C N K Knowledge Tracker - CNK & Associates LLP · AO held that payment made to FS was taxable as “fees for technical services” as per India Singapore Tax Treaty and the same was

C N K Knowledge Tracker …..Be a Step Ahead

April 2018

C N K & Associates LLP www.cnkindia.com

C N K Knowledge Tracker, April 2018 For Private Circulation only International Tax

C N K & Associates, LLP Page 2 of 12

Contents International Taxation/Transfer Pricing

• Notifications/Circulars/Press Release 3

• Recent Judicial Decisions

- International Taxation 3 - Transfer Pricing 9

Disclaimer and Statutory Notice 12



International Taxation/Transfer Pricing

• Notifications/Circulars /Press Release

There is no significant Notifications/Circulars/Press Release which has been

issued during the period January to March 2018.

Return back to Contents

• Recent Judicial Decisions

International Taxation

Fees paid to a Singapore based company for rendering marketing and

business development services to an Indian company would not be fees

for technical services as per India Singapore Tax Treaty and therefore,

not subject to TDS

Fractal Analytics Pvt. Ltd. [TS-107-ITAT-2018(Mum)]

Facts

The assessee, an Indian company was engaged in the business of providing predictive

analytics for the retail financial services, insurance, consumer packaged goods and telecom.

The assessee entered into an agreement with Fractal Singapore (‘FS’), a Singapore based

WOS for providing marketing, business development and customer co-ordination support

services to it.

The said services were provided by FS from outside India through its employees, who

provided assistance to the assessee in identifying the potential customers through market

studies, establishing communication with such prospects by conducting meetings and

holding discussions with potential customers, as per the requirements by the assessee. FS did

not have the authority to conclude any agreements or make any commitments on behalf of

the assessee.

The assessee made payment to FS without deducting TDS as per section 195 of the Act. The

AO held that payment made to FS was taxable as “fees for technical services” as per India

Singapore Tax Treaty and the same was subject to TDS.



Held

The Tribunal, analyzed the terms of the Agreement between the assessee and FS and held

that

a. The services rendered by FS were in the nature of Marketing services using various tactics

and negotiation strategies, and the same were personal in nature and not technical.

b. These services provided by the employees of FS to the assessee does not fall under the

category of “managerial services” as these services are rendered using various tactics and

negotiation strategies which are personal in nature and has no element of managerial

services in it.

c. The expression “consultancy service” involved giving of an advice or advisory services by

a professional and the assessee did not seek any sort of advice from FS. The services

provided by the employees of FS to the assessee would not fall under the category of

consultancy also.

Further, the requirement of Article 12 of India Singapore Tax Treaty of ‘making available’ of

services was not satisfied, since the services availed by the assessee would only remain with

FS. The assessee was not enabled to independently perform such functions on its own.

Accordingly, payment made to FS would be taxable as ‘business income’ of FS and in

absence of PE of FS in India, these services would not be taxable in India.

Provision of technical/ professional personnel to Indian AE would not

be taxable in India in absence of PE in India and absence of clause

taxing “fees for technical services” in India UAE Tax Treaty

Booz & Company (ME) FZ-LLC [TS-27-ITAT-2018(Mum)]

Facts

The assessee was a UAE based company belonging to the Booz group. The assessee was

engaged in the business of providing management and technical consultancy services. That

during the year under review the tax payer provided technical/ professional personnel to its

Indian associated enterprise, namely Booz India. These personnel were physically present in

India for a period of 156 days. The assessee received Rs. 112.83 lakhs for the said services.

The assessee claimed that the said services rendered were not taxable in India, in absence of

Article on “fees for technical services” (‘FTS’) in the India UAE Tax Treaty and accordingly

the consideration was taxable as business income. Further, since the employees of the

assessee had only worked for 156 days in a year, there was no Service PE of the assessee, in

India.

As per the agreement entered between the assessee and Booz India, the technical/

professional personnel were provided to Booz India on “Principal to Principal” basis. The

said personnel were not entitled to work for any other projects. Further, no specific part of

the office premises of Booz India/ the client of Booz India was at the specific disposal of



the personnel of the assessee. Booz India was not under an obligation to earmark or provide

a dedicated office or any other space to the personnel of the assessee.

The AO noticed that the Booz group was a global network with group of companies having

subsidiaries all over the world. The AO also noticed that some of the group companies of

Booz group, had approached the Authority for Advance Ruling (‘AAR’). The AAR, in case

of group companies had held that they were having PE in India and accordingly, incomes

received by them from the Indian companies are taxable in India. The AO, following the

ruling of AAR in case of group companies held that the assessee had a PE in India and

accordingly, taxed the receipt from Booz India as business income.

The assessee, before the Tribunal argued that the ruling given by the AAR is binding only on

those parties and not on others. Even if it was considered that the same shall have persuasive

value, the ruling would show that it was given without considering main aspects, such as, the

Form of PE (whether fixed place PE, Service PE, Agency PE etc.), relevant provisions of

Tax Treaty country-wise etc. All the applicant companies before AAR were from different

Countries, but the AAR had given a common ruling without making specific reference to the

provisions of respective Tax Treaty.

Held

The Tribunal accepted the argument of the assessee and decline to follow the ruling of the

AAR.

In order to ascertain whether an establishment had a fixed place of business or not,

physically located premises should be 'at the disposal' of the enterprise. The assessee did not

have any fixed place of PE in India and Booz India had not earmarked any specific place

under the control or disposal of the assessee. Accordingly, the assessee did not have a Fixed

Place PE in India.

Further, the employee of assessee had worked only for 156 days. Therefore, the same would

not result in service PE. The assessee had provided service to Booz India and did not receive

any services from them. Therefore, the question of dependent agent PE did not arise in

India.

Accordingly, in the absence of PE in India, income received by the assessee from Booz India

would not be taxable in India.



Where employees of the foreign company heading various divisions in

the Indian company and their employees visiting India would not create

a PE, where no business was conducted by the assessee in India through

the expatriated employees, nor any income was derived by them though

the activities of the employees

Samsung Electronics Co Ltd [TS-142-ITAT-2018(DEL)]

Facts

The assessee, a company established in Republic of Korea was a tax resident of South Korea.

The assessee was engaged in the business of manufacturing and sales of various categories of

home appliances for global markets. The assessee had 2 wholly owned subsidiaries in India,

SIEL and Samsung India Software Operations Private Limited (now known as Samsung

R&D Institute India Bangalore Private Limited) (‘Samsung R&D’).

Survey was conducted on the premises of SIEL, pursuant to which reassessment proceedings

were initiated. The statements of the employees were recorded during the survey. The AO

found that there was continuity of business between SIEL and the assessee. The assessee was

doing business in India through its employees, who were heading various divisions in the

Indian company and also through employees visiting India regularly. There was a close

business connection in terms of the dependence of the Indian company on the assessee for

all imports because the Indian entity did not have the authority to make imports from, other

than Samsung affiliates. The postings and a recruitment of senior employees were decided by

Korea. The Korean expatriates who worked in India were working under the complete

guidance, control and supervision of the Korean company. They had a lien in their

employment with the parent company.

The entire dispute on this issue revolved around the status of the expatriate employees

working with SIEL and the nature of functions they were performing i.e. whether they are

actually the employees of the assessee and placed with the subsidiary to run the business of

the assessee, or they are assessee’s employees who are seconded to SIEL and the SIEL was

the economic employer who exercises full control over them.

Held

There was no doubt that there was seemless information exchange between the employees of

the assessee and the expat employees. On a careful consideration of the entire matter

including the statements of the expatriate employees, the same showed that such information

exchange relates to the models/designs to the liking of the Indian consumers, plans and

strategies relating to the sale of the products, detailed stock/logistical status, the market

strategies both the mid and long terms etc. At the best, the statements and other material

relied upon by the AO showed that the expatriate employees were only discharging the

duties of the subsidiary company towards the holding company. Whatever the benefits that

were derived by the Indian subsidiary by such communication are offered to tax in India.

The activities spoken by the expatriate employees in their statements were in the nature of



reporting required in the course of discharge of the functions of the subsidiary company

towards the holding company, and such activities do not constitute a PE under Article

5(4)(d), (e) and (f) of the Tax Treaty.

In the absence of proof that any management activity of the assessee was being conducted in

India or that the decisions relating to the products to be manufactured, pricing in the

domestic markets, or the decisions relating to the launch of such products in India was taken

by the assessee, there was neither any business conducted by the assessee in India through

the expatriated employees, nor any income was derived by them though the activities of the

employees. Consequently, the assessee had no fixed place PE of the assessee constituted

through the expatriated employees.

Salary received in India by a non-resident for services rendered outside

India would not taxable in India

Taxas Instruments (India) Pvt. Ltd. (AAR 1229 of 2012)

Facts

The assessee, an Indian company was engaged in the business of digital signal processing and

analog technologies. The assessee had sent one of its employees on assignments to USA for

2 years. During the assignment, the said employee was on the payroll of the US group entity.

During the stay in US, the employee had received a part of the salary in India. However, no

part of the services were rendered in India. The employee was a non-resident in India for AY

2011-12, but resident for AY 2012-13. The said employee was also a resident of USA for the

calendar years 2010 till 2012. Accordingly, he was required to file his tax return in USA as a

resident and offer the entire salary paid in USA as well as in India.

The assessee sought an advance ruling on the following issues:

1. Is the assessee obliged to withhold taxes for the salary paid in India, where the employee

is non-resident;

2. Can the assessee consider a claim of Foreign Tax Credit in India for taxes withheld and

paid in USA in AY 2012-13.

Held

1. As per the Act, taxability of income in case of a non-resident is determined based on the

provisions of the Act or the Tax Treaty, whichever is beneficial. It is settled position that

the actual place of rendering services was a key test in determining place of accrual of

salary to a non-resident. Accordingly, salary received, in respect of services rendered

outside India was to be considered as, being earned outside India. Once the said salary

income was not taxable in India, the assessee was not required to withhold taxes on the

portion of salary paid in India to a non-resident.

2. As per the Act, where the employee receives salary from more than one employer, he

could furnish the details of salary paid and TDS deducted to one of the employers, who



would then consider such details at the time of computation of TDS. There are various

judicial decisions wherein it has been held that foreign tax credit can be considered by an

Indian employer at the time of computing the TDS. Accordingly, the assessee can

provide for foreign tax credit while computing withholding tax after obtaining

documents such as proof of period of residence, Tax Residency certificate, details of

income earned and taxes paid in USA etc.




Transfer Pricing

The assessee entitled to deduction under section 10A/ 10B on suo-moto

adjustment on account of transfer pricing provisions

Approva Systems Pvt. Ltd. [TS-167-ITAT-2018(PUN)-TP]

Facts

The assessee was a wholly owned subsidiary of US parent. The assessee was engaged in the

business of providing software development activities and quality assurance services to its

AEs. The assessee also provided software maintenance and support functions to its AEs.

The AO observed that the assessee had voluntarily made TP adjustments, on which it had

claimed deduction under section 10A.

The AO rejected the assessee’s claim of deduction under section 10A/10B on TP adjustment

made voluntarily. The AO also held that since the taxpayer failed to bring into India the

export proceeds in relation to the said voluntary adjustment, it was not eligible to claim

deduction under section 10A in respect of such income.

It was contended by the assessee that the additional income representing TP adjustment was

made to the profits of the business and not the turnover and hence there was no requirement

of realizing the same in convertible foreign exchange. Further the assessee also contended

that the additional income was not determined by AO, but by assessee itself on a voluntary

basis and hence the proviso to section 92C(4) was not attracted on such income.

Held

The additional income was determined by the taxpayer and not the A and therefore the

proviso to section 92C(4) was not attracted. Reliance was placed on the decision of Austin

Medical Solutions Pvt. Ltd Vs ITO ((TP) A. No.542/Bang/2012) and IGate Global

Solutions Ltd. vs ACIT ((2008) 24 SOT 3 (Bang)).

The tribunal also held that Section 10A deduction is allowed on the profits derived from

export of Article or things or computer software upto an amount which bears to the profits

of the tax payer, in proportion as the export turnover bears to the total turnover of the tax

payer. The said additional notional income offered to tax forms part of profits of business.

Since the said notional income does not qualify as export turn over or total turnover there

was no requirement to realize such income in convertible foreign exchange in India.

Hence, the taxpayer was eligible to claim 10A deduction on such additional Income



Purchase of second hand machinery from AE was accepted at arm’s

length price based on Chartered Engineer’s valuation certificate

Caparo Engineering India Pvt Ltd [TS-109-ITAT-2018(DEL)-TP]

Facts

The assessee had international transaction with its AE for purchase of old/used machinery.

The assessee had chosen itself as tested party and benchmarked the transaction using CUP

method. The assessee contended that instead of investing huge amount for buying new

machines, it had decided to purchase the similar used machines from its AE.

A Chartered Engineer carried out an inspection for ascertaining the fair market value of the

machines. On the basis of said inspection, the Chartered Engineer issued a certificate

disclosing market value, estimated life of machine. The machine was imported on the price

mentioned in the certificate. The assessee stated that the said FMV was also accepted by the

custom authorities. Thus, it constituted CUP for ascertaining the ALP, and therefore,

transaction was at arm’s length.

The TPO did not accept the FMV as certified by the Chartered Engineer observing that even

if such value was accepted by the custom authorities, it would not fulfil the transfer pricing

principles and adopted a unique approach, whereby life of the machinery given by Chartered

Engineer at India along with year of manufacturing given by the Chartered Engineer at UK

was considered as the basis for working out the market value of the machinery. Where the

manufacturing year was not given in the report of UK engineer, the original purchase date

given in the report of the Indian Engineer was considered by the TPO

Held

The assessee, in the earlier years and subsequent years had purchased certain machineries

along with accessories from its AE. It was a trite principle of TP regulation that the

international transaction with AEs should be benchmarked under the prescribed methods, so

as to arrive at arm’s length price paid for the services/products.

Valuation by an independent qualified expert for determining the fair market price or the

FMV of the machinery has to be treated as the arm’s length price for the value of such

products/services, which could be reckoned as the price paid by any independent party in

the open market for such product/goods”. In assesses case, the price paid for the old

machine was sought to be justified by determining the fair market value of the old machine

imported by the AE. To determine the fair market value of the said machine, the assessee

considered the valuation done by a Chartered Engineer who certified the cost of the

machinery taking into account various factors for determining the fair market value. In case

of used machinery, ostensibly the purchase price of a new product could not be taken as the

comparable uncontrolled price, because the cost of used/ old machinery depends upon

number of various factors like usage, maintenance obsolescence, number of change in

ownership, model, change of market etc.



The TPO had also not carried out any independent exercise for the value of the machinery

by any approved valuer/ Chartered Engineer so as to controvert the fair market value

determined by the assesses Chartered Engineer. Accordingly, the adjustment made by the

TPO was without any basis and ought to be deleted.




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C N K Knowledge Tracker - CNK & Associates LLP · AO held that payment made to FS was taxable as “fees for technical services” as per India Singapore Tax Treaty and the same was