DCIT vs. UPS Jetair Express Pvt. Ltd. (TS-102-ITAT-2015(Mum.)) dated March 10, 2015

DCIT vs. UPS Jetair Express Pvt. Ltd. (TS-102-ITAT-2015(Mum.)) dated March 10, 2015

Facts of the case

The assessee M/s. UPS Jetair Express Pvt. Ltd. an Indian company is a joint venture between UPS Worldwide Forwarding Inc. USA (UPS WWF) and Jetair Pvt. Ltd. engaged in the business of international express delivery services.

During the year, the assessee had obtained debtor collection services from RMS USA and legal services from TITUS an Indian firm. The payment for such services was made by M/s. UPS WWF USA and later reimbursed by the assessee to UPS WWF on cost-to-cost basis without any mark-up. No TDS was deducted on such services.

The AO contended that the assessee failed to deduct TDS u/s. 195 r.w.s. 9(1)(vii) and made the disallowance of such expenses

u/s. 40(a)(ia).

In appeal, CIT(A) rejected assessee's contention and AO's order was upheld.

Being aggrieved, the assessee preferred an appeal before Mumbai ITAT.

Issues

Deepak Fertilizers and Petrochemicals Corporation Ltd. vs. DDIT (Int. Tax)-I (ITA No.2040/PN/2012) Dated 29th October, 2013

Facts of the case

The assessee, Deepak Fertilizers and Petrochemicals Corporation Ltd., is engaged in the business of manufacture and sale of chemicals, fertilizers. The assessee embarked upon a project to produce Ammonium Nitrate Prill at its factory located at Taloja as a part of its expansion project of its existing business.

For this, the assessee had entered into an agreement with GPN Engineering & Process, France (GPN). The agreement was in two parts and was executed in France on January 1, 2009. Under Part I, GPN agreed to grant to the assessee, non-transferable and non-inclusive licence to use technical information. Whereas, under Part II GPN agreed for process for production of Ammonium Nitrate Prill.

The payment of consideration was agreed to be made on “net of tax” basis. Accordingly, the assessee remitted an amount of € 2,10,000 being 70% of the total € 3,00,000 as stated towards consideration for outright purchase of Process Book Package for Ammonium Nitrate Prill production.

The assessee paid tax of Rs. 15.20 lakhs on April 30, 2009. However, the assessee contended that the amount remitted by it for outright purchase of Process Book Package was not taxable and requested AO to refund the tax already deducted and deposited.

Issue before the Tribunal

Whether the payment had to be recognised as ‘fees for technical services’ and ‘consultancy services’ u/s 9(1)(vii) and is liable to deduction of tax at source in India?

Held

ITAT observed that the facts of the present case and that of the Royal Extrusion were similar. Therefore, following the same ratio, ITAT held that assessee was not liable to deduct tax on the amount remitted to GPN for acquisition of process, design, documentation called Basic Engineering Package on outright purchase basis for Ammonium Nitrate Prill production.

ITAT held that the amount could not be considered as fees for technical services liable to withhold tax in India. ITAT had accepted the assessee’s contention.

Metro & Metro vs. Additional Commissioner of Income Tax (ITA No. 393 Agra 2012) Dated 1st November, 2013

Facts of the case

The assessee is a 100 per cent EOU engaged in the manufacture and export of leather goods. The assessee has made remittances to a Germany based company, in respect of leather testing charges, but did not withhold the applicable taxes from these remittances.

The Assessing Officer was of the view that since the assessee has made the remittances without withholding requisite tax deductions, the payments so made are not allowable as deductions in the hands of the assessee.

Aggrieved, assessee carried the matter in appeal before the learned CIT (A) but without any success.

Issue before the Tribunal

Whether the payment had to be recognised as ‘fees for technical services’ rendered in India u/s 9(1) (vii) and is liable to deduction of tax at source in India?

Held

Tribunal held that, the amount paid to foreign party was not taxable in India in the light of Legal position as it prevailed at that point of time, and it became taxable in India only as result of retrospective amendments in section 9(1), the said payment cannot be disallowed invoking provision of section 40(a) (i).

DIT vs. Alcatel Lucent USA Inc. (ITA 328/2012, ITA 329/2012, ITA 336/2012, ITA 337/2012 & ITA 340/2012) (Delhi HC)

Facts of the case

The taxpayer, a US company and a part of the Alcatel Lucent Group. The taxpayer was having a subsidiary in India, which provided marketing support services to the taxpayer.

The taxpayer was engaged in the business of supplying telecom equipments to customers in India. The payers (i.e., Indian customers) did not deduct tax while making payments to the taxpayer. The income tax authorities conducted a survey in the premises of Indian subsidiary and the Assessing Officer (AO) concluded that the taxpayer was having Permanent Establishment (PE) in India under the India-USA tax treaty and attributed 2.5 per cent of sale proceeds of the hardware as profit attributable to the PE in India. In addition to the aforesaid income, the AO also levied interest under sections 234A, 234B and 234C of the Act.

Initially, before the tax authorities, the taxpayer denied any liability to pay tax in India. However, before the Commissioner of Income Tax (Appeals) [CIT (A)], it did not press the claim that it was not liable to tax in India. However, the taxpayer contended that it is not liable to pay interest under section 234B of the Act.

The taxpayer claimed that it was not liable to pay interest under Section 234B of the Act, since the liability to deduct the tax on its income was on the payer. It was claimed that as per Section 209(1)(d)2 of the Act, the taxpayer was entitled to take credit of tax which was ‘deductible’ while computing its liability for paying advance tax and if the amount of tax so ‘deductible’ by the payer in India is given credit, there was no advance tax payable by the taxpayer.

The CIT(A) and Income Tax Appellate Tribunal (the Tribunal) ruled in favour of the taxpayer.

Issue before the High Court

Whether the taxpayer is liable to pay interest under section 234B of the Act, when the tax was deductible at source, but not deducted by the payer?

Held

In the case of Jacabs, the taxpayer admitted taxable income in the income-tax return. However, in the present case, the taxpayer did not admit any taxable income in the income-tax return. Accordingly, the facts of the present case were different from the facts of the case of Jacabs.

It would be inappropriate to hold that even though the taxpayer did not admit any tax liability in India while filing the income-tax return and correspondingly the payers were also not liable to deduct tax under section 195(1), still it can claim credit for the tax ‘deductible’, though tax was not deducted by the payers from the remittance made to the taxpayer.

The contention of the taxpayer that the liability of the payer under section 201 of the Act is different from the liability of the non-resident taxpayer under section 234B of the Act need not be examined, and in the present case it would not make any difference on account of the peculiar facts of the present case.

The taxpayer denied its tax liability in India while filing income-tax return and therefore, it can be inferred that the taxpayer would have asked its Indian payers not to deduct tax from the remittances made to it. If the taxpayer did not make such a representation, it would only be consistent with the taxpayer’s stand regarding its tax liability in India. Therefore, even though there may not be any evidence to show that the taxpayer has made a representation to payers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed.

It was open to the taxpayer to deny its tax liability in India on whatever grounds it thinks fit and proper. Having denied its tax liability, it seems unfair on the part of the taxpayer to expect the Indian payers to deduct tax from the remittances.

It was open to the taxpayer to change its stand at the first appellate stage and submit the assessment of income. When it does so, all consequences under the Act follow, including its liability to pay interest under section 234B since it would not have paid any advance tax. Such liabilities would arise right from the time when the income was earned.

The High Court observed that it would be inequitable that the taxpayer, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers. Once the liability to tax is accepted by the taxpayer, all consequences follow.

Eruditus Education Private Limited (AAR No. 1037 of 2011) (AAR)

Held

The services rendered by the foreign university to the applicant involve expertise in or possession of special skill or knowledge that is ‘technical’ in nature. Thus the payment for the services falls under the definition of FTS, both under the Act and the tax treaty. However, the case of the applicant will fall in the exclusion clause of Article 12(5)(c) of the tax treaty which reads as under - “Notwithstanding paragraph 4, ‘Fees for technical services does not include payment: for teaching in or by educational institutions..”

There is no dispute regarding the fact that the foreign university is an educational institution and services rendered are in the nature of ‘teaching’. Thus the payments are not considered as FTS under the tax treaty.

Further the AAR held that the foreign university does not have a PE in India under Article 5(1) or 5(8) of the tax treaty in relation to the activity of conducting in-class teaching or through tele-presence in India.

Thus the payments were not chargeable to tax in India and there will not be any withholding tax implications.

US Technology Resources Pvt. Ltd. vs. ACIT (ITA No. 222/Coch/2013) (Cochin ITAT)

Held

On reference to the tax treaty, it indicates that the term ‘managerial service’ did not find place in Article 12(4) of the India US tax treaty. However, on a perusal of MOU under the tax treaty, it indicates that if technical or consultancy services make available technical knowledge, experience, skill, etc., then it would be considered as technical or consultancy services.

It was observed that consultancy services which were not of technical nature cannot fall under the ‘included services’. However, as per MOU of the tax treaty, the consultancy services which are technical in nature are to be considered as technical and consultancy services under the tax treaty.

On a perusal of management services agreement, extracted from CIT(A)’s order, it indicates that the US company provides highly technical services which were used by the taxpayer for taking managerial decision, financial decision, risk management decision, etc.

The Tribunal discussed the decisions in the case of De Beers India Minerals Pvt. Ltd., Raymond Ltd., Wokhardt Ltd, Intertek Testing Services India (P) Ltd and Sandvik Australia Pty Ltd and held that they are distinguishable from the facts of the present case.

Therefore, the expertise and technology which was made available by the US company is technical service under Article 12(4)(b) of the tax treaty.

Deputy Director of Income-tax (IT) – 4(1) VS. Marriott International Licensing Company BV [2013] (Mumbai ITAT) dated 17th July, 2013.

Facts of the case:

• Assessee-foreign company (Marriott) entered into a Franchise agreement and International sales & Marketing Agreement (ISMA) with Franchisee-hotel M/s Ansal Hotels Limited (AHL) in India.

• Preamble of the Agreement provides that the Franchisee is the owner of the hotel and desires to establish and operate an MHRS International Hotel between Marriott and Franchisee. The Franchisee required certain sales and marketing publicity and promotion services to be performed outside India in support of the operation of the hotel and Marriott (the assessee) chose to perform such services.

• The Franchisee also had entered into an International Sales and Marketing Agreement with Marriott in order to participate in internationally recognized hotel system for the purposes of attracting foreign guests to the hotel.

• Assessee made certain payments as per Article 3.1 of the Franchise Agreement. Clause 3.2 of the agreement provided that AHL shall reimburse the assessee 1.5% of its gross revenue on quarterly basis for International Marketing Activities. In addition to this, it shall reimburse every additional cost and special advertising costs as mentioned in Clause 3.2B and 3.3. of the agreement.

• AO brought total amount to tax as "royalty" under Article 12(4) India-Netherlands DTAA.

• CIT(A) allowed the receipt under clause 3.1 of the Agreement to be royalty and the second part of the amount under clauses 3.2 and 3.3 was held to be towards 'Reimbursement of expenses' on sales promotions and marketing and hence not chargeable to tax in India.

• Aggrieved by CIT(A) order, appeal was filed by Revenue to ITAT.

Issue before the Tribunal:

• Whether payment received by a foreign company from Indian franchisee for international marketing activities is "royalty" under Article 12(4) of DTAA even if its on the basis of % of gross revenue?

Held:

• A perfunctory look at the definition of term 'royalties' as per the para 4 of the Article 12 of the DTAA makes it clear that it represents payment received as a consideration 'for the use of or the right to use' any copyright of literary, artistic or scientific work including cinematograph films, patent, trade mark or design etc.

• In order to cover any amount within the purview of "royalties" as per Article 12 (4) of the DTAA it is imperative that the payment must be a consideration for “use or right to use” any copyright of the literary artistic work etc. or any patent, trademark etc. (collectively referred to as the 'defined property').

• In the present case, even if the contribution made by AHL towards the international marketing activities led to the brand building, still it is a payment for the creation or swelling of the brand and not for the” use “of such brand, which could qualify to be characterized as 'royalties'.

• The term 'royalties' as per article 12(4) contemplates a consideration for the use of or right to use of the defined property which is already in existence and the payment is agreed for its use or right to use. If the payment made is of such a nature which helps in the creation of the defined property that cannot fall within the ambit of Article 12(4) of the DTAA.

• Thus the AO's action in treating this amount as royalties was set aside.

• However, said contribution at 1.5 per cent of the gross revenue for each quarter is not any actual reimbursement of expenses on itemized basis. The actual expenses to be incurred by the assessee may be more or less than the said fixed rate of contribution. In such a situation, there is every possibility of the assessee having some mark up on the costs incurred by it on advertisement. Or alternatively, it may be the other way around also. No material has been placed on record to demonstrate that the actual expenses incurred by the assessee were equal to the amount received.

• Hence, Ld. CIT(A) was not justified in deleting the addition by holding that it represented 'reimbursement of expenses'.

• Thus, in the interest of justice, the case was remanded to AO to consider the facts on the touchstone of Article 7 of DTAA.

Abacus International (P.) Ltd. vs. DDIT [2013] 34 taxmann.com 21 (Mumbai ITAT) dated 31 May, 2013

Facts

The taxpayer is a company resident of Singapore engaged in the business of Computerised Reservation System (CRS). Its primary business is to make airline reservations for and on behalf of the participating airlines and for this purpose, it uses the CRS.

During the year under consideration the taxpayer was granted refund by the Income-tax department which included interest on such refund. The taxpayer offered such interest for tax at the rate of 15 per cent as per Article 11 of the tax treaty.

The Assessing Officer (the AO) denied the concessional tax rate under the tax treaty since the taxpayer did not furnish any proof of remittance to Singapore. Therefore, such interest income has to be taxed at the rate of 20 per cent in accordance with Section 115A of the Act.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the order of the AO.

Issue

Whether the interest received on income-tax refund can be taxed at concessional rate provided under the tax treaty if such interest is not received in Singapore?

Held

The taxpayer could not lead any direct evidence to show that such amount was received in Singapore.

As per Article 24(1) of the tax treaty, where the tax treaty provides that income from source in India shall be taxed at a reduced rate in India and shall also be taxed in Singapore, then the said income shall be taxed at the reduced rate prescribed in the tax treaty provided the income is 'remitted to or received in' Singapore.

Article 24 of the tax treaty limits the relief granted by other relevant Articles, including Article 11 of the tax treaty, subject to the fulfilment of the conditions enshrined therein.

Accordingly, if the income is not remitted to or received in Singapore, then the benefit of Article 11 of the tax treaty providing for a reduced rate of tax of 15 per cent cannot be extended to the taxpayer. In that situation, the income will be taxed as per the Act.

The requirement of Article 24 of the tax treaty is that the taxpayer must have received the interest income in Singapore. The relevant facts for proving this are available in the domain of the taxpayer alone. Simply not having a bank account in India does not mean that the amount was received in Singapore. The requirement of Article 24 is to receive the amount of interest in Singapore, which can't be established by proving that the amount was not received in India.

The burden is on the taxpayer to prove that the amount of income was remitted to or received in Singapore. However, the taxpayer has not shown any supporting evidence to prove the fulfilment of the requisite condition.

Accordingly, the interest on income-tax refund shall not be taxed at the concessional tax rate under the tax treaty and it shall be taxed at the rate of 20 per cent as per Section 115A of the Act.

India and Albania signed an Agreement for Avoidance of Double Taxation

The Union Government of India and Government of Albania on 8 July 2013 signed an Agreement for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to the Taxes on Income and on Capital (DTAA). The agreement was signed to provide tax stability for the residents of both the nations. It would also facilitate mutual economic cooperation between the two countries. The signed agreement would also stimulate the flow of investment, technology and services between India and Albania. The agreement incorporates provisions for effective exchange of information between tax authorities of the two countries, which also includes exchange of banking information and supply of information without recourse to domestic interest.

Source : JaganJagrosh

ASSTT DIT (IT) - 1(2) Vs M/s CLIFFORD CHANCE 2013-TII-81-ITAT-MUM-SB-INTL Dated : May 13, 2013

 

Facts:

• The assessee is a firm of solicitors which is a tax resident of UK. During the years under consideration, it rendered legal consultancy services in connection with different projects in India, some part of which was performed in India. Income attributable to the services so performed in India was offered to tax by the assessee in India in the return of income filed for A.Y. 1998-99 as per Article 15 of the India-UK Treaty since the aggregate period of its presence in India through partners and employees exceeded 90 days in that year. In the returns of income filed for other years, the assessee declared ‘Nil’ income on the ground that the aggregate period of its presence in India did not exceed 90 days and its income was not taxable in India as per Article 15 of the India-UK Treaty

• The A.O. held that the profits of the assessee to the extent they were directly or indirectly attributable to PE in India were taxable in India as per Article 7. Accordingly, the entire fees received by the assessee from its clients for the services utilised in relation to the projects in India was brought to tax by the A.O. in India in the hands of the assessee.

• In appeal, the CIT (A) who ruled in favour the assessee and the issue was finally taken to the Tribunal.

Issues:

• Whether the amendment made by the Finance Act 2010 in section 9 with retrospective effect from 1st June, 1976, is applicable only in the cases covered under clause (v), (vi) or clause (vii) of section 9(1) and not clause (i) of section 9(1)?

• Whether the Bombay High Court decision in the assessee's own case holds good notwithstanding the retrospective amendment in the Explanation to Sec 9 vide Finance Act, 2010?

• Whether Article 7(1) of the India-UK DTAA read with Article 7(3) thereof, are akin to the provisions of section 7(1)(b) and 7(1)(c) of the UN Model Convention?

• When the connotations of “profits indirectly attributable to permanent establishment” are defined specifically in Article 7(3) of the India-UK there is any need to refer to the UN Model Convention?

Held:

• The tribunal held that, the amendment made by the Finance Act 2010 in section 9 with retrospective effect from Ist June, 1976, which is applicable only in the cases covered under clause (v), (vi) or clause (vii) of section 9(1) and not clause (i) of section 9(1), thus has not negated the decision of Bombay High Court in the case of the assessee for A.Y. 1996-97 and the said decision rendered in the context of section 9(1)(i) still holds good even after the said amendment in so far as the assessee’s case is concerned.

• Article 7(1) of the India-UK DTAA is read with Article 7(3) thereof, we are of the considered view that the provisions thereof are not at all akin to the provisions of section 7(1)(b) and 7(1)(c) of the UN Model Convention and it would not be correct to say that the connotations of “profits indirectly attributable to permanent establishment” extend to the two categories of income as specified in clause (b) and clause (c) of Article 7(1) of the UN Model Convention and incorporate a force of attraction rule as held by the Division bench of this Tribunal in the case of Linklaters LLP;

• In our opinion, when the connotations of “profits indirectly attributable to permanent establishment” are defined specifically in Article 7(3) of the India-UK DTAA which clearly explains the scope and ambit of the profits indirectly attributable to the PE and the provisions of said article being unambiguous and capable of giving a definite meaning, there is really no need to refer to the provisions of Article 7(1) of UN Model Convention which are materially different from the provisions of Article 7(1) of the India-UK DTAA read with Article 7(3) thereof.

Commissioner of Income-tax –IV VS. Sikandarkhan N Tunvar [2013] 33 taxmann.com 133 (Gujarat) Dated 2nd May, 2013.

Facts:

• The Assessing Officer in his order of assessment dated 30-11-2009 disallowed the entire expenditure on the ground that the assessee had admittedly not deducted the tax at source though payments were made to transporters which exceeded to Rs. 20,000 in a single trip and aggregated above Rs. 50,000 in the year.

• CIT (A) dismissed assessee's appeal against the disallowance under section 40(a)(ia) . On further appeal to ITAT, assessee succeeded.

• Relying on the decision of Special Bench of the Tribunal (Visakhapatnam) in the case of M/s. Merilyn Shipping & Transports v. ACIT, the Tribunal deleted the entire disallowance. The Tribunal believed that the word "payable" used in Section 40(a)(ia) of the Act would make the provision applicable only in respect of expenditure payable on 31st March of a particular year and that such provision cannot be invoked to disallow the amounts which had already been paid during such year even though tax may not have been deducted at source.

• Hence the present appeal by Revenue to HC.

Issues:

• Whether disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 could be made only in respect of such amounts which are payable as on 31st March of the year under consideration?

• Whether decision of Special Bench of the Tribunal in the case of M/s. Merilyn Shipping & Transports v. ACIT (supra) lays down correct law?

Held:

• The term used in section 40(a)(ia) is interest, commission, brokerage etc. is payable to a resident or amounts payable to a contractor or sub-contractor for carrying out any work.

• The language used is not that such amount must continue to remain payable till the end of the accounting year. Any such interpretation would require reading words which the legislature has not used.

• The Courts in India have been applying the principle of deliberate or conscious omission. Such principle is applied mainly when an existing provision is amended and a change is brought about.

• While interpreting such an amended provision, the Courts would immediately inquire what the statutory provision was before and what changes the legislature brought about and compare the effect of the two.

• The other occasion for applying the principle, noticeable from various decisions of the Supreme Court, has been when the language of the legislature is compared with some other analogous statute or other provisions of the same statute or with expression which could apparently or obviously been used if the legislature had different intention in mind, while framing the provision.

• The Tribunal committed an error in applying the principle of conscious omission in the present case. Firstly, there is serious doubt whether such principle can be applied by comparing the draft presented in Parliament and ultimate legislation which may be passed. Secondly, the statutory provision is amply clear.

• Section 40(a) (ia) would cover not only to the amounts which are payable as on 31st March of a particular year but also which are payable at any time during the year. Of course, as long as the other requirements of the said provision exist.

• In the result, Revenue's appeal allowed.

HP Agrawal: Is royalty paid by a non-resident to another taxable in India?

The issue for consideration is as to whether the royalty paid by the foreign manufacturers on manufacturing of the goods outside India could also be taxed in India if such goods are sold in India. In terms of section 9(1)(vi)(c), royalty payable by a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India, is taxable in India because such royalty is treated as ‘deemed’ to accrue or arise in India in the hands of recipient of royalty.In an interesting recent case (ITA - 3700/D/2009), a US Company granted a non-exclusive and non-transferable worldwide license of its patents developed on CDMA technology to wireless Original Equipment Manufacturers (‘the OEMs’) outside India to make, import, use and sell CDMA handsets and wireless equipment (the ‘Products’) anywhere in the world. In consideration for the grant of licence, the US Company charged a royalty from OEMs.

Source : Business Standard

India signs multilateral tax pact to curb evasion & bring back black money

India has signed a multilateral tax agreement that will will reinforce the domestic authorities' capacity to combat tax avoidance/evasion and help bring back black money illegally stashed abroad.The Multilateral Convention on Mutual Administrative Assistance in tax matters is an instrument available to all countries for developing a broader multilateral approach to improve the effectiveness of exchange of information and facilitate co-operation between the countries in the assessment and collection of taxes. Pertinently, it provides for assistance to signatories in the recovery of taxes, a facility not available with bilateral tax treaties The pact was signed at the OECD headquarters in Paris by Sanjay Mishra, joint secretary, CBDT and Rintaro Tamakio, OECD deputy secretary-general. With the signing of the pact, India has joined the league of 31 other countries who are part of the convention. So far, the convention has been ratified by 12 countries

Source: Financial Express

India to sign DTAA with Macau

CBDT Chairman M C Joshi leaves for Macau today to ink a double taxation avoidance agreement , a move to facilitate the exchange of tax-related and banking information between the two and prevent tax evasion. Macau is one of the most well-known offshore financial centres and tax havens worldwide. The agreement will also help create a better investment climate for Indian businesses in Macau and vice-versa.Double taxation is a situation in which one or more taxes is imposed on the same income, asset or financial transaction of an entity of one country doing business in another country by two or more countries, such as income paid by an entity of one country to a resident of a different country.