International Tax Update: India
Foreign Remittance: Taxability: Case Law Analysis 2015: Series 3
1. Reimbursement of Technical Expenses to Head office: Bureau Veritas-Indian Division vs. ADIT [2015] 54 taxmann.com 139 (Mumbai - Trib.): The Assessee was a French company which operated in India through its Indian Division. Assessing Officer had observed that 'the head office expenditure allocated to the Indian division was in the nature of technical and administrative expenses'. According to Assessing Officer, it represented fee for technical services and as while crediting such amount to head office account no tax was deducted, he added said amount under section 40(a)(ia). The Assessing Officer also added the said amount in the hands of the assessee as according to him the said amount was taxable separately at the rate of 20 per cent in the hands of permanent establishment as per the DTAA between India and France. HELD, connotations of fees for technical services under Indo-French tax treaty are confined to payment for such services 'as make available' technical knowledge, skill, experience, etc. In instant case, payment in question was in nature of reimbursement of technical expenses to head office and not on account of any specific technical services having been 'made available' and, therefore, said amount could not be brought to tax in hands of assessee under article 13 of Indo-French Tax Treaty. Also, said amount could not also be taxed in hands of assessee under article 7 as it was not an income 'attributable to PE'.
1.1) Comments: In the instant case, Indian division is allowed deduction of technical expenses paid to Head office even without deduction of TDS and further the income of head office is also considered as non-taxable in India leading to DOUBLE NON-TAXATION of technical expenses.
1.1(a): There are 2 issues in the case:
a) Taxability of PE in India as a separate entity and Allowability of deduction for payment of technical expenses to HO in the hands of Indian PE for non-deduction of TDS u/s 40(a)(ia)
b) Taxability of Foreign Company for income in India Taxability of Income of Non-resident Company In Respect Of Income earned from Indian branch office.
1.1(b): The tribunal has rightly observed that assessee was not required to deduct tax at source from the impugned payment, consequently no disallowance could be made of the said amount of fee for technical services paid by the assessee to its Head Office, therefore, disallowance under section 40(a)(ia) of the Act was not called for.
1.1(c): Further, the tribunal has also kept the receipts by non-resident head office out of the purview of Income Tax on the grounds that it is not in the nature of fees for technical services and also not business profits.
1.1(d): Thus the payment by Indian division to foreign head office is completely taken out of the purview of Income tax by the above judgement and hence exposing the loophole in the present scheme of Indian taxation.
1.1(e): DTAA requires that Indian PE should be treated as separate entity for the purpose of computation of income and hence payments by the Indian PE to its foreign head office is also required to be deducted for the purpose of computation of Income of Indian PE and determining its tax liability. Also, it allows under Article 7(3)(b) the deduction for amounts towards reimbursement of actual expenses by PE to head office. However, In Income Tax Act, Indian PE and foreign head office are considered as One entity and payment by Indian PE to foreign head office is not liable for TDS as it is payment to self.
1.1(f): It should be noted that Finance Act 2015 has tried to plug the above loophole by bringing into tax net the interest paid by Indian branch office of foreign bank and making it liable for TDS. However, other payments by Indian branch office to foreign head offices is still a possible loophole.
2. No Shipping Profits clause in DTAA: ADIT vs. Mediterranean Shipping Company S.A. [2015] 54 taxmann.com 112 (Mumbai - Trib.): Assessee, a Switzerland based company, was engaged in business of operation of ships in international waters. Assessee filed its return claiming refund of tax liability on freight earnings contending that profits arising out of operation of shipping activities was not taxable in India - Assessing Officer held that profits earned by assessee from operations of ships in international traffic was taxable in accordance with provisions of section 44B. HELD, It was noted that held that international shipping profits of assessee company were covered by Article 22 of Indo-Swiss treaty in terms of which shipping income earned by assessee was taxable in Switzerland. Where assessee, a Switzerland based company, was engaged in business of operation of ships in international water, in terms of article 22 of India-Switzerland DTAA, freight income earned by assessee was taxable in Switzerland and not in India
2.1) Comment: It should be noted that the above judgement has brought the taxability of shipping Income under Article 22 ”Other Income” as there is no specific article dealing with shipping profits under India –Swiss DTAA. Also, the income was not considered as business profits under Article 7 as the said article specifically excludes income from operation of ships in International traffic.
2.1(a) Also, It should be noted that normally DTAAs with other countries require income from operation of ships in international traffic be taxed in the state in which place of effective management in situated. However, Article 22 only requires the condition of residence to determine taxability of “other income”.
2.1(b) Since, DTAA does not define residence, the meaning has to be taken from Indian Income Tax Act which as amended by Finance Act 2015 considers a company as Indian resident if Place of Effective management(POEM) is situated ‘AT ANY TIME’ of the year in India.
2.1(c) So, this judgement shall be highly disputed by tax authorities for shipping profits after 1.4.2015 in respect of Swiss based companies as POEM at any time will make swiss company an Indian Resident and hence taxable in respect of ‘other income’ in India.
(For detailed discussion refer article /articles/place-of-effective-management-critical-analysis-23256.asp)
3. Purchase of Technical Know-How not royalty: ITO vs. Heubach Colour (P.) Ltd. [2015] 54 taxmann.com 377 (Ahmedabad - Trib.): Assessee-company was in business of manufacturing and sale of colour pigments and fine chemicals - It acquired Arocia business from 'CL', a non-resident company and paid certain sum to 'CL' claimed to be for intangibles assets, trademarks and goodwill - Assessing Officer treated assessee as assessee-in-default holding that payment was covered by section 9(1)(vi) and, therefore, assessee was required to deduct tax under section 195 treating payment as royalty. HELD, purchase of technical know-how could not be treated as royalty and, therefore provisions of section 195 were not applicable.
3.1) Comment: Judgement has rightly held the payment as not royalty on the basis of judgement by Delhi high court in Asia Satellite Communications Ltd. [2011] 332 ITR 340 wherein it was held that ‘The Term 'royalty' appearing in Explanation 2 to sub-clause (vi) of section 9(1) of the Act. Sub-clause (i) deals with the transfer of all or any rights (including the granting of a licence) in respect of a patent, etc. Thus, what this sub-clause envisages is the transfer of "rights in respect of property" and not transfer of "right in the property". The two transfers are distinct and have different legal effects. In first category, no purchase is involved, only right to use has been granted, while in the second category, the rights are purchased which enable use of those rights. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights are indeterminate in duration and residuary in character. 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’
4. Transfer of Intangible asset not royalty: Flag Telecom Group Ltd. vs. DCIT [2015] 54 taxmann.com 154 (Mumbai - Trib.): The assessee sold the cable capacity to VSNL for US $ 28,940,000. The CSA provided for the ownership rights in the Flag Cable System with all the rights and obligations in he capacity sold i.e., VSNL can transfer, assign or sell the capacity. It also lays down the concept of standby maintenance, payments, obligations, management decisions etc. The entire procedure for ownership of capacity in the cable system and all other terms and conditions has been contained in a separate agreement titled as "Construction and Maintenance Agreement" (C&MA). As per the terms, once C&MA comes into force, the CSA will come to an end. HELD, The entire agreement was for the period of 25 years which coincided with the life of the cable. In case of 'royalty', the complete ownership in the equipment is never transferred to the other party. What is envisaged in section 9(1)(vi) read with Explanation thereto, is consideration for use or rights to use of any equipment. Where consideration is received by foreign company from Indian Co. for sale of capacity involving transfer of ownership of cable system to Indian company as distinguished from a mere payment for simply user of capacity, the consideration is not taxable as royalty u/s 9(1)(vi).
5. NO FTS Clause in DTAA: McKinsey Business Consultants Sole Partner Limited Liability Company MEPE vs. DDIT [2015] 54taxmann.com 300 (Mumbai - Trib.): Assessee was a foreign company incorporated in Greece - It had provided assistance in form of borrowed service to Mckinsey India (associate concern), in consideration for which, assessee received an amount from Indian company - Assessing Officer held that said sum was to be taxed as fee for technical services within meaning of section 9. HELD, since assessee had earned income by rendering services in course of its business, in absence of FTS clause in DTAA between India and Greece, it was nothing but business profit which was covered under article 3. Also, in absence of any PE in India, it could not be taxed in India
5.1) Comment: Greece is one of the few countries where DTAA does not have clause on taxability of Fees for technical services. Other countries are Thailand, Phillippines, Indonesia. Other relevant judgements pertaining to NO FTS clause in DTAA where authorities held the payment as business profits include: Bangkok Glass Industry Co. Ltd. v. ACIT [2013] 215 Taxman 116(Mag.) (Mad.)(HC), Mckinsey & Company (Thailand) Co. Ltd. v. Dy. DIT (Int. Tax.) [2013] 36 taxmann.com 375 (Mumbai-Trib.) (Country: Thailand), GECF Asia Ltd. vs. DDIT [2014] 65 SOT 257 (Mumbai - Trib.) (Country: Thailand), IBM India Private Limited vs DDIT [TS-78-ITAT-2014 (Bang.)] (Country: Phllipines) PT McKinsey Indonesia vs. DDIT (ITA No. 7624/Mum/2010) (Country: Indonesia)
(Author can be reached at ca.guptarohit@gmail.com for any queries)
Thanks and best regards,
Rohit Gupta
B.Com, FCA, LLB,
CIA, DISA, CertIFRS
Certificate in International Taxation
New Delhi-110063, India
CAclubindia
