Update on international case laws for july2012

DCIT vs. Mohan BalakrishnanPookulanagara (ITA NOS. 2190 (AHD.)  2009)

Facts:

The taxpayer was employed by a Polish company, Zaklady Farmaceutyczne Polpharma S.A (the employer Company) to assist them in establishing a representative office of the employer company in India. The agreement between the taxpayer and the employer Company mentioned that the taxpayer was engaged as a 'Service Provider'.

The taxpayer filed his tax return for the Assessment Years (AYs) 2005-06 and 2006-07 claiming that the salary received by him from the employer Company was not taxable in India under Article 17(2) of the India – Poland tax treaty. Article 17 of the tax treaty deals with the taxation of Director's fees and remuneration paid to officials in 'top level managerial positions' in the Company. The tax treaty provides that a tax resident of India who is an official in a 'top level managerial position' in a company that qualifies as a Polish tax resident may be taxed in Poland. In such a case, the income taxed in Poland shall be exempt3 from tax in India

The Assessing Officer (AO) observed that the taxpayer had not produced any document from the employer Company that indicated that he was at a 'top level managerial position'.

Issues:

Whether the taxpayer qualified as an official in a 'top level managerial position' and is eligible for the exemption from tax in India under the tax treaty?

Held:

The copy of the certificate issued by the employer Company that was produced as additional evidence by the taxpayer before the Tribunal was not taken on record since the Tribunal noticed several irregularities in the certificate.

Since the term 'top level managerial position' has not been specifically defined in the tax treaty, the Tribunal examined the meanings provided in various dictionaries for this term, based on which it interpreted that the highest ranking executives, officials with decision-making powers that affect the entire organisation or personnel who are responsible for controlling and overseeing the entire organisation could possibly fall within this category.

Accordingly, it held that the function of supporting the establishment of the India representative office of the Company can at best be termed as a management function but cannot be equated with 'Top Level Managerial Position'.

The Tribunal observed that apart from two short visits to Poland, the taxpayer was functioning from India and hence the salary is deemed to accrue or arise in India and is taxable in India.

The Tribunal therefore denied the exemption claimed by the taxpayer.

B4U International Holdings Ltd vs. DDIT (IT) (I.T.A.No. 880 of 2005)

Facts:

The taxpayer, a Mauritius company having the Tax Residency Certificate (TRC), is engaged in the business of telecasting of TV channels such as B4U Music, MCM, etc.

The taxpayer's revenue from India includes collections from time slots given to advertisers in India. The Indian companies namely B4U Multimedia International Ltd and B4U Broadband Ltd (collectively referred as 'B4U India'), were granted general permission by the Reserve Bank of India (RBI) to act as advertisement collecting agents of the taxpayer.

The taxpayer claimed that since it does not have PE in India, it is not liable to tax under the tax treaty. The Assessing Officer (AO) held that D4U India is a DAPE on the taxpayer in India and further held that the payment of arm's length remuneration does not extinguish the tax liability of the taxpayer in India.

The Commissioner of Income-tax Appeals [CIT (A)] held that the taxpayer carries out its entire activities from Mauritius and all the contracts were concluded in Mauritius. The only activity carried out in India is incidental or auxiliary/ preparatory in nature which was carried out in a routine manner as per the direction of the principals without application of mind and therefore, it could not be treated as a DAPE in India.

Issues:

Whether B4U India can be treated as DAPE of the taxpayer under the tax treaty?

Held:

The Tribunal observed that the entire issue as to whether the taxpayer has a PE in India or not, depends on the Agreement entered into between both the parties and the functions performed by them. The term 'has' used under Article 5(4) of the tax treaty vis-à-vis authority to conclude contract, has reference to legal existence of such authority in terms of the contract between principal and agent. A reading of the agreement shows that such power is not conferred on the agent. Similarly, the words 'habitually exercises' has reference to a systematic course of conduct on part of the agent, as held by the AAR in the case of TVM Ltd. v. CIT (237 ITR 230). In the present case, there is neither legal existence of such authority, nor is there any evidence to prove that the agent has habitually exercised such authority. The Tribunal held that when the agent has no authority to conclude contracts, the tax department cannot ask for contrary evidence as nobody can prove the negative. Thus, it was held that Article 5(4) of the tax treaty is not attracted in the instant case.

The Tribunal further observed that under Article 5(5) of the tax treaty, the wordings 'when the activities of such an agent are devoted exclusively or almost exclusively on behalf of the enterprises', refer to the activities of an agent and its devotion to the non-resident and not the other way round. The perspective should be from the angle of the agent and not of the non-resident. This view is contrary to the decision of the Tribunal in the case of ACIT v. DHL Operations B.V. (142 Taxman 1) (Mum) but is in line with the decision of the AAR in the case of Morgan Stanley & Co. (272 ITR 416). During the year under consideration the income of B4U India from the taxpayer constituted merely 4.69 percent of its total income. B4U India cannot be treated as dependent agent of the taxpayer.

Accordingly, the Tribunal held that neither Article 5(4) nor Article 5(5) of the tax treaty was attracted in this case. Therefore, the taxpayer has no PE in India.

The Tribunal further held that even if it is held that there is a PE of the taxpayer in India, and then also it is to be held that as the rate of commission of 15 percent was accepted as arm's length price by the TPO for AY 2002-03 to 2004-05, no further profit is attributable to the PE. While holding so, the Tribunal relied on the decisions of DIT v. Morgan Stanley & Co. [2007] 292 ITR 416 (SC), Set Satellite (Singapore) Pte Ltd. v. DDIT [2008] 307 ITR 205 (Bom) and DIT v. BBC Worldwide Ltd. [2011] 203 Taxman 554 (Del).

B4U International Holdings Ltd vs. DCIT (IT) (I.T.A.No. 3326 of 2006)

Facts:

M/s B4U International Holdings Ltd ('the assessee'), a tax resident of Mauritius, had made certain payments to certain parties during the relevant year without deducting tax at source.

The Assessing Officer ('AO') was of the view that payments made to PanAmsat Limited  (USA) and Advance Satellite (UK) towards transponder hiring charges were taxable as royalty in India thus he disallowed the payments by invoking the provision of section 40(a) (i) of the Income Tax Act, 1961('the IT Act').

On appeal, the Commissioner of Income Tax (A) ('CIT (A)') upheld the view taken by the AO. Being aggrieved, the assessee was in further appeal before the Tribunal.

Issues:

Whether the payments made to the above parties were chargeable to tax in India as 'Royalty" in terms of the provisions of IT Act and DTAA?

Whether the AO was correct in disallowing payments under section 40(a) (i) of the IT Act?

Held:

The Tribunal referred to the decision of Asia Satellite Telecommunications Co. Ltd. (332 ITR 340) wherein it was held that assessee was the operator of satellite and the controls of satellite were not separable from that of transponder. Thus, the assessee who had merely given access to a broadband available with transponder to particular customers, amount paid to assesse by  its customers would not represent income by way of 'Royalty' within  meaning of section 9(1)(vi) of the IT Act.

As regards the alternative contention of the AO seeking to tax the payment as FTS, the Tribunal referred to the decision Madras High Court in case of Sky cell Communication (251 ITR 53) wherein it was held that mere collection of a 'fee' for use of a standard facility provided to all those willing to pay for it did not amount to the fee having been received for technical services.

Further, it was held that the mere rendering of service was not enough and payer must be enabled to perform services himself to make available technical knowledge. Accordingly, it was held that payment was not taxable as FTS.

Further, the Tribunal placed reliance on the decision of Delhi Tribunal in case of Herbellife International 101 ITD 450 (Del) wherein it was held that provisions of section 40(a) (i) as it existed prior to its amendment by Finance Act, 2003, w.e.f. 1st April, 2004 provided for disallowance of payment made to a nonresident where tax was not deducted at source. A similar payment to a resident did not result in disallowance in the event of non-deduction of tax at source.

Non-Discrimination Clause in India-US DTAA seeks to provide against such discrimination and says that deduction should be allowed on the same condition as if the payment is made to a resident.

Thus, Non-Discrimination Clause in DTAA neutralizes the rigour of the provisions of section 40(a) (i). By virtue of the provisions of section 90 (2) the law which is beneficial to the assessee to whom the DTAA applies, should be followed.

The Tribunal relying on the above decision and the decision of Central Bank of India ITA No. 4155/Mum/03 where similar view was taken held that payment could not be disallowed under the Non-Discrimination Clause.