1. International Taxation – Capital Gain – Lower rate of tax – Non-resident

– Ss. 48, 112(1)

Applicant, a company in UK, sold shares of an Indian listed company, acquired out of foreign currency between 1963 and 1994 – seeks ruling on applicability of concessional rate of 10% – held, issue is no longer res integra as it is already settled that even non-residents are eligible for benefit of rate of 10% as per proviso to section 112(1) – Application decided in favour of the applicant.

Facts

The applicant is a company incorporated in United Kingdom, engaged in the business of information technology services. The applicant acquires shares of Zensar Technologies Limited, a company listed on Bombay Stock Exchange and National Stock Exchange, between 1963 and 1994, by making payments in foreign currency. On 4th July 2007, it sold its shareholding to an Indian company and a Cypriot company. Purchasers deducted tax @ 20% out of the sale consideration.

The questions before the authority are

a) whether the applicable rate of tax will be 10% (plus applicable surcharge and education cess) as per the proviso to section 112(1) of the Income-tax Act, 1961 (ITA)?

b) whether the beneficial rate of 10% can be applied where the long-term capital gain (LTCG) is computed by applying section 48 of the ITA read with first proviso to section 48 and rule 115A?

The authority has consistently ruled in the case of Timken France SAS, McLeod Russel Kolkata Ltd. and Burmah Castrol Plc. that the expression “before giving effect to the second proviso to section 48” only mean that the calculation under the 2nd proviso shall not enter into the computation of capital gain, wherever that proviso is applicable. It cannot be construed as a condition precedent for availing the benefit under proviso to section 112(1).

The authority also referred the decision of the “H” Bench Tribunal in the case of BASF Aktiengesellschaft vs. Deputy DIT (International taxation) and expressed disagreement to the view expressed by the tribunal.

Conclusion & Ruling

Authority ruled both the questions in affirmative and held that the applicant is liable to pay tax at a lower rate of 10% plus surcharge and education cess as per the proviso to section 112(1) of ITA.

Fujitsu Services Limited, AAR No. 800 dt. 23rd July 2009 [2009-TIOL-19-ARA-IT]

2. International Taxation – When there is no permanent establishment, commission paid to non-resident not taxable in India – Ss. 5(2), 9, Article 5(2) – India South Africa DTAA

Applicant is an Indian manufacturer of pesticides – enters into contract with a South African trading company for marketing and promotion of its product – 3% commission to be paid to the non-resident on confirmed sales – Applicant states that the non-resident has no business connection in India nor any PE – further contends that since the commission paid to the non-resident is business income, it is not taxable under Article 7 of the DTAA – Held, since the non-resident has no PE, its income is not chargeable to tax in India – Even under section 9(1), the commission income is not taxable since no operations are carried out in India – the applicant is not under obligation to deduct tax at source u/s 195

Facts

Applicant, an Indian company engaged in the business of manufacture and supply of industrial pesticides has applied to Authority to determine the tax liability of non-resident, Zaikog Trading Co (Zaikog), a company incorporated in South Africa engaged in promotion and distribution of various products. It is stated that the role of Zaikog is to communicate the details of the interested parties to the applicant who will pursue the proposal for confirmed orders. Applicant stated that Zaikog renders all the services outside India. No services of whatsoever nature are performed in India and Zaikog does not maintain any establishment in India. As the income received by Zaikog from India is a business income, it is contended that same cannot be taxed under the ITA in absence of PE in India.

Questions before the Authority

a) whether the amounts proposed to be paid by the applicant to Zaikog are liable for deduction of tax in accordance with the provisions of section 195 of ITA read with the provisions of the Agreement for the Avoidance of DTAA between India and Republic of South Africa?

b) whether the amounts paid by the applicant to Zaikog are taxable in the hands of Zaikog which does not have a PE in India?

c) whether the amounts paid by the applicant to Zaikog would be taxable as fees for technical services under the ITA?

d) whether there is any liability for Zaikog to file a return of income in India?

Conclusion & Ruling of the authority

Applicant’s contention is well founded and fully supported by Circular No. 23 dt. 23-7-1969 issued by CBDT and Circular No. 786 of 7-3-2000 on account of following

a) Scope of total income u/s 5(2) read with section 9 as clarified by the circular states that where the non-resident agent operates outside the country, no part of his income arises in India. Further since the payment is directly remitted abroad, it cannot be held to have been received by or on behalf of the agent in India

b) Zaikog has no fixed PE in India and none of the sub-clauses of para 2 of Article 5 becomes applicable and hence Article 7 of the treaty cannot apply to tax the income in India.

c) Even from standpoint of section 9, if such income is an income accruing or arising whether directly or indirectly through or from any business connection in India, it is not taxable in India since no operations of non- residents are carried out in India.

M/s Spahi Projects Pvt Ltd. AAR No. 802 dt. 29th July, 2009 [2009-TIOL-20-ARA-IT]

3. International Taxation – No Technical Knowhow is made available in India – TDS is not deductible – Ss. 5, 195 – India- USA DTAA

Applicant, a company in USA, enters into an agreement with Indian company for cost allocation of the services availed – services are in the nature of managerial services – services not taxable u/s 9(1) or u/s 5 of ITA as services have been provided from outside India – even if some services availed are technical in nature, since no technical knowhow is ‘made available’ as per India-USA DTAA, no income is taxable in India – no TDS.

Facts

The applicant is a company based in United States of America which is engaged in the business of manufacture of process control instruments, engineering and research and technology based services, co-operative or consortium services etc. The applicant entered into an Agreement titled as Cost Allocation Agreement with Invensys India (P) Ltd (IIPL). The applicant incurs expenditure in relation to the functions enumerated in Schedule I to the said Agreement for the benefit of the Group as a whole. Pursuant to the Agreement the applicant raises invoice on IIPL for the amounts worked out on the basis of the formula in the Agreement. It is stated that none of the personnel of the applicant visited nor would in the future visit India for providing the centralized assistance to IIPL.
The questions raised before the authority are as under:

a) whether the payments made by IIPL towards the cost allocated by the applicant is taxable in India as per the provisions of Double Taxation Avoidance Agreement (DTAA) entered into between India and USA?

b) whether IIPL is liable to withhold tax at source under section 195 of the ITA on the payments made by it towards the cost allocated by the applicant?

The applicant contended that most of the services listed in the agreement can at best be clubbed as managerial services and fall outside the ambit of technical services as defined under Article 12 of the DTAA. Even if some of the services are brought within the ambit of technical or consultancy services, they are not covered by Article 12 as the essential ingredient of Article 12.4 (b) of the DTAA is not satisfied because the applicant does not ‘make available’ any technical knowledge, skill, knowhow, etc.
Also, since all the services have been provided from outside India, the payment made cannot be taxed either under section 9(1) or section 5 of ITA.

Conclusion & Ruling of the Authority

The Authority observes that,

a) there is no service which is in the nature of technical or consultancy services. The services even if they are technical, do not ‘make available’ the technical knowledge, etc. within the meaning of Article 12.4(b) of the Treaty;

b) No income can be taxed in India if the services are rendered from abroad;

c) Certain activities undertaken by the applicant are not really services but they are more in the nature of stewardship/shareholder activities, for that reason, the amounts received from the Indian Group Co. cannot be taxed in India in the absence of a permanent establishment (PE).

Thus the Authority ruled that the applicant is not liable to be taxed in India as per the provisions of Article 7.1 and Article 12.4 of DTAA and the India-based Group Co. is not obliged to withhold tax at source u/s 195.

M/s Invensys Systems Inc AAR No. 796 dt. 6th August, 2009 [2009-TIOL-21-ARA-IT]

4. International Taxation – Capital Gain – Maintainability of application

– S. 245N(a)

The applicant, a company in Luxembourg – enters into a transaction to purchase entire equity share capital of an Indian company which was earlier a partnership firm, and on conversion the assets were revalued and excess was credited to the respective partners’ accounts – seeks ruling on the capital gains liability of the Indian company – doubts expressed over maintainability of application – held, the application is maintainable having regard to the wider language of sub-clause (i) of section 245N(a)

Facts & Contention

The applicant, a company in Luxembourg entered into a transaction for purchase of the entire equity share capital of an Indian company, Anandeya Zinc Oxide (P) Ltd, which was earlier a partnership firm. On 31-3-1998, the assets of the partnership firm were re-valued and the excess was credited to the respective partners’ accounts. In September 2005 the partnership firm was converted into a private limited company. On 1st July, 2008, the share holders of the company sold their entire holdings to the applicant. Under section 47(xiii) of the ITA, the company was protected from payment of capital gains tax on revalued assets on conversion of firm into a company. However the condition of continuation of the 50% or more voting power by partners for a period of 5 years is violated on account of sale. Thus the applicant has sought the advance ruling on the tax liability of the Indian company. Thus doubt was raised on admissibility of the application.

The transaction undertaken by the applicant has given rise to the application seeking determination on a question of law regarding capital gains tax liability which, in turn, directly affects the non-resident applicant by reason of the stipulations in the agreement. Unless the capital gains tax payable by the Indian acquired company is determined the purchase consideration payable by the applicant cannot be finally determined and also the audited financial statements cannot be prepared.

Conclusion & Ruling of the Authority

The authority held that the application is maintainable having regard to the wider language of sub-clause (i) of section 245N(a). There is no specific requirement in sub-clause (i) that determination should relate to the tax liability of the non-resident. Going by the averments of the applicant, it is clear that the capital gain tax issue arising in the case of the acquired Indian company has a direct and substantial impact on the applicant’s business in view of the stipulations in share purchase agreement. Therefore, the authority is of the view that the question raised by the applicant falls within the definition of ‘advance ruling’ under section 245N(a) of the Act and accordingly the application is allowed under section 245R(2) and posted for hearing.

M/s. Umicore Finance, AAR No. 797 dt. 6th July 2009 [2009-TIOL-22-ARA-IT]

5. International Taxation – DTAA between India & South Africa

Commission for services rendered for arranging sales abroad could be taxed only in South Africa on the principles of Tax Residency. As recipient in South Africa had no fixed place of business in India nor he had entered into any contracts in India, Sec. 9(1)(i) could not be invoked.

Spahi Projects (P.) Ltd., In Re (2009) 225 CTR 133 (AAR)

6. International Taxation – DTAA between India & USA

Income deemed to accrue or arise in India. Royalty u/s. 9(1)(vi) – Whether subscription fees received by the Applicant for use of data base concerning financial and economic information of companies on which neither any proprietary rights nor any exclusive rights conferred on the Applicant will amount to Royalty u/s. 9(1)(vi) r.w. its Expl.2 – Held, No – Payment cannot therefore be brought either u/s.9(1)(vi) or under Art. 12.3 of DTAA. No tax liability arises in India.

Factset Research Systems Inc. (2009) 225 CTR 49 (AAR)

7. International Taxation – Design supplied outside India – There is no permanent establishment – S. 5(2)(1) – Indo-German DTAA

Indo-German DTAA, Articles 5, 7 & 12 and section 9(1)(vii) of ITA – German company got a contract for the Sethu Samudram ship channel project – sub-contracted substantial part of the work to an Indian company – design to be supplied from outside India – supervision work to last less than 6 months – whether a PE exists – Held, no – Even if there is a fixed place whether time requirement in Article 5(2)(i) needs to be fulfilled – held, yes – Whether services rendered for designing from outside India can be taxed as FTS – held no.

Facts

Applicant is a German company, was awarded a contract by Tuticorin Port Trust, through the process of international bidding. The scope of the work included work design, fabrication supply, transportation, delivery, installation and maintenance of mild steel, navigational channel and fairway buoys, mooring gear and solar operated navigational lighting equipments in relation to Sethu Samudram Ship Channel Project being executed in Tamil Nadu. Applicant sub-contracted most of the work to a third party namely, Asia Navigation Aids, Delhi (ANA) except

a) Study of technical requirements in relation to execution of the project

b) Designing of equipments

c) Supply of critical components to sub-contractor

d) Supervision of installation of equipment as and when the installation is carried out by the contractor

Activities (b) & (c) will be carried out from the applicant’s office in Germany. Time of completion of the contract was 16 months from the date of commencement. In order to carry out supervision activity two engineers from Germany will be deputed who will be present at the time of installation of equipment at the mid-sea for a total period not exceeding 60 days.

The performance guarantee for the entire work was given by the applicant. The value of the contract was Rs. 9.76 crores and contract value payable to the su-contractor was about Rs. 5.5 crores. Later few items were contracted to other parties in India replacing ANA. Payments were made on milestone basis and sub-contractor was required to provide guarantee for 12 months and provide for 5 year maintenance. All local cost like transportation, storage, etc. were on sub-contractor’s account.

Contention of the applicant

Applicant contended that it has no PE in India and the supervisory operations which it will have to carry out at the time of installation and commissioning by the sub-contractor would be only for 2 months and therefore no PE exist nor can be deemed to exist.

Contention of Revenue

It contended that sub-contractor is undertaking various activities which constitute the core of the contract work entrusted to the applicant. All the activities undertaken by the sub-contractor are on behalf of the applicant and sub-contractor is nominee of the applicant. Delegation of work to the subcontractor for the applicant’s convenience should not influence the decision on the question whether the applicant has a PE in India and therefore workshop of the sub-contractor should be treated as PE of the applicant contractor.

Conclusion and Ruling of the Authority

Authority ruled that based upon the fact presented by the applicant, it is not possible to hold that the applicant has or will have a PE in India on following reasoning

a) Once PE is characterized as installation PE, minimum period test as described at Article 5(2)(i) shall apply irrespective of General PE rule as of Article 5(1), as specific provision will override the general provision in respect of the PE. Thus minimum period test of 9 months as specified at Article 5(2)(i) will apply.

b) Although definition of PE under Article 5(2) is construed as ‘inclusive’ in nature, does not mean that Article 5(1) (primary and main definition of PE) and Article 5(2) (inclusive) should be read distinctly independent of each other

c) Work place set up by the sub-contractor to carry out the works entrusted by the applicant contractor can be treated as workplace of applicant only if sub-contractor is treated as dependent agent of the applicant as distinct from the independent agent. Moreover fixed place of business as referred in Article 5(1) is qualified by the words, “through which the business of enterprise is carried on” (tax-payer’s physical presence)

d) If contractor was to be treated as agent and its place of work was to be treated as place of business of contractor then there was no need to have separate agency PE article in the treaty. If sub-contractor is to be treated as agent then Agency PE article will apply with all its conditions as available in agency PE clause only in limited circumstances where work is jointly carried out by the contractor and the sub-contractor. Where sub-contractor is aiding the work of the contractor as referred at paragraph 19 of OECD Commentary on Article 5(4) then time taken by the sub-contractor and place may be construed as that of contractor for the purpose of contractor’s PE.

e) The fact that the applicant is not relieved of the liabilities and obligations under the contract by reason of sub-contract and the fact that the applicant has to furnish performance security to TPT does not have much of bearing on the aspect whether the sub-contractor’s establish-ment shall be deemed to be the PE of the applicant.

f) That component of technical or consultancy services incidental to the execution of the project cannot be segregated and brought within the scope of FTS.

Pintsch Bamag AAR No. 790 dt. 11th September, 2009 [2009-TIOL-23-ARA-IT]

8. International Taxation – Profits arising in India by the carrying of goods from Indian ports to foreign ports will be governed by domestic law enforced in India – S. 172 – Indo-Swiss DTAA

Income tax – Sec. 172 – Indo-Swiss DTAA – Articles 7, 8 & 22 – Assessee is a Swiss company, enters into shipping contracts for the transportation of cargo worldwide – taxability of profits from transportation of cargo from Indian ports to China – claims that in absence of a PE, the same is covered under Article 22 of DTAA – whether profits from shipping business is covered under the DTAA or can be taxed as per provisions of sec. 172 of the ITA

Facts

Applicant, Gearbulk AG, enters into contract with an independent charterer in Dubai for carrying cargo from Indian ports. It appoints an independent port agent for handling the cargo. Indian agent files return on behalf of the assessee u/s 172 and pays tax @ 7.5% of the freight charges collected. Applicant claims that it has option u/s 172(7) to be assessed as per provisions of Article 22 of DTAA between India and Switzerland, as profits from operation of ships being business profits. Since it carries the business in India through independent agents, it has no permanent establishment in India.

Questions before the Authority

Following questions are posed before the authority

a) Whether during the previous years relevant to assessment years 2008-09 and 2009-10, the applicant had a Permanent Establishment in India under Article 5 of India-Switzerland DTAA, in relation to activity of charter of vessels for transporting cargoes from Indian ports to outside India?

b) If the answer to the first question is negative, whether income of the applicant from such charter of vessels is not liable to tax in India under the Treaty?

Contention of the applicant

a) Indo-Swiss DTAA was signed on 29th December 1994. DTAA was amended in 2001 introducing Article 22 which is in the nature of residuary article, ‘other income’ and after amendment another notification was issued by the Central Government u/s 90. Article 22 was not existing in the original DTAA.

b) Article 7 excluded from its scope the profits arising from the operation of ships in International traffic. It also provides that where profits include items of income which are dealt with separately in other articles of this agreement, the provisions of those articles shall not be affected by the provisions of this article.

c) Article 8 includes only international operations from Air traffic does not cover shipping transport.

d) Applicant therefore contended that the profits from the operation of ships in international traffic which stand excluded by Article 7 should be brought within the purview of Article 22. In view of the fact that the applicant does not have PE in India as contemplated by paragraph 2 of Article 22, only the state of residence can levy tax in terms of Article 22(1).

Contention of the Revenue

Revenue contended that since profits of the international shipping business is excluded from the scope of Article 7 and Article 8 covers only international operations from air traffic, shipping business has been consciously kept outside the ambit of the DTAA and it cannot be brought within the fold of Article 22.

Conclusion and Ruling of the Authority

Authority ruled that profits arising in India by the carriage of goods from Indian ports to foreign ports will be governed by the domestic law enforced in India; i.e., ITA. The language and scheme of the provisions, the possible incongruities that would otherwise arise and comparative study of the other treaties have led to the inevitable conclusion that shipping income derived from international operations is outside the purview of the DTAA and is left to be taxed under the domestic law on following reasoning

a) Residuary Article 22 concerning ‘other income’ was introduced as noted earlier in 2001. Until then there is no dispute that profits derived from the operation of ship in International traffic are left as the subject matter of domestic tax law disciple as Article 7 has specially excluded it and Article 8 is devoted only to the profits derived from the operation of aircraft in international traffic.

b) Argument advanced by the learned counsel of the applicant that although Article 7 excludes from its scope, profits derived from International shipping operations, from 2001 onwards the shipping income is covered by Article 22, is not acceptable on any intelligible basis because both the articles, namely Article 7 and Article 22, provides for the similar pattern of right of taxation in favour of State of Residence unless there is a PE in the State of Source.

c) Profits from the international operation of ships are only a species of business profits, just as the profits from international air transport. Income from air transport is separately dealt with in Article where PE is not relevant to tax the income as only State of Residence has right to tax the income irrespective of the existence of the PE in the Source State.

d) Based on the model treaty, various treaties signed by India and Switzerland, in absence of the clear words in the Indo-Swiss DTAA, the shipping profits arising from international operations cannot be placed at par with the profits from the business of International air transport.

Gearbulk AG, AAR No. 803 dt. 30th September, 2009 [2009-TIOL-24-ARA-IT]