Latest Judicial Pronouncements International Taxation

Latest Judicial Pronouncements International Taxation

CA. Kapil Goel FCA LLB Advocate

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Snapshot

DHC order in Asia Satellite (royalty etc) 51 DTR 1

DHC order in LG Cable (off shore supply) 50 DTR 1

DHC order in Mother Dairy Fruit (salary section 9(1)(ii)); Kar HC in 51 DTR 95 (Prahlad Rao)

Calcutta High Court in cases of: a) PILCOM 238 CTR 387; b) ABM Amro bank

Snapshot

Karnataka High Court on Liasion office/LO related case in JEBON & ITAT orders on LO taxation in M Fabrikant and LinmarkDelhi ITAT in Menlo Worldwide ; Rolls Royce (Resp. Royalty and FTS u/s 9(1)(vi)/9(1)(vii) 47 DTR 257Bang ITAT in Teja Network & Filtrex Technologies & Crane Software on FTS and Make available etc AAR in Bharti Axa & latest AAR in : VNU intl BV (28/3/2011); Toshiba Plant Systems (22/2/2011) 239 CTR 163 ; DB Zwirn Mauritius ((28/03/2011)SC (constitution bench) order in GVK case on Extra territorial operation of a law 239 CTR 113

Snapshot

Hyd Bench of ITAT in 43 SOT 137 (outright sale of know-how)Mum bench of ITAT in Wizcraft 135 TTJ 647Delhi bench of ITAT in MRO Ltd section 195: section 9(1)(vii) FTS etc: 11.02.2011Hyd bench Dredging activity and PE : 133 TTJ 692Mum bench ITAT arbitration award : Goldcrest 134 TTJ 355Mum itat Daimler case (PE/DTAA) 39 SOT 418Mum ITAT in Hapag Lloyd container 27.12.2010 (Article 8 scope)Delhi ITAT R&B Falcon : Exploration activity PE period to be considered?

Snapshot

Mumbai bench 51 DTR 148: Indo denmark dtaa: DTAA and Act (article 9 vis a vis FTS : reimbursement of costs from agents)Ahd SPECIAL Bench ITAT Rajeev gajwani (Non discrimination) (80HHE benefit non resident)AAR in Joint Accredetion System Australia and NewzealandMum bench ITAT on 44BB vs 43B :Clough Projects International Vs DDIT Section 44C Bank of BEHRAIN Mum Bench of ITAT

DHC Asia Satellite case 51 DTR 1

Process: a) Programmes were uplinked by TV Channels- customers of appellant (admittedly not from India) b) After receipt of programmes at the satellite (at the locations not in Indian airspace) these are amplified through complicated process c) The programmes so amplified are relayed in footprint area including INDIA where cable Operators catch the waves and pass them over to INDIAN population


HELD section 9(1)(i) is not attracted as: No part of appellant’s operation was carried in India (no man/material/machinery or combination thereof is in INDIA)


The basic submission of Mr. Ganesh was that the service charges received by AsiaSat from its customers are not ―royalty‖ because the said charges are not recovered for the use of any equipment or process as such by the customer Cases relied by assessee: ISRO Satellite Centre [ISACT] Vs. Commissioner concerned DIT (Intl. Taxation) [307 ITR 59]; Bharat Sanchar Nigam Ltd. and Anr. Vs. Union of India (UOI) and Ors. [282 ITR 273] ; Puran Singh Sahini Vs. Sundari Bhagwandas Kripalani & Ors. [(1991) 2 SCC 180]; Karnataka High Court in the case of Lakshmi Audio Visual Inc. Vs. Assistant Commissioner of Commercial Taxes (Kar.) [124 STC 426]; Ishikawajima-Harima Heavy Industries Ltd. Vs. DIT [(2007) 288 ITR 408 (SC)]


Mr. Sanjeev Sabharwal, learned counsel for the Revenue submitted inter-alia:

a) ‗Use‘ in context means only ‗usage simpliciter‘ and nothing more; b) Legislature has ‗intentionally‘ used the expression ‗use‘ because in other sub clause of Explanation 2 to Section 9(1)(vi) wherever required expression used is ‗use or right to use d) Thus, according to the respondent it makes no difference in what capacity the appellant allows someone to use the process.


Mr. Sanjeev Sabharwal, learned counsel for the Revenue submitted inter-alia:

That the appellant was not right in relying upon the ISRO (supra) because of the following reasons: a) ISRO‘s case does not apply to the facts of the present case. b) The difference lies in the type of the transponder being used. There are two types of transponder being used, i.e., Active or Passive. c) The difference as recognized is that the process of ―Amplification‖ takes place in the communication active satellite whereas not in the case of passive satellite. d) Authority of Advance Rulings was well aware of the same while dealing with facts of the ISRO‘s case and even put a question to the assessee about the same.


On royalty u/s 9(1)(vi) HELD:

Thus, the definition of term royalty in respect of the copyright, literary, artistic or scientific work, patent, invention, process, etc. does not extend to the outright purchase of the right to use an asset. In case of royalty, the ownership on the property or right remains with owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary.


HELD:…..68. We are inclined to agree with the argument of the learned Senior counsel for the appellant that in the present case, control of the satellite or the transponder always remains with the appellant. We may also observe at this stage that the terms ―lease of transponder capacity‖, ―lessor‖, ―lessee‖ and ―rental‖ used in the agreement would not be the determinative factors. It is the substance of the agreement which is to be seen. ….Refer: Interesting analogy from IHI 288 ITR 408; OECD and Klaus Vogel’s commentary relevance; etc


HELD ….The Tribunal has made an attempt to trace the fund flow and observed that since the end consumers, i.e., persons watching TV in India are paying the amounts to the cable operators who in turn are paying the same to the TV channels, the flow of fund is traced to India. That is a far-fetched ground to rope in the appellant in the taxation net. The Tribunal has glossed over an important fact that the money which is received from the cable operators by the telecast operators is treated as income by these telecast operators which has accrued in India and they have offered and paid tax. Thus, the income which is generated in India has been duly subjected to tax in India. It is the payment which is made by the telecast operators who are situated abroad to the appellant which is also a non-resident, i.e., sought to be brought within the tax net.

DHC LG Cable case

SC in IHI 288 ITR 408; Mad HC in Ansaldo 310 ITR 237 referred on off-shore supply in TURNKEY contract

Fact that 15% payment will be given after operational acceptance on erection and completion; obligation of assessee co to handover equipment functionally completed in (trade warranty) : cannot be given undue importance to hold title in goods did’t pass to buyer in country of origin

DHC LG Cable case

Mad HC distinguished on account of:Indian subsidiary co was held to be façade created for taxation purposes only; not engaged in execution of on-shore contractsIndian co in Madras case was in existence prior to subject turnkey contract whereas in LG cable/present case same was established post award of contract for executing on-shore work

DHC LG Cable case

Contd..In Madras case, initially there was single contract later same on insistence of Ansaldo, it was split into 4 parts whereas in present case/LG Cables, from beginning there were 2 separate contracts (Off-shore supply and on shore services)In madras case there was allegation of “price of on shore part” being loaded on off-shore partIn Madras contract there was complete overlaping in onshore and off shore work where as in present case, no activity of supply contract is carried in INDIA and both supply & erection contracts were totally separate

DHC LG Cable case

Explanation 1 to section 9(1)(i) applied to hold since no operation qua agreement for equipment supply was carried in INDIA, no income on that count can be taxable in INDIA in hands of Indian business connection

Hold facts are better that IHI case (supra)

DHC Mother Dairy Fruit case 19/10/2010 : ITA 980/2009

Section 5 and section 9(1)(ii) applied under ActSince NR never worked in India, never recd salary from PE; were NR and paid salary in foreign exchange in overseas country – no taxation under Act in India

(refer Mad HC in 315 ITR 195)

The admitted facts are that the salaries were paid in foreign currency to the employees who are in foreign country i.e. in Netherlands and even these employees are non-residents. It is also admitted at the Bar that the salary paid to these employees were exigible to tax in Netherlands and accordingly, they had paid tax as per the Income-Tax laws of that country. The question is as to whether the salary paid to them was to be taxed in India as well? Answer has to be in the negative: India Netherlands DTAA applied

Cal HC in PILCOM 238 CTR 387

Section 115BBA (payment and game material)- complete code for income accrual Above provision cannot be controlled by section 5(2) and section 9 Section 194E referring to Section 115BBA nowhere refers income chargeabilityIn case payment recd without matches being played- no taxation in hands of NR sports association Section 194E is not controlled by DTAA alsoExtra territorial operation of section 194E has no place after SC order in ELI LILY 312 ITR 225; CBDT 1996 inst. contrary to law is not acceptable

Cal HC in ABM Amro bank

Interest paid by a branch of a Foreign Bank to its HO is deductible in the hands of the branch. Such interest is not taxable in the HO’s handsThe assessee, a Netherlands Bank, carried on banking business through a PE in India. The PE borrowed funds from its HO on which interest was paid. The assessee claimed that in the computation of profits of the PE under Article 7(3)(b) of the India-Netherlands DTAA, the interest paid to the HO was deductible. The AO & CIT (A) held that while the interest was deductible in principle in the hands of the PE, it was taxable in the hands of the HO and as there was no TDS u/s 195, the interest had to be disallowed u/s 40(a)(i). The result was that the interest paid by the PE to the HO was disallowed in the hands of the PE while being assessed in the hands of the HO. On appeal, the Special Bench (98 TTJ Kol 295) held that the PE and the HO were the same person and the interest paid was neither deductible in the hands of the PE nor assessable in the hands of the HO. On appeal by the assessee, HELD reversing the Special Bench:

Cal HC in ABM Amro bank

(i) As regards deductibility of the interest in the hands of the PE, though a branch and the HO are the “same person” in general law, Articles 5 & 7 of the DTAA provide that the PE shall be assessable as a separate entity. Under Article 7(3)(b) payment of interest by a bank’s PE to its HO is allowed as a deduction. The result is that the interest paid by the PE to the HO is deductible in computing the PE’s profits (Betts Hartley Huett 116 ITR 425 (Cal) distinguished); (ii) As regards taxability in the hands of the HO & obligation for TDS u/s 195, in accordance with the principles of apportionment of profits between the PE & the HO as laid down in Hyundai Heavy Industries 291 ITR 482 (SC) & Morgan Stanley 162 TM 165 (SC), only the PE is to be taken as the assessee and not the HO. As the interest was not chargeable to tax in the hands of the HO, the PE was under no obligation to deduct tax u/s 195 and consequently no disallowance u/s 40(a)(i) can be made in the hands of the branch.

Kar HC in JEBON Liaison office case

ITA 451/2009 dt 8.2.2011: once the material on record clearly establishes that the liaison office is undertaking an activity of trading and therefore entering into business contracts, fixing price for sale of goods, merely because officials of the liaison office are not signing any contract would not absolve them for tax liability under Income Tax Act and India Korea tax treaty.

M.Fabrikant and Sons l td ITA No. 4657 to 4660 and 3342/Mum/2007

LIASION OFFICE: WHETHER TAXABLE PRESENCE UNDER ACT (SECTION 9)

We have heard the rival content ions and perused the relevant record. Undisputedly, the LO of the assessee was performing the activities of assorting of diamonds, checking of the right quality of diamonds and price negotiation as per the instruct ions and specification of the assessee. These activities of the LO is only part of the purchasing process of the diamonds and did not bring any physical or qualitative change in the goods purchased. Even otherwise, the function of the LO as mentioned above are prior to purchase of the diamonds and not subsequent to the purchases.

M.Fabrikant and Sons

CONTD…..Therefore, no quality change is brought by the LO while doing the operation of purchasing in India for export purposes. I t is a case of purchase of goods through LO and al l the activities carried out by the LO are basic and preliminary requirement of the purchasing process/operation. Select ion of right goods and negotiation of price as per the instruct ions of the assessee are essential part of the purchasing activity. Thus, the case is fully covered by the clause (b) of explanation (1) to sexton 9(1) (i ) of the Act .

Delhi bench of ITAT in LINMARK case

The Indian offices practically carry out all operations of the business of the commission agent except the formation of the contract between the vendors and the buyers, which in any case cannot be done by a commission agent


n such a situation, it cannot be argued that no income accrues or arises in India from the commission to which the Linmark Development (BVI) Ltd. is entitled to. Accordingly, relying on the decision in the case of Performing Right Society Ltd. & Another it is held that notwithstanding the nomenclature of liaison office, the Indian offices are carrying out real and substantive business operations of the assessee , the income from which accrues or arises in India.


Further, the provision contained in section 9(1)(i) is subject to the limitation contained in clause (b) of the Explanation 1. This provision scales down the rigor of section 9 in a certain situation. Such a limitation can not obviously be read into the first part of the provision contained in section 5(2) (b) which, as mentioned earlier, stands independent of section 9. In fact, section 9 is an appendage to section 5 and not the viceversa.

M/s MRO (India) (P) Ltd., ITA No.3838/Del/2007 11.02.2011.

Kiwish Co Payment for co-ordination charges : HELD not FTS u/s 9(1)(vii) delhi ITAT order

The nature of payment made by the assessee to MRO New Zealand is of liaisoning and coordinating to ensure that the blood samples collected by the assessee is properly received at US and the reports are received in time and as per the terms fixed by the US Embassy. Neither of these services can be termed as services in the nature of managerial, technical or consultancy nature. It is also not providing the services of technical or other personnel, therefore, it also cannot be said that such services fall within the term ‘fee for technical services.’

Crane Software Ltd., I.T.A 741 & 742/Bang/2010 08th/2/2011

33.2. The payment was made to the German company for rendering market support for positioning the software products and branding those products for theassessee in European market. The payment was made to the Indian company towards market survey and research activities by compiling customer data basefor promoting assessee's proprietary products. The Singapore company was paid for marketing and promotion of assessee's products abroad.


33.3. All the services rendered to the assessee, thus are professional and technical in nature. The products of the assessee-company are software products. The promotion of those products in competitive markets require technical expertise. Market landing of those products call for elaborate marketing managementnetwork and extreme professional strategy.


33.4. Therefore, the payments made by the assessee company have been rightly treated as fee for technical services. 33.5. This issue is decided in favour of the Revenue.

33.6. But, the German company and Singapore company did not have any PE in India. Payments were made outside India. Services were rendered outside India. Profits were generated in the hands of those companies outside India


33.9. Therefore, the Commissioner of Income-tax(A) is justified in deleting the disallowance of ` 1,36,44,000/- for the asst. year 2005-06 and ` 39,08,79,350/-for the asst. year 2006-07, being the payments made to German company and Singapore company respectively.

Bang bench ITAT order on FTS

Tejas Networks Ltd

After considering: Wipro Ltd. v. ITO reported in 2005-TIOL-32-ITAT-BANG; Madhya Pradesh High Court in HEG Ltd. case 263 ITR 230); De Beers India Minerals (P) Ltd. reported in 297 ITR 176 and

HELD: Payments were made towards charges for subscribing to reading materials. The said subscription charges is not covered either within the definition of royalty or fees for technical services both under the Act and under the treaty laws.

Bang bench ITAT order on FTS

Filtrex Technologies Intertek Testing Services India (P) Ltd. in Re 307 ITR 418 (AAR);Cable & Wireless Networks India (P) Ltd. 315 ITR 72 (AAR);Anapharm 305 ITR 394 (AAR) Diamond Services 304 ITR 201 (Bom); Raymond Ltd 86 ITD 791 (Mum) Bovis Lend dt: 28.8.2009 (b) International Hotel 288 ITR 534 – AAR

The expertise, knowledge and skill to manufacture carbon blocks using the sad technology was available with the assessee for its further utilization which has not been repudiated by the assessee with any documentary evidence.

Bang bench ITAT Filtrex case ITA 654/B/2009 Dt 28.01.2011

On a diligent perusal of the Service Agreement between the assessee and FTG [source: P 8 -10 of PB AR] as also earnestly highlighted by the Ld. CIT (A), the nature of services rendered by FTG being public relations activities, liaison, co-ordination and also design of advertising material like power-point presentation materials, leaf-lets etc., we are of the considered view that they did not represent of rendering any managerial, technical or consultancy services as advocated by the AOs in their impugned orders. Further, the AOs have not brought any clinching evidence before us to substantiate their conclusions that the services rendered by FTG to the assessee for promoting their businesses which were covered under the managerial services as defined as FTS in the Act.

Delhi bench In Rolls Royce case FTS and Contract execution (business income)

Contract for O&M of power plant of Indian co by UK Co was works contract and do not make available technology/skill To Indian co.- do not fall u/expl to section 9(1)(vii)/article 13(4) of India UK DTAA 47 DTR 257


In our opinion, the performance of a work contract would necessarily take the assessee out of the rigors of Section 9(1)(vii) Explanation 2 of the Income Tax Act as well as outside the definition of fees for technical services as contained in Article 13.4 of the DTAA between India and UK. CBDT in its Circular of 1976 has clearly laid down that such contracts where carrying on of that work would require huge expenditure does not envisage the new Section 9(1)(vii) to tax them on gross basis.


The Delhi High Court decision in the case of SRF Finance Ltd. v. CBDT 211 ITR 861 has very nicely brought out the distinction between the rendering of service and carrying out of workIn our opinion, a distinction between rendering of service and carrying out of a work is very important. Carrying out of work also may require technical expertise but it does not convert a works contract into a service contract.

Delhi bench ITAT in Menlo

CIT-A further observed that in this case assessee has been given the right to use the computer system of M/s Emery USA for tracking its packages and would fall within the purview of sub-section (iva). Therefore, in his opinion as the payment was chargeable to tax, tax was to be deducted at source.


AR’s contention: No payments have been made for the alleged use of computer systems. In this regard, ld. counsel placed reliance upon the ISRO Satellite Centre vs. DIT 307 ITR 59; Dell International Services India (P) ltd. vs. C.I.T. 305 ITR 37) and Pacific Internet India Private Limited vs. ITO 318 ITR 179.


Applying Expeditors International 118 \

TTJ (Del)/652 HELD: subject payment for

EMCON connectivity data circuit Expenses

cannot be construed as royalty because no

right to use any industrial, commercial or

scientific equipment has been conferred upon

the assessee.

Some importance decisions on FTS for section 9(1)(vii)

Case Law Gist

Mum bench 49 DTR 97

Merchant Shipping: Payment to be FTS must be for acquiring/using technical know-how simplictier provided/made available by human element

Punja PETROCHEM

ITA 6574/Mum/2009 Lab testing charges not FTS u/expl 9(1)(vii)

AshaPura Minichem 131 TTJ 291

payment made to China Aluminum, towards bauxite testing charges is 'fees for technical services'

AAR in Bharti AXA 326 ITR 477

Whether the payments made by the applicant to AXA ARC for providing access to applications and to the server hardware system hosted in Singapore and related support under the terms of the Service Agreement is in the nature of "royalty" within the meaning of the term in Article 12 of the India-Singapore Tax Treaty?

AAR in Bharti AXA 326 ITR 477

The payments made for access to the system hosted in Singapore is for availing of the facility provided by AXA ARC and it cannot be said that the applicant has been conferred any right of usage of the equipment located abroad, more so when the server is not dedicated to the applicant.

Applied Dessault AAR 322 ITR 125 which is

also followed in GeoQuest 234 CTR 73

Latest Feb & Mar’11 AAR orders Gist

Case Law Gist

Toshiba Plant 52 DTR 155

Sec 44BBB would apply to erection of plant separately taxable independent of off-shore supply

Transworld Garnet 52 DTR 161 (refer 275 ITR 434)

India Canada DTAA: Non discrimination vis a vis indexation benefit under IInd proviso section 68:held not dsicriminatory where as Spl bench ITAT in 137 TTJ 1 (Ahd) held PE of US entity entitled to benefits u/s 80HHE

D.B.Z Mauritius

India Mauritius DTAA applied (to hold capital gains tax not leeviable u/art 13(4) of DTAA SC azadi Bachao applied (E-trade AAR also see)

Latest AAR orders Intl Taxation

Case Law Gist

VNU Intl 28/3/2011

Distinguishing AAR in 289 ITR 464; 321 ITR 478& 322 ITR 678 held u/s 139(1) ROI to be filed by NR co. where taxability is there in Act and removed by DTAA

Jt. Accreditation System 326 ITR 487

Essence of Service for FTS & Occasional trips and fixed place PE issue dealt

Latest ITAT orders Intl Taxation: Gist

Case Law Gist

Daimler 133 TTJ 766

In our opinion mere existence of subsidiary does not by itself constitute the subsidiary company a PE of the parent. The main condition for constitution of PE is carrying on of business in India, Further the assessee does not have a right to use of DCILs premises & for Agency PE:

There should be some definite activity of the PE to which profits can be attributed. Unless it is so established, merely calling a person as agent acting on behalf of foreign non-resident would not by itself render him to be considered as an agency PE and pro tan to part of the profits of the nonresident is liable to be taxed in India.

Latest ITAT orders Intl Taxation: GistCase Law Gist

Vesil SPA italy 43 SOT 137

Therefore a clear distinction was made between the lumpsum pymt for sale of technical know-how and the royalty for usage of the patent right during the period of agreement. Referred: Finolex case 106 TTJ 741

Goldcrest 134 TTJ 355

Payment of compensation under arbitration award to NR Co. held to be business profit arising from trading contract cannot be taxed in absence of PE under DTAA

R& B Falcon 42 SOT 432

Prior to commencement of work by the non-resident assessee, its rig underwent for repairs in India. The period taken for repairs by the rig could not be included to work out stay of 120 days.Art. 5(2)(i) of DTAA with USA.

Latest ITAT orders Intl Taxation: GistCase Law Gist

Clough ProjectsITA No. 670/Mum/2010

The provisions of Sec 44BB estimate the income

at 10% if gross receipts and no separate claim for

expenditure is allowable. In view of this we are of

the opinion that the disallowance under section

43B of `5,86,624/- is not warranted.

Bank of Bahrain

From here it follows that whereas common head

office expenses as per the Expl. (iv) are governed

by sec. 44C, the exclusive head office expenses

are deductible separately as per the regular

provisions of the Act.

Wizcraft 135 TTJ 647

Payment of commission to agent Colin Davie for limited purpose of coordinating the engagement of artiste from outside India…not taxable u/art 18 and cannot be taxed u.art 7 without PE in India

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Latest Judicial Pronouncements International Taxation