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A.A.R. No. 745 – Geoconsult ZT GmBh (2008) (304 ITR 283) (AAR)
a) Facts
(i) The applicant, M/s. Geoconsult ZT GmBh (G.C. or
Geoconsult), is a company, incorporated in Austria.
(ii) The applicant, Geoconsult, has formed a joint venture
(J.V.) with two Indian companies namely (a) M/s Rites Ltd. India, registered
in Delhi and (b) M/s. Secon Pvt. Ltd. India, registered at Bangalore. This
joint venture is specialized in providing project consultancy services.
Further, Himachal Pradesh Road and Other Infrastructure Development
Corporation Ltd. (HPRIDC) has awarded a contract to the applicant, to provide
Consultancy services for development of seven tunnels in Himachal Pradesh to
carry out the implementation of the aforesaid work. The applicant, as per the
averment, renders almost all the services from Austria and in order to
coordinate with other members of the joint venture, an engineer has been
deputed who undertakes periodical site visits. The applicant states that it
has neither a ‘fixed place of business nor an office’ in India. It does not
also perform any substantial activities in India. The employees are also not
deputed in India for a considerable length of time. The applicant, as
contended, does not have a ‘permanent establishment’(P.E.) in India within the
meaning of Article 5 of the DTAA between India and Austria. The applicant,
however, submits that the income received by the J.V. for the services
performed in connection with the agreement fall within the term ‘fees for
technical services’ and is, therefore, subject to tax in India in accordance
with Article 12 of the DTAA between India and Austria.
(iii) On the above facts and contentions, the applicant has
sought advance ruling by the Authority on two questions framed by it – one
relating to the applicability of Article 12 of DTAA and the other about the
existence of P.E. in India.
b) Question before the authority
The final reframed questions raised by the applicant are as
under
1. “Whether the applicant can be said to have permanent
establishment in India within the meaning of DTAA between India and Austria?
2. If the answer to question 1 is in the affirmative,
whether the income of the applicant under the agreement in question is
attributable to such permanent establishment and be subjected to tax as
business profits under Article 7 of the DTAA between India and Austria?
3. If the answer to question 2 is negative, whether the
income of the applicant under the agreement in question is liable to be taxed
as fees for technical services under Article 12 of the Double Taxation
Avoidance Agreement between India and Austria?”
c) Contention of the Applicant
The applicant states in the statement of facts that it has
been awarded a contract for consultancy services in respect of phase I and
phase II above and has received the payment only for the rendering of
managerial and consultancy services. As such, the income earned by the
applicant on this score is taxable as fees for technical services under
section 9(1)(vii) of the Act read with Article 12 of the Treaty. It has also
been emphasised that there is no Permanent Establishment (PE) as per Article 5
of the Treaty in this case.
d) Contention of the Revenue
The Revenue stated that the services provided by the JV
partners to the client, HPRIDC, are in the nature of consultancy services. It
has also been stated that as per the provisions of section 9(1)(vii) of the
Act, the term “fees for technical services” has been defined as including “any
lump sum consideration for the rendering of any managerial, technical or
consultancy services”. Since the services provided by the applicant are in
the nature of ‘consultancy services’ as well as ‘technical services’, income
arising to the applicant, therefrom, are deemed to accrue or arise in India
and is also subject to tax therein. Since the applicant is a resident of
Austria, it would, however, be entitled to the benefits of the provisions of
DTAA between India and Austria. Article 12(4) of the DTAA, defines the term
“fees for technical services” meaning “payments of any amount to any person
other than payments to an employee of a person making payments, in
consideration for the services of a managerial, technical or consultancy
nature including the provisions of the services of technical or other
personnel”. The consultancy services provided by the applicant to HPRIDC may
fall within the scope of definition of “fees for technical services”, and as
per Article 12(2) of the Treaty the Indian Government is empowered to deduct/
withhold tax @ 10% on the gross amount of the fees for technical services
received by the applicant, if there is no P.E. in India. The Revenue contended
that the applicant has a PE in India and the fees received by HPRIDC are
attributable to such PE and is thus taxable in India as “profits & gains of
business or profession” under Article 7 read with sec. 44DA of the Act as per
the rates in force.
Before the case was taken up for hearing on merits under
section 245R(4) of the Act, Revenue submitted that the ‘J.V.’, which has
received the contract from the HPRIDC is, in fact, assessable as an
‘Association of Persons’ (AOP) under the provisions of the Income-tax Act.
Accordingly the question is reframed as, “Whether, in the factual as well as
the legal matrix, the Joint Venture can be treated as an association of
persons (A.O.P.) in consonance with section 2(31)(v) read with the Explanation
to section 2 of the Act and liable to be assessed as such under the Income-tax
Act?”
The learned counsel for the Revenue emphasized that
(i) Scope of the work lays down that all the parties shall
be jointly and severally liable for the satisfactory and successful
execution/completion of the work in all respects
(ii) Allocation of work between the JV partners reveal that
they have agreement of various work responsibilities amongst themselves
(iii) Members of JV are jointly and severally responsible
and in case of default by one of them, he/it indemnifies other member in
respect of the consequences.
(iv) JV partners are responsible for invoicing to the lead
partner for their services and lead partner is required to prepare a
consolidated invoice to the client.
(v) That the decision of the case in Van Oord ACZ B.V.
reported at 248 ITR 399 (AAR) is distinguishable on facts and on legal aspect
in as much as that essential ingredient i.e. joint management. Joint liability
and sharing/ production of profits were not much explicit in that decision and
on the basis of the clause “each of the parties expressly agrees that it is
not their intention through the joint venture to carry on business in common
with the other parties with a view to profit and that it is their intention to
utilize the joint venture safely for the better cooperation with the employer
and the division of the works and gross income arising under the contract.”
Authority held that the agreed object was not to produce income and that with
insertion of proviso to section 2(31), ingredient to produce income is not
required and what is required is common business purpose and common management
(vi) Receipt from HPRIDC by the lead partner be assessed as
the income of the AOP based on the decision of Supreme Court in the case of
ITO vs. Atchaih 218 ITR 239 (SC), i.e. taxation @ 41% on the net basis
e) Countering the argument raised by the Revenue learned
counsel for the applicant has contended that
(i) the JV cannot be regarded as AOP primarily because of
the fact that contract has been awarded to consortium/JV for the purpose of
execution.
(ii) scope of the work of member is clearly spelt out and
extent of co-ordination is only for the satisfactory completion of the whole
project.
(iii) the income on the gross basis goes to the JV members
directly and not to the JV and there is no agreement to share profits between
the JV members. Consequently invoices has been separately raised by each
member for their part of services. The only purpose for associating together
is the client’s insistence for the same.
(iv) nothing has been done by JV to produce income and the
fact of the case is similar to that of decision of Authority in case of Van
Oord ACZ BV.
(v) If the decision in case of Atchaih were literally
followed then provisions of section 67A and section 86 of the Act would become
redundant. In the applicant’s case gross revenue is directly paid to each
member so there will be no taxable income earned by the AOP.
(vi) Dr. Prinzal’s role on behalf of the applicant is quite
limited to co-ordination and “liaisioning activity” and does not involve
actual project itself. Moreover there is neither fixed place of business or
place of office as described in Article 5 of the DTAA. Consequently there is
no PE in India and the income cannot be taxed under the head “Business
Income”.
f) Conclusion
AAR after reviewing the rival submissions
(i) referred to the case of CIT vs. Indira Balkrishna, 39
ITR 546, for meaning of the word “Associate” means according to Oxford
dictionary “to join in common purpose, or to join in an action.”
(ii) referred to the case of Deccan Wine & General Stores
vs. CIT 106 ITR 111 (AP) which has laid down the principles governing an AOP
that there must be common design (combine will & meeting of minds) to produce
income. If there is no common design there is no association. Common interest
is not enough. Production of income is not enough.
(iii) Arrived at a crystallized judicial view that
essential of AOP are (a) Presence of two or more persons, (b) voluntary
combinations, (c) a common purpose or common action, (d) combination in joint
enterprise, (e) some kind of scheme for common management
(iv) Arrived at a conclusion that (a) Contract is with the
JV and not the members, (b) members have collaborated for all work associated
with the consultancy services, (c) they are jointly and severally responsible
for the performance of the work, (d) applicant who is recipient of the major
part of the consideration manages the JV and coordinates with all concerned.
The formation of association with a common object and unified management is
thus evident, (e) there is mutual agreement between JV members in relation to
investments in the venture
(v) If it is income of the AOP in Law, AOP alone has to be
taxed, members of the AOP cannot be taxed individually in respect of the
income of the AOP and that section 67A has lost its relevance after the
decision of Supreme Court in ITO vs. Atchaih, which held that there is no
option either for the revenue or the assessee for assessing the members
directly, as was possible under the Income-ax Act, 1922
g) Ruling of the Authority
JV is to be assessed to tax as an Association of Person
only. Consequently other three questions as contained do not merit ruling.
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Anapharm Inc. (2008) 174 Taxman 124 (AAR)
a) Facts
Applicant, Anapharm Inc., a company incorporated in Canada,
had entered into agreements with two Indian pharmaceutical companies, namely
Sandoz Pvt. Ltd., Ranbaxy Research Laboratories for rendering the services of
bioequivalence and/or comparative bioavailability of the new generic drugs
vis-à-vis the reference drugs already available in the market. Anapharm had
developed methods/protocols for carrying out the evaluation work which were
its own property and only the final reports and conclusions of the evaluation
were provided to its clients. Also each new drug required a fresh evaluation
to be undertaken.
b) Question before the Authority
Whether the fees received by Anapharm from the Indian
pharmaceutical companies for undertaking clinical and bio-analytical study and
in terms of the agreements entered into with the said companies is subject to
tax in India under the Income-tax Act, 1961 (“the Act”) and the India-Canada
Double Tax Avoidance Agreement (“Treaty”)?
c) Applicant’s contention
It was Anapharm’s contention that the services rendered by
it to its clients did not make available any technical knowledge, experience,
know-how or process or consist of the development and transfer of a technical
plan or technical design and must therefore not be considered as ‘fees for
included services’ under Article 12(4) of the Treaty. According to Anapharm,
technology is considered to have been ‘made available’ only when the recipient
is enabled to apply that technology.
d) Revenue’s contention
The Revenue argued that the fees paid to Anapharm were in
the nature of ‘fees for included services’ and ‘royalty’ under Article 12 of
the Treaty. According to the Revenue biotechnical services are, in fact,
technical services and the test result is know-how and technical experience of
Anapharm which it makes available to its clients at the time of furnishing its
report. This was especially since Ranbaxy and Sandoz retained the ownership(s)
of the tested samples, test compounds, and also patents arising from the
research project.
e) Ruling
The AAR while deciding on the matter, relied upon the
protocol to the India-USA Convention on avoidance of double taxation
(“India-USA Convention”) which provides guidance in interpreting Article 12 of
the India-USA Convention which is pari materia with Article 12(4) of the
Treaty. The said protocol provides that ‘Generally speaking, technology will
be considered ‘make available’ when the person acquiring the service is
enabled to apply the technology. The fact that the provision of the service
may require technical input by the person providing the service does not per
se mean that technical knowledge, skills, etc., are made available to the
person purchasing the service, within the meaning of paragraph 4(b).
Similarly, the use of a product which embodies technology shall not per se be
considered to make the technology available.’ The mere fact that technical
skills were required to provide the commercial information the service
rendered does not become a technical service. It is, thus, reasonably clear
that mere provision of technical services is not enough, but the service
provider should also furnish his technical knowledge, experience etc. to the
recipient such that the recipient can independently perform the technical
function himself in the future without the assistance of the service provider.
In the facts and circumstances of the case the AAR
considered that the test reports are drug specific and the materials furnished
by Anapharm will not in any way help the customers to facilitate further
research and development of new drugs. Mere handing over tested samples and
test compounds could not be equated with making technology, know-how, etc.,
available to Ranbaxy. Thus, the payment to Anapharm could not be regarded as
fees for included services. Further, the income could not be taxed as royalty
income since Anapharm only imparted its final conclusions which it draws from
its own experience and by its own interest in retaining its secrets and means
of production, which would pre-vent it from parting with its experience or
transferring any knowhow. Thus Anapharm being in the business of providing
bio-analytical services, the consideration received by it was considered to be
business income. In view of Article 7 and 5 of the Treaty, such income could
only be taxed in India if Anapharm had a permanent establishment in India and
in the absence of which the same is not taxable in India.
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A.A.R. No. 770 (2008) 174 Taxman 480 (AAR) – Golf In Dubai,
L.L.C. dt. 13th October, 2008
a) Facts:
(i) The applicant, Golf In Dubai, LLC (GID), is a company
registered in United Arab Emirates (UAE), having its registered office in
Dubai. The applicant is engaged in the business of promoting Golf nationally
as well as internationally by way of organizing Golf tournaments in different
countries. The applicant’s role is that of an event organizer who earns
income by way of organizing such events.
(ii) It organized two Golf tournaments in India. The first
one was organized in Bangalore at Eagleton, the Golf Resort (in short Eagleton)
from 3rd December, 2007 to 8th Dec., 2007. The second tournament was organised
on the Golf course of the Delhi Golf Club (in short DGC) in February 2008;
i.e., from 4th February 2008 to 10th February, 2008.
(iii) For organizing the tournaments at Delhi, the
applicant had entered into formal Venue Agreement dated 30th January, 2008
with DGC and had agreed to pay DGC a fee of US $ 80,000 in consideration of
granting of the right to use the premises (of DGC) to host the event which was
sponsored by EMAAR-MGF, an Indian company along with OMEGA and CNN as
co-sponsors. The applicant entered into a formal agreement with EMAAR-MGF
also for three years from 2007 presumably with an eye on such future Golf
tournaments. No formal venue agreement seems to have been entered into with
Eagleton. In pursuance of the oral agreement, GID paid US $15,000 as venue
charges for obtaining the right to use the Eagleton. Incidentally, no ticket
income was generated from both these tournaments, as entry was free.
(iv) Since GID did not have, as stated, any Permanent
Establishment (PE) in India, these tournaments were organized on ‘remote
basis’ i.e. by hiring independent third party local contractors and suppliers,
having local expertise and experience. In fact, GID entered into a formal
agreement with one consultant company of Kolkata, namely Par Golf Tours &
Accessories Pvt. Ltd. (in short ParGolf) which had requisite experience of
organizing such events in the past. GID made total payments (after withholding
tax) to ParGolf who provided the services in relation to organizing the
events. As stated in the application, GID proposes to continue organizing
such
events in future also so that India is publicized as a venue for international
Golf tournaments.
(vi) In the wake of organizing both these tournaments as
referred to above, the applicant has received the following income from the
Indian sponsors: -
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Sponsorship fee,
which essentially represents reimbursement expenses on prize money,
accommodation for players, Golf course fee, catering, advertisements and
publicity expenses etc.
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The management
fee, which represents the actual fee for organizing the tournament.
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Income from sales
of merchandise at the venue and over the internet.
b) Questions
before the authority
(i) Whether “GID/the Applicant” could be deemed to have a
Permanent Establishment (“PE”) in India in terms of Article 5 of “India-UAE
DTAA”?
(ii) Whether Eagleton, Bangalore and/or the Delhi Golf Club
could be deemed to be an agency PE of GID in India since the tournaments were
held at grounds of each of these clubs and/or for providing ancillary
assistance to GID in organizing the Golf tournaments?
(iii) If the answer to any of the queries above is in
affirmative, whether any or all of the following income generated by GID from
the Golf tournament held in Delhi and Bangalore would be liable to tax in
India in terms of Article 7 of the India-UAE DTAA?
(iv) In the event that GID does not have a PE in India,
would any of the income arising to GID under any of the above heads be taxable
in India under any other provision of the India-UAE DTAA?
c) The applicant emphasised that it does not have PE
(i) In terms of Article 5(1) of India-UAE DTAA, as PE
indicates availability of fixed place at a particular geographical location
for an enduring period which is not a temporary and generally the period is at
least of six months. In present case learned councel contended that business
of organizing the tournament lasted only for 6-7 days and as such the
requisite degree of permanence is absent. Also there is no certainty as to its
regularity through such a fixed place.
(ii) In terms of Article 5(2)(i) of India-UAE DTAA, the
employees or other personnel did not stay in India for furnishing services for
a period aggregating to more than nine months within any twelve month
period. There is accordingly, no Service PE of the applicant.
(iii) Further, there is no Agency P.E. also in this case as
various third-party vendors with whom GID had entered into arrangements for
organizing the tournament, both in Bangalore and Delhi, were independent
contractors who acted in their ordinary course of business operations. In
fact, none of these vendors can be termed as dependent agents who can act on
behalf of the applicant and have an authority to conclude contracts on behalf
of the applicant. In this regard, the learned counsel has also placed reliance
on two decisions of the Authority for Advance Rulings– the first being the
case of AL NISR Publishing In re (239 I.T.R.879) and the second being that of
Speciality Magazines P. Ltd., reported in 274 I.T.R. 310 where the concept of
Agency PE has been dealt with.
(iv) In the absence of the PE, applicant’s income cannot be
taxed in India.
(v) The nature of the income is such that it cannot be
characterized as royalty income or fees for technical services (FTS) in
accordance with the provisions of the treaty. Moreover there is no mention FTS
in the article 12 of the treaty. Applicant did not receive any income for use
of any right or patent or secret formula or imparting of any commercial
information by the applicant. Although it is in possession of such commercial
information, same is not imparted to any third party.
(vi) Article 22 on residual income of the treaty does not
envisage receipts of the type of FTS.
d) Learned Department Representative strenuously
contended that
(i) the fixed place of business in the case of the
applicant is the Golf course of the DGC and the Eagleton.
(ii) these places arguably are made available to the
applicant also during 2009 and 2010 as per its agreement on an annual basis,
being a pattern of regularity although it may be for 6-7 days in a year.
(iii) the above argument is based on the paragraph (4),
(4.1) and (4.6) of the OECD commentary, wherein it is stipulated that even if
an enterprise has certain amount of space at its disposal which is used for
the business purposes, it is sufficient to constitute place of business and no
formal legal right to own the place is required.
(iv) Regularly maintaining the same pitch in the market
place for a weekly market would be enough to constitute a fixed place of
business, relying upon the commentary of Prof. Klaus Vogel’s book.
Number of examples were cited by revenue and the applicant
focusing on length of the fixed place PE and regular availability of such
fixed place, may be for a week in a year. However revenue further contended
that
(i) PAR Golf with whom GID has entered into agreement has
provided services for organizing the event as such and therefore it
constituted PE for the applicant as per paragraph (4) and (5) of Article 5 of
the treaty
(ii) Taking into account the initial visit of the Vice
Chairman of the company on 27-5-2007, the total stay of the employees of the
company aggregates to nine months or more giving rise to existence of service
PE as per article 5(2)(i) of the treaty.
e) To strengthen the submission, applicant’s counsel
(i) submitted various examples of PE in respect of “musical
tours”, “ice skating shows”, “theatre company”, “travelling circuses” from
Prof. Skaar’s book.
(ii) submitted that even in applicant’s case there is no
degree of permanence in respect of any of the venues of the Golf Tournaments
because as per the contractual terms there is no binding agreements for
organizing these events in 2009 & 2010 at these very places. As such the
element of enduring performance is missing and moreover these Golf Courses are
not at the exclusive disposal of the applicant and therefore such a non
exclusive and the limited access to the space does not constitute PE.
(iii) While denying the existence of Service PE, referred
that as per article 5(2)(i) of the treaty, Service PE includes “furnishing of
services through employees or other personnel in the Contracting State
provided that such activities continue for the same project for a period
aggregating more than 9 months within any 12 months period. It has been stated
that employees in the instant case did not furnish the service on the project
of “organizing Golf tournaments” for such a period.
Learned counsel also argued that present case has to be
analysed under Article 5(2)(i) of the treaty and if Article 5(2)(i) is not
applicable then article 5(1) cannot be pressed into service as specific
provisions of Article 5(2)(i) of the treaty will override the provisions of
Article 5(1). As regards services of third parties including that of ParGold,
they cannot be considered for PE perspective as they are not dependent
personnel of the applicant.
f) Conclusion and Ruling of the Authority
(i) Existence of Service PE:
Authority opined that Article 5(2)(i) of the Treaty is not
at all applicable in the present case. In fact, clause (i) of Article 5(2)
states that PE includes ‘furnishing of services’ by a foreign enterprise. In
its ordinary connotation, the concept of ‘furnishing of services’ is a
bilateral concept and it necessarily postulates the existence of at least two
parties i.e. (a) a provider of Services and (b) a recipient of Services. The
applicant is a mere organizer of an event which has resulted in some
income. Assuming for a while that the applicant is a service provider in this
case, the natural query is ‘who is the recipient of the services’? In fact,
there is no recipient of services here. Thus, the reliance placed on Article
5(2)(i) is misplaced. Even otherwise also, after taking into account the date
of the visit of the Vice-Chairman of the applicant company on 27-5-2007, the
period of physical presence of the applicant’s employees or other personnel
(dependent on the applicant) did not exceed more than 9 months in 12 month
period, as required under the Article 5(2)(i) of the Treaty. Thus, the
contentions of the Revenue on this score are not at all tenable and there does
not exist a Service PE in terms of the Article 5(2)(i) of the Treaty.
(ii) Agency PE
The facts in this case do not justify the conclusion that
these third party contractors are agents of the applicant. ParGolf is carrying
on its own business and is an independent entity. The activities of these
third party contractors, inclusive of ParGolf, are not at all carried out
wholly or almost wholly on behalf of the applicant. As such, there does not
exist Agency PE in this case
(iii) Fixed base PE
The mere presence of a non-resident at a particular
location does not necessarily make that location a ‘place of business’. In
other words, it means that there should be relationship between the place and
the business of the enterprise. That is, does the place of business support
the business activity or does the business activity simply occur at the place
of business?
In accordance with paragraphs (4) & (6) of the OECD
commentary
• Since the place of business must be fixed, it also
follows that a permanent establishment can be deemed to exist only if the
place of business has a certain degree of permanence i.e. if it is not of a
purely temporary nature. A place of business may, however, constitute
permanent establishment even though it exists, in practice, only for a very
short period of time because the nature of the business is such that it will
be carried on for that short period of time
• The expression ‘carrying on’ implies a repetition of
acts, and excludes the case of an association formed for doing one particular
act which is never to be repeated
• As such, ventures like travel circuses, musical troupes,
stalls in exhibition and game shows etc. will have a fixed place PE in a State
only if they carry on their activities on a regular basis.
• In the instant case the Golf Course was at the disposal
of the applicant for the stipulated time frame, though the owner can exercise
some limited rights.
• No hard and fast rule can be laid down as to the number
of days which can impart a degree of permanence to the place of business to
make it a ‘fixed’ place. Irrespective of the fact whether the test of degree
of permanence is satisfied in the instant case, taking an overall view, we are
unable to hold that by organizing and conducting golf tournament at the Delhi
or Bangalore Golf Course for a week’s duration without repetition thereof the
applicant has carried on business through a fixed place in India. On the
basis of a solitary or isolated activity during the year, it is difficult to
infer the existence of PE within the meaning of Article 5(1) of the Treaty.
What is conspicuously missing is the ingredient of regularity, continuity and
repetitiveness as conveyed by the word ‘carried on’.
• The place of business does not, in the absence of firm
stipulation in the contract, support any business activity. On the other hand,
the business activity simply occurred at the place of business i.e. DGC and
Eagleton for one time only. The example of a salesman erecting a sales-stand
regularly every week in three markets in Netherlands, cited by learned
Departmental Representative, is not apt because in the case of salesman, the
weekly visit is indicative of regularity, whereas in the present case the
element of regularity is absent.
• On the touchstone of whether the business of the
applicant is being ‘carried on’ in India, as elucidated above; the answer
relating to the existence of a PE is in the negative. It may not be out of
place to observe that the course of events in future will determine whether a
different view needs to be taken as regards the existence of PE within the
meaning of Article 5(1) of the Treaty. We have reached the above conclusion in
the context of factual position obtaining as on today and on the basis of the
existing agreement with the DGC.
In light of the above Authority replied the questions as
under
Q.1 That on the facts and circumstances of the case the
applicant does not have a PE in India in terms of Article 5 of the Treaty.
Q.2 In view of ruling on Q. No.1 above, this question
requires no ruling.
Q.3 In view of ruling on Q.No.1 above, the receipts earned
by the applicant in India are not liable to tax in terms of Article 7 of the
Treaty.
Q.4 That on the facts and circumstances of the case the
income of the applicant is not taxable under any other provision of the
Treaty.
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Burmah Castrol Plc. (2008) 174 Taxman 95 (AAR)
a) Facts
The applicant, Burmah Castrol Plc. is a
non-resident company incorporated under the laws of England and Wales. The
applicant submits that during the financial year 2001-02, as per the directive
of SEBI, it acquired 12,77,292 equity shares of Foseco India Limited
(hereinafter referred to as “FIL”), an Indian company, for an acquisition
price of Rs. 221.86 per share and also as per SEBI directives paid a further
amount of Rs. 49.1429 per share for the delay in making the Open Offer. The
payment of the said cost of acquisition of Rs. 271.0029 was made in foreign
currency; i.e., Sterling Pounds. The shares have been held by the applicant
for more than 12 months. The shares of FIL are listed on the Bombay Stock
Exchange and National Stock Exchange. Cookson Plc. has accepted to buy
12,75,689 shares of FIL from the applicant at a price of Rs. 420 per share –
for a total consideration of Rs. 53.38 crores.
b) Questions before the Authority
In respect of capital gain arising therefrom, the applicant
seeks advance rulings on the following two questions:
(i) Whether, the tax payable on the long term capital gains
arising on sale of equity shares of Foseco India Ltd, being listed securities,
will be 10% of the amount of capital gains as per the proviso to section
112(1) of the Income-tax
Act, 1961?
(ii) Whether, while calculating the amount of long term
capital gain chargeable to tax interest paid by the applicant to the share
holders of Foseco India Limited as per the directives of the Securities
Exchange Board of India will also be treated as a part of the cost of
acquisition of the shares?
c) Contention of the Applicant
The applicant has pointed out that the ruling of this
Authority in the case of Timken France, SAS, reported in 294 ITR 513 has a
direct bearing and it concludes the issue in favour of the applicant.
d) Contention of the Revenue
The DIT (International Taxation), Mumbai, opposed the
admission of this application on the ground that the applicant had already
moved the assessing authority u/s.197 of the Income-tax Act, 1961, seeking an
order that the transferee of shares i.e. cookson Plc., shall be permitted to
deduct tax at source on the sale proceeds of the shares of 10 per cent
(exclusive of surcharge and cess). The assessing authority by its order dated
17-1-2008 rejected the applicant’s claim and authorized Cookson Plc to deduct
tax at source at 21.15 per cent (inclusive of surcharge and cess) on Rs.198.14
per share (representing the excess of sale price over cost). That order
passed by the Asstt. Director of Income-tax 3(2), International Taxation,
Mumbai, remained in force till 31-3-2008. The Commissioner points out that
the applicant having waited till the expiry of the validity of the order, has
filed the present application 3 days later. The Commissioner while pointing
out that, although technically, the applicant is not hit by the bar under
section (2) of section 245R, the question of obtaining advance ruling at this
stage should not arise in view of the order passed under s. 197.
e) Ruling of the Authority
Authority held that there is no merit in the strongly
worded objection raised by the Commissioner for admitting this application
under section 245R(2) of the Act. On the one hand, the Commissioner concedes
that in “technical sense”, the applicant is entitled to maintain this
application, for the obvious reason that the applicant is eligible to apply
for ruling and none of the embargos laid down in sub-section (2) of section
245R are attracted. If at all, the relevant clause of s. 245R(2) is clause (i)
which created a bar against the Authority entertaining the application, if the
question raised in the application is already pending before any income-tax
authority or appellate Tribunal or court. Admittedly, the question raised in
the application is not presently pending before any income-tax authority or
Tribunal or Court. The application filed under section 197 has already been
disposed of and the order passed therein worked itself out by reasons of
expiry of validity period. Moreover, the proceeding initiated before the
assessing authority was in connection with tax deduction at source. Deduction
and withholding of tax at source by the payer is, it is well settled, is in
the nature of tentative determination as pointed out by the Supreme Court in
the case of Transmission Corporation of A.P. Ltd. vs. CIT . The final view
has to be taken in the course of regular assessment. If before such
assessment proceeding is initiated, this Authority gives a ruling in exercise
of jurisdiction conferred by the Act, that ruling is binding on the assessing
authority and it has to be followed. The order passed u/s 197 as a tentative
measure does not in anyway fetter the jurisdiction of this Authority to
proceed with the application. In fact, the rejection of this application at
the admission stage under section 245R(2) would amount to failure to exercise
the jurisdiction vested in this Authority. The Authority will now decide the
main questions on merits for hearing on 17th October, 2008.
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A.A.R. No. 768 – Small Business Corporation]
a) Facts
The Small Business Corporation (for short ‘SBC’) is an
undertaking of the korean Government which assists small enterprises for the
purpose of promotion of small and medium size business organizations in
various ways, having its office in Seoul. Articles of incorporation of SBC has
been filed along with the application. SBC has opened liaison office in India
at Gurgaon after obtaining the permission from the RBI. RBI in its letter
dated 24-1-2007 stipulated among other things that the liaison office should
not involve in any trading activities and the entire expenses of the office
should be met exclusively out of funds received from abroad through normal
banking channels. The purpose of opening liaison office in India is stated to
be to assist and facilitate the Korean businesses in India and to act as an
interface between them and the Governmental authorities. The applicant states
that the SBC is a non-profit entity. For the purpose of looking after the
affairs of liaison office. Mr. Ji Hoon Lee was appointed as a General Manager
at its India office.
b) Questions before the Authority
The question raised before the authority is, whether
remuneration payable to the said Korean national by the Republic of Korea
and/or by the India Liaison Office, will be exempt from tax in India
in terms of Article 20 of the Double Taxation Avoidance Agreement between
India and the Republic of Korea?
c) Contention of the Applicant
Article 20 of the Double Taxation Avoidance Agreement
between India and Republic of Korea (DTAA) states that the tax on
remuneration, other than a pension, is payable only in the State for whom
service has been rendered. Paragraph (4) of the Article also applies to
certain other organizations promoted by the Governments as specified in that
paragraph.
The applicant submitted that by virtue of clause (a) of
Article 20 the remuneration paid/received by Mr. Ji Hoon Lee from SBC Korea is
not liable to be taxed in India under the Income-tax Act, 1961.
In an apparent bid to establish that the source of salary
payment to Mr. Jin Hoon Lee is the Government funds placed at the disposal of
SBC, the applicant has filed an affidavit of the Administrator of SMBA. The
contents of the affidavit are as follows:
“SBC is a non-profit Government controlled entity under the
direct supervision of SMBA which is a Government department of the Republic of
Korea. SMBA seems to be a department of the Government (Though the expression
used is Government agency in the context the deponent apparently mean
Government Department). It was established in 1979 under SBE Promotion
Act. SBC is entrusted with management of SME Development and Industrial
Foundation Fund (SME fund). Then it is averred that SME Fund is one of the 61
funds. The amount of SME fund for the year 2008 is KRW 6239.8 B. The amount of
capital contribution from SMBA for the year 2008 is KRW 124.2 B.” Government
contribution toward the SME Fund is restored to the budget of SMBA and serves
as the source of operating and personnel expenses required during the
execution of businesses by SBC. In this regard, the source of payroll for the
chief representative of SBC India Office, Mr. Jin Hoon Lee (at present) is
also the SME Fund which is assigned from government budget.”
d) Ruling of the Authority
Authority held that Mr. Ji Hoon Lee is an employee of SBC
but not the employee of the State; i.e. Government of Republic of Korea. He is
an employee to the undertaking permitted by the Government which is a legal
entity by virtue of its incorporation. SBC does not appear to be the
department of the Government. The applicant guardedly states in the
application that the liaison office of SBC ‘is similar to a Government
department’. A Government undertaking with corporate status cannot obviously
be equated to the Government. The fundamental requirement of Article 20(1)(a)
is that the remuneration should be paid by the Contracting State. Even if it
is paid out of funds allocated by the Government to the applicant specifically
towards personnel expenses, the requirement of Article 20(1) is satisfied. It
is as good as payment by the State itself. The expression “payment by a
Contracting State” ought not to be given a rigid or literal interpretation so
as to cover the payments made directly by Government or a department of the
Government. Even if the payment is made out of State’s funds set apart for
that purpose, the requirement of section 20(1)(a) will be attracted and the
Indian income-tax cannot be levied in such a case. But, the applicant has
omitted to furnish requisite clarification with supporting documents to prove
such a fact situation. Therefore the payment cannot be considered as payment
by the Contracting State; i.e., Korean Government. However, if the applicant
is able to furnish necessary material before the assessing authority to
substantiate what has been observed by us, the assessing authority is free to
take an independent decision. Subject to this observation, the ruling is given
against the applicant and the question is answered in the negative.
Authority opined that Article 20(4) extended the benefit of
Article 20(1) only to three entities and therefore the other business
undertakings of the Government, like the one of applicant cannot claim the
benefit of Article 20(1). The specification of certain organizations which are
controlled by the respective Governments does not exclude by necessary
implication the other State run entities falling within the scope of Article
20(1) as interpreted. Prima facie, none of the entities specified in Article
20(4) would be entitled to invoke Article 20(1) even in the expanded sense in
which it has been interpreted. Hence, they were specifically brought within
the purview of sub-Article (4) of Article 20. Lastly, it may be observed that
the applicant may have a reasonable claim for specific inclusion within
Article 20(4) because prima facie it stands on the same footing as Korea Trade
Promotion Corporation. Whether or not to include any of the other entities of
like nature as those specified in Article 20(4) is a matter of agreement
between the two Contracting States.
[Source: www.aar.gov.in]