurance business and
systems related thereto.
d) However in order to
treat the payment as FTS, important question is whether the amounts paid to
HMFICL in terms of the Secondment Agreement can be construed as the
‘consideration’ for the provision of services of technical personnel?
e) A perusal of the
agreement would show that the parties have entered into a mutually
beneficial arrangement; as HMFICL will also benefit because it would not
merely promote business relations, but the applicant would, wherever
possible, place the re-insurance business with HMFICL; and the applicant
reimburses a part of the salary of the employee, payable by HMFICL. In this
process, no income can be said to have been generated which answers the
description of FTS
f) The Authority answered
the first question in negative but held that that no tax is liable to be
deducted at source by the applicant in respect of the payments made or to be
made to HMFICL
Cholamandalam MS General
Insurance Co Ltd., dt. 29th January, 2009, AAR No. 752 of 2007
(2009-TIOL-02-ARA-IT) (2009) 221 CTR (AAR) 721; (2009) 309 ITR 356; (2009)
19 DTR 1
8. Industrial Undertaking –
Special provisions – Row casting into machined castings – Manufacture – S.
80-IC(2)
Section 80-IC(2), whether a
mechanical process by an undertaking converting raw castings into commercially
new goods called machined castings – a new product with distinctive name &
character – eligible for deduction.
1. Facts
a) The applicant is a
non-resident individual intending to start during F.Y. 2008-09 a unit 100%
ancillary to tractor manufacturing industry in the State of Himachal
Pradesh, with initial investment of Rs. 40 lakhs in the Plant and total
investment of Rs. 1 crore.
b) The proposed business
establishment will be covered as small-scale industrial unit
c) Applicant undertakes, as
per the parameters, milling, tooling and grinding of the surface of the raw
castings of Rear Cover & Differential Housing, which are important parts of
tractors; through requisite technology such as Special Purpose Machines (SPM),
special Jigs, Jigs and tools.
d) Pursuant to processing,
a new product/article called ‘Machined casting’ is manufactured and these
‘machined castings’ fit compatibly into tractor parts.
2. Questions
a) Whether the applicant
would be eligible for deduction under section 80-IC(2) of the Income-tax
Act, 1961 for carrying out the activities stated in the application as a
small scale industrial undertaking / ancillary unit?
3. Ruling
a) AAR observed that the
cardinal point, in order to claim relief under section 80-IC of the Act,
there exist
• an undertaking or an
enterprise and
• the said undertaking/enterprise must manufacture or produce any article
or thing
b) In the present case, it
emerges that the applicant is a proposed undertaking i.e. business
establishment which will be processing or refining the raw castings provided
by the Principal. It further emerges that the mechanical process to be
applied to raw castings would bring into existence commercially new goods;
with distinctive name, character and use; called ‘machined castings’ which
fits compatibly into a tractor.
c) On the basis of the
facts presented, the conclusion that inevitably follows is that the
applicant’s enterprise can be said to have undertaken business activities
which amount to manufacture or production of an article different from the
raw casting and therefore merits requisite deduction under section 80-IC(2)
of the Act.
Shri Ramit Kumar Sharma, dt.
27th January 2009, AAR No. 778 of 2008 (2009-TIOL-01-ARA-IT) (2009) 309 ITR
344
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