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CIT v. De Beers India Minerals Pvt. Ltd. (ITA No. 549 of 2007) Facts: The taxpayer was a private limited company engaged in the business of prospecting and mining for diamonds and other minerals. The State Government of the Karnataka and Chhattisgarh had granted to the taxpayer, licenses (Reconnaissance Permits) for mineral reconnaissance activities. Reconnaissance is the early stage of exploration. For the purpose of carrying out geophysical survey, the taxpayer entered into an agreement with Fugro Elbocon B.V. Netherlands (Fugro). The Services were engaged to conduct the air borne survey for providing high quality, high resolution and geophysical data suitable for selecting probable kimberlite targets for prospecting and mining for diamonds and other minerals. The Assessing Officer ('AO') treated the consideration paid to Fugro as Fees for Technical Services ('FTS') under Article 12 of the tax treaty. Alternatively, the AO also held that payment made was for development and transfer of a technical plan or technical design. Issues: Whether the income received by Fugro from the taxpayer for services to supply technical data including drawings, plans, maps etc., (geological survey) to identify the Kimberlite targets would not be treated as FTS? Whether the payment made to Fugro was for the development and transfer of technical plan or technical design to the taxpayer? Held: The Court observed that in case of Perfetti Van Melle Holding, the AAR held that the services which are ancillary and subsidiary to the application of right, property or information for which the payment prescribed in the Article 12(4) was to be made, falls within the purview of Article 12(5)(a) of the tax treaty. Further, in the cases of Shell India Markets Pvt. Ltd. and Areva T & D India Limited, AAR held that the technology was made available to the recipient. Based on the above three AAR rulings, it was not possible to hold that there was a departure by the AAR in respect of its earlier views. As per the tax treaty FTS means the payment in consideration for rendering of any technical services only, if such services make available technical knowledge, expertise, skill, know-how or processes. The India-Singapore tax treaty further explains the meaning of the word 'make available' by adding the words which enables the person acquiring the service to apply technology contained therein. By virtue of Most Favoured Nation (MFN) clause in the tax treaty, the said additional explanation in India-Singapore tax treaty also applied to the India – Netherlands tax treaty. Therefore, for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. Merely because service receiver's business is dependent on the technical service provided by the service provider does not amount that former is making use of the technology which the latter utilizes for rendering technical services. Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. Payment of consideration would be regarded as FTS only if the twin test of rendering services and making technical knowledge available is satisfied. On a perusal of the contract entered into with Fugro, it was clear that Fugro had given the data, photographs and maps. But it had not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the taxpayer. The taxpayer could not independently and without assistance of the Fugro undertake geophysical survey in future. Hence, the technical service rendered by Fugro was not of enduring nature. Therefore, it was held that though Fugro rendered technical services as defined under Section 9(l)(vii) of Income-tax Act, 1961 (the Act), it does not satisfy the requirement of technical services as contained in the Article 12 of the tax treaty. Therefore the liability to tax was not attracted. The taxpayer processes the raw input data provided by Fugro in a software technology which was not provided by Fugro to generate a report to determine probable targets. The information furnished to the taxpayer by way of technical service in the digital form is also given in the form of maps. Further, the contract was for providing of services and not for supply of technical design or plan. The reports and maps provided by the Fugro were only additional mode of representation of data and it was not a technical plan or design as understood in law. Under the terms of the agreement, the ownership of the data collected or other documents vested with the taxpayer only and not with Fugro. Therefore, question of transfer of such data and other documents did not arise. Accordingly, the consideration paid by the taxpayer was not for development and transfer of technical plans and technical designs. In view of above the High Court held that the consideration paid to Fugro could not be treated as FTs under Article 12 of the tax treaty. Thought Buzz Pvt. Ltd. v. DIT (AAR No. 1036 of 2010, dated 7 April 2012) Facts: The applicant, a tax resident of Singapore is engaged in providing social media monitoring service for a company brand or product. Further it is a platform for users to hear and engage with their customers, brand ambassadors etc. on the internet. The applicant, incorporated, wholly controlled and managed from Singapore, does not have a Permanent Establishment (PE) in India. The applicant offers services on charging a subscripttion. The clients who subscribe services of the applicant can login to its website to do a search on what is being spoken about various brands. The system operated by the applicant generates a report with analytics with inputs provided by the clients. The information for generation of report is obtained from blogs and forum, social networking sites, review sites, question and answers sites and twitter. The applicant also maps blog, forums, facebook posts and twitter users country wise to provide social media analytics for different markets. The subscripttion received from the provision of service is taxable as business income in Singapore. Issue: Whether the amount received by the applicant for offering subscripttion based services is taxable in India? Held: The AAR observed that the applicant is in the business of gathering, collating and making available or imparting information concerning industrial and commercial knowledge, experience and skill and consequently, the payment received from the subscriber would be in the nature of royalty in terms of clause (iv) of Explanation 2 to Section 9(1)(vi) of the Act. In view of the tax treaty, the subscripttion fee would qualify as royalty since it is for the use or right to use for consideration, the process or information concerning industrial, commercial or scientific experience. Therefore, the subscripttion fees received from the Indian subscriber would be treated as royalty under Article 12(2) of the India – Singapore tax treaty. Accordingly, the payment received from offering the particular subscripttion based service is taxable in India as 'royalty' under Article 12(2) of the tax treaty. Therefore, tax is required to be deducted from the payment made by the subscribers who are resident in India under Section 195 of the Act. Roxar Maximum Reservoir Performance WLL [AAR No. 977 of 2010, dated 7 May 2012] Facts: The Oil and Natural Gas Corporation Limited (ONGC) invited a tender for the 'services for supply, installation and commissioning of 36 manometer gauges' for carrying out its operations. The applicant was a successful bidder for this tender. Accordingly, ONGC and the applicant entered into a contract to carry out these services. The applicant was of the view that the income from such sale transaction is not taxable in India since the title to the goods passed outside India and the payment was received outside India. Issue: Whether payments received by the applicant from ONGC for offshore supply are taxable in India under the Act? Whether the amounts received by the applicant for installation, erection and commissioning of gauges are chargeable to tax under the provisions of Section 44BB of the Act? Held: The applicant argued that the income from such sale did not accrue or arise in India and it cannot be deemed to have accrued or arisen in India. The applicant relied on the decision of the Supreme Court in the case of Ishikawajima and Hyundai Heavy Industries Company Ltd, AAR ruling in the case of Hyosung Corporation and such other decisions. The AAR held that the decisions relied on by the applicant needs to be considered in the context of the Supreme Court decision in the case of Vodafone International Holdings BV where a three judge bench of the Supreme Court has laid down the principle that what is needed is to consider the transaction in its entirety and look at the transaction as a whole and not adopt a dissecting approach. Further the Supreme Court observed that a transaction must be 'looked at' and not 'looked through'. A two judge bench of the Supreme Court in the case of Ishikawajima had adopted a dissecting approach by dissecting a composite contract into two parts and holding one of the parts as not taxable in India. However, the decision in the case of Vodafone International Holdings BV having been rendered by a three judge bench, it is not proper to follow the approach made in the decision in Ishikawajima and to adopt a dissecting approach to the contract in question. The AAR observed that a contract has to be read as a whole and the purpose for which the contract was entered into by the parties needs to be ascertained from the terms of the contract. On a perusal of the contract, it indicates that the contract was for erection and commissioning of 36 manometer gauges for the use of ONGC. The contract is neither for sale of equipment nor is it for mere erection of the equipment. It is a composite contract for supply and erection at sites within the territory of India. The payment is received by the applicant for the performance of the contract as a whole in India. Therefore the AAR held that the income of the applicant accrued in India. A contract for sale of goods differs from a contract for installation and commissioning of a project. The tests which are relevant for considering where the title to the equipment passed would not be relevant while construing the terms of a supply and erection contract. Therefore, the facts relied on by the applicant to argue that the title to the gauges passed outside the country is not useful. If the tender invited is for supply, erection and commissioning, the contract entered into can only be for that. Further, as per the contract, the applicant is made responsible for the overall project i.e. for supply of equipment and materials and installation /commissioning of the equipments. On a look at the contract, it could not be held that the contract contains two distinct parts and they have to be separated for the purpose of taxation. Accordingly, the income to the applicant has arisen in India. Therefore, all payments received by the applicant under the composite contract with ONGC are income taxable in India under the provisions of the Act. The contract entered into by the applicant is a composite contract and cannot be treated independently, one for offshore supply of 36 manometer gauges and another one for erection of it. Further, the AAR held that since the services are rendered in connection with the prospecting and extraction of oil by ONGC, the payment under the contract is taxable under Section 44BB of the Act. M/s METAL ONE CORPORATION Vs DEPUTY DIRECTOR OF INCOME TAX (2012-TII-44-ITAT-DEL-INTL) dated: 11th May,2012. Facts: The assessee company is a tax resident of Japan. It deals in steels and steel products. It had opened an LO in India. The LO was closed down in the year 2008. In the course of the assessment proceedings, the assessee was directed to file correspondence with the clients in India, copies of invoice, e-mail exchanged and profit & loss account of the Head Office ('HO'). The legal argument of the assessee was that by its very nature, the LO cannot earn profits and, therefore, no tax was payable under the DTAA. The AO was of the opinion that, it was not merely carrying on preparatory or auxiliary work, but was also undertaking core business activities. Having decided that business was being conducted from the LO, the AO proceeded to compute profits attributable to it. The assessee had not furnished any India specific financial statement or profit & loss account; therefore, he invoked the provision contained in Rule 10(iii) of the I.T. Rules, 1962. The gross profit rate of 10% of sales was applied to work out the profits and 50% of the profits were attributed to the LO. The assessee filed objections to the draft order, which were considered by the DRP. The activities carried on by the assessee were that potential buyers were located in different countries, negotiations were carried on with a view to settle contractual terms and the sales were effected. The documents proved that the India office located potential buyers, conducted negotiations with them and then sold the goods through the HO. These activities were core business activities. They were not in the nature of preparatory or auxiliary activities. Thus, the existence of PE was upheld. The assessee filed an appeal before tribunal. Issues: Whether when the RBI has not found any violation of rules by LO, Revenue can still presume that LO was engaged in carrying out profit-making business activities in India? Whether for the LO to be treated as PE, it is essential that the LO carries out an essential activity of business? Held: The Tribunal held that, paragraph No.1 of Article 5 defines (PE) to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. This is a key paragraph of Article 5 and what has to be seen under this paragraph is whether there is a fixed place through which the business of the assessee is carried on wholly or partly. There is no dispute that India office is a fixed place. The dispute is whether the business of the assessee is being partly carried on through this office. The CIT(DR) found that India office was engaged in price negotiation. However, that is not correct as quotations were made on the basis of instructions from the Head Office and that does not form an essential part of the business of the sale of iron/iron material and iron product by the assessee in India. On the basis of aforesaid discussion it was held that the presumption which can validly be raised in this case that India office does not constitute a PE as no violation was noticed by the RBI. This presumption has not been rebutted by the AO by bringing any positive material to show that any substantive business activity was carried on by the assessee in India. It is held that although the assessee has a fixed place of business in India, there is no evidence on record that any substantive business activity has been carried on from this place. The income earned by the assessee is the business income. For bringing to tax business income in India, one of the essential conditions is that the assessee has a PE in India. Since it has been held that the assessee does not have a PE in India, it is not necessary for us to decide other grounds on merit. DEPUTY COMMISSIONER OF INCOME TAX Vs M/s INCENT TOURS PVT LTD (2012-TII-54-ITAT-DEL-INTL) dated: 11th May, 2012 Facts: The assessee is in the business of inbound tour operation and provides services to foreign tourists visiting the Indian subcontinent. The assessee does not have any branches abroad. In order to generate business and to find new clients it entered into agreement with one Mr Patrice Dedeyn, a resident of France who was appointed as a business development representative of the assessee for Europe. His task, as per the agreement, was to find new clients and generate incremental business and his marketing activity principally was to be concentrated around Belgium, France and Switzerland. He was to provide all possible commercial assistance as and when required by the existing clients, a list of which was to be provided to him and besides he was also to make proposals, prepare quotations and follow up on payments. The AO held that since no tax was deducted at source, the entire payments were disallowed invoking the provisions of section 40(a) (i). Aggrieved, the assessee appealed before the CIT(A), where it was argued that the provisions of section 9(1)(vii) read with explanation 2, were not applicable as the payment made by the assessee to Mr. Dedeyn did not refer to rendering services of technical or consultancy but was providing marketing support to generate incremental business to the assessee. Moreover, the provisions of non-discrimination as contained in Article 26 of Indo French Treaty were also applicable. Considering all the above arguments, the CIT (A) allowed the appeal. Aggrieved, the department appealed to the Tribunal. |
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