Let us analyze some of the judicial pronouncement in respect of International payments.
01. Compensation : Compensation paid by the Satyam to the applicant, a non-resident company as per terms of settlement agreement for severing their business relationship, deficiency in the patents assigned to the applicant by Satyam and for grant of perpetual world wide royalty fee license by the applicant on all its patents is capital receipt but not capital gain , except the portion of the amount ascribable to the consideration for licensing of the right to use the patented software . Assessing Officer is directed to determine the portion of the compensation amount that may be attributable to royalty and thereafter to consider the question whether it is taxable in terms of section 9 (1) (vi). Refer, Unpaid Systems Ltd. 338 ITR 517.
02. Transponder Hire : Payment of Transponder Hire charges made by a resident company to Two Foreign Companies are only Royalty. Refer, Asianet Communication Ltd v DCIT, ITA Nos 792 dated 11-12-2009- Chennai.
03. FTS : ITAT Mumbai in the case of Ashapura Minichem vs. ADIT decided that Fees for Technical service eventhough rendered outside India, deemed to accrued in India, if the service is received in India and hence taxable.
In the case of Jindal Thermal Power Co, 182 Taxmann 252, it was held that The deductor of TDS (i.e. the payer) is entitled to question the imposition of tax liability on the payee. In order to impose liability on a non-resident assessee for income from services rendered to an Indian party, u/s. 9 of the Act, it is imperative that services are rendered in India and are also utilised in India- the twin conditions have to be To this extent, the newly inserted Explanation to s. 9 does not disturb the ratio of the Supreme Court’s decision in Isshikawa Jima Harima.
Purchase of technical know how by foreign company, was business receipt. As there was no permanent establishment in India, the same was not liable to be taxed in India, though the same was treated as ‘royalty’. Refer, Vesil SPA Italy vs. Jt. CIT.
Canadian company providing consultancy services to Indian Government organisation . Technical drawings furnished by canadian company and fees received were fees for included services within the meaning of article 12(4) of DTAA and hence Fees not assessable under section 9. Refer, DIT v SNC lavalin International INC, 332 ITR 314.
Assessee is engaged in the manufacture of steel wheels for commercial vehicles, passenger cars ,utility vehicles , earth moving construction equipment , agricultural tractors and defence vehicles. Assessee developed the new process of manufacturing steel wheels for trucks etc, however it did not have requisite know how for designing the machine capable of manufacturing the product as patented process. Assessee approached the two US Companies which had the required knowledge. Assessee made advance payment in respect of entire services under the agreement were rendered outside India and hence no income chargeable to tax in India. The Tribunal held that in terms of Article 12(4) of India US tax treaty, payment made to US company for ‘developing tooling’ and ‘validating new process for manufacture’ of wheels for commercial vehicles is ‘fees for included services’. Refer, Wheels India Ltd. vs ITO, ITA No. 1792/Mds./2006, dt.19‐04‐2011, A.Y. 2005 – 2006, Chennai ITAT.
In the case of Lanka Hydraulic Institute Ltd, 337 ITR 47, it was held that Services involving field data collection, desk study and mathematical model study and technology transfer involving transfer of software is FTS and hence taxable under DTAA.
04. Export : In the case of Aramaco Overseas Company B V In re, AAR No. 825 of 2009 dated 12-3-2010, it had been decided that any and every person who in someway or the other facilities purchased by a non resident for the purpose of export cannot be brought within in the ambit of clause (b) of explanation 1 to section 9(1)(i).
When assessee receives only net proceeds as per export invoice, there is nothing further left over to be treated as income received or to be received or accrued or deemed to be accrued or arising in India or outside India, Refer, ITO v Vishal Janakkumar Agarwal.
The profits from the off shore supply contract held not to be liable to tax in India on the ground that the transfer of title in the goods had passed outside India. As no operations qua the agreement for supply of equipment were carried out in India, no income can be deemed to have accrued or arisen in India whether directly or indirectly or through any business connection in India. Refer, Dy. CIT vs. LG Cables Ltd.
05. Cost Contribution Agreement : ABB India to ABB Zurich for funding of corporate R&D under cost contribution agreement cannot be treated as Payments in Nature of Royalties Liable to be taxed in India. Refer, ABB Ltd In re, AAR No. 834 of 2009 dated 15-3-2010.
06. Purchase of Software : In the case of CIT V Maggronic Devices (P) Limited, 190 Taxmann 382, it had been decided that Purchase of software is not a royalty.
Similar view was given in the case of Velankani Marutius Ltd v dy DIT, 132 TTJ 124, where it was held that Sale of off-the shelf shrink –wrapped software by foreign companies to a company in India is sale of copyrighted article and therefore, income therefrom is not royalty either under the IT Act or under the terms of the relevant DTAA’s.
Same was also decided in the Geoquest Systems B V in re, 327 ITR 1.
However, different view was expressesed in the latest case of CIT v. Synopsys International Old Ltd where Karnataka High Court held that Payment for shrink wrapped software/ off-the-shelf software amounts to ‘royalty’. The summary of the case law is given below.
Payment for shrink wrapped software/off-the shelf software amounts to royalty within the meaning of Section 9(1)(vi) of the Income-tax Act, 1961 as well as under Article 12 of the India-Ireland tax treaty.
The Parliament by the Finance Act, 2010, has substituted the Explanation to Section 9 of the Act which gives a clear intention of the Legislature insofar as the liability of tax under this provision is concerned. By the Explanation, the Legislature have declared that for the purpose of Section 9 of the Act which deals with income deemed to accrue or arise in India, under Section 9(1)(v), (vi) and (vii) of the Act, such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India; and the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from royalty.
In the tax treaty, the term royalty means payment of any kind received as a consideration for the use or the right to use any copyright of literary, artistic or scientific work. Therefore, under the tax treaty, it is sufficient if the consideration is received for use of or the right to use any copyright. Further the High Court also held that, in terms of the tax treaty, the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes royalty and attracts tax. Therefore, the consideration is taxable as royalty both under the Act as well as the tax treaty.
07. Subscription Fees : Subscription fee received by applicant from the licensee (customer) for providing database containing financial and economic information of companies worldwide was not royalty within the meaning of s. 9(1)(vi), Expln. 2 or art 12 of DTAA between India and USA as no exclusive right or copyright was made over to customer and it did not amount imparting of information concerning the applicant’s own knowledge, experience or skill in commercial and financial matters. Refer, Factset Research Systems Inc, 25 DTR 146.
In the case of JCIT v Telerate, TII 72 –Mum-Intl. (2010) (October) BCAJ) P. 25. A Singapore resident company had PE in India, which provided information available in public domain to subscribers. The AO held that the income was fees for technical services (FTS) under the Income Tax Act and taxable on gross basis and not on net basis as claimed by the Tax payer under DTAA. The Tribunal held that the assessee can choose between DTAA and the Income Tax Act and tax authorities cannot thrust provisions of the Income Tax Act unless they are more beneficial.
Assessee made certain payments to a non-resident ‘G’ USA/ Ireland, on which no tax was deducted under section 195, on the ground that the payment was akin to making a subscription for a journal or magazine of a foreign publisher and though the journal contained information concerning commercial, industrial or technical knowledge, payee made no attempt to impart same to payer and thus, payment fell outside scope of clause (ii) of Explanation 2 to section 9(1)(vi) as well as article 12 of Indo-US DTAA. Assessing Officer held that payments made to ‘G’ was ‘royalty’ within the meaning of Explanation 2 to section 9(1)(vi) and in alternative ‘fees for technical services’(Included services) both of which were liable for tax in India in terms of section 195, read with section 9(1)(vi) and (vii) and relevant provisions of DTAA. The Court held that ‘G’ had maintained a data base and it had granted online access of same to assessee therefore, the payment made by assessee for licence to use data base maintained by ‘G’ was to be treated as royalty. Since assessee failed to deduct tax at source while making payment of royalty to ‘G’ impugned order passed by Assessing Officer was up held. Refer, CIT v. Wipro Ltd, 203 Taxmann 621.
08. Commission : Commission being payable to South African Company for services rendered abroad and it having no fixed place or agent in India, no income could be taxed in India. Refer, Spahi Projects (P) Ltd., 26 DTR 303 (AAR).
Similar judgement was given by Delhi ITAT in the case of EON Technology, where it was held that There is no deemed accrual of income in India under section 9(1)(i) in case of export commission and other related charges payable to a non - resident agent operating outside India for a service rendered outside India. 46 SOT 323.
Again, in the case of ADIT vs. Star Cruise India Travel Services, Mumbai ITAT held that Non-Resident, even with “business connection”, can be taxed only in respect of business operations carried out in India. While canvassing agent is not “business connection”, fair fee extinguishes non-resident’s liability to tax.
09. Underwriting Commission : In the case of Mahindra and Mahindra Ltd., 313 ITR 263, it had been held that Underwriting commission paid to lead managers to issue of global depository receipts by Indian party, are business profits which are not taxable in absence of permanent establishment in India. Reimbursement of expenses no element of income hence not taxable.
Similar decision was given in the case of DY DIT v Tata Iron & Steel Co Ltd , where it had been held that Services rendered by non resident lead managers to the assessee company for bringing out GDR issue , though in the nature of technical or managerial services , were not “made available ” to the assessee and therefore cannot be taxed in India. Underwriting commission was neither fees for technical services under section 9 (1) (vi) nor chargeable to tax as “business profits’ under art 7 of the DTAA in the absence of any PE of the non resident in India, payment towards reimbursement of expenses not being in the nature of income was not taxable.
10. Voice Data Transmission : Payment made by applicant to the UK company for providing international leg of the service in transmitting voice/data to places outside India using its international infrastructure and equipments is neither royalty nor fees for technical services: payment is in the nature of business profits and in the absence of PE of UK company in India, same is not taxable in India. Refer, Cable & Wireless Networks India (P) Ltd, 25 DTR 49.
Similar judgement was given by Mumbai ITAT in the case of Standard Chartered Bank vs DDIT, where it was held that The activity of transmitting raw data to user, processing of the data by such user by using software belonging to assessee and transmission of such data to assessee does not involve “use of any process” so as to constitute royalty under Article 12(3)(a). In order to constitute ‘use of equipment’, the customer should actually have domain or control over the equipments it should be at its disposal. (A. Y. 2004-05).
Again, in the case of R.R.Donnelley India Out source (P ) Ltd, 241 CTR 305, it was held that Services rendered by the UK company to the applicant Indian Company pursuant to the data processing services agreement being in the nature of routine data entry application sorting document handing and data capturing services, cannot be said to be managerial or technical services with in the meaning of art 13 of the Indo –UK DTAA or Explanation 2 to section 9 (1) (vii) and therefore , consideration received for such services is not taxable in India and accordingly ,there is no question of withholding tax under section 195.
11. Supply of equipment/ Raw Material : Offshore supply of equipment is not liable to tax in India though it is a part of composite contract involving onshore service component. Refer, Xelo Pty Ltd., ITA Nos. 4107 & 4108/Mum/2002, A.Y. 1995-96 & 1997–98, Dt. 22-6-2009 BCAJ pg. 35, Vol. 41A, Part 5, August 2009.
Similar view was given in the case of DY DIT v Daimler Chrysler A.G., 39 SOT 418, where it was held that Sale of raw materials /CKD units to DCIL. DCIL carried out further activity of assembling the same and selling the finished cars. There were no further activities carried out by the assessee in India in this connection. Mere sale of raw materials/components would not result in business connection and even if it did as per the terms and conditions of the contract between the assessee and DCIL no income occurred to the assessee on the basis of any activities carried out on behalf of the assessee in India. Mere existence of subsidiary does not by itself constitute the subsidiary company as a PE of the parent. The DCIL was merely rendering a very insignificant auxiliary/preparatory service in the sale of CBU cars by assessee to the Indian Clients. Therefore DCIL did not constitute a dependent agent of the assessee.
In the case of Director of Income Tax vs. LG Cable Ltd., 237 CTR 438, it was held that Consideration for the offshore supply of equipment by the assessee, a Korean company, to an Indian company cannot be deemed to have accrued or arisen in India as the terms of the agreement stipulated transfer of title / property in the goods as soon as the goods were loaded on the ship at the port of shipment i.e. outside India, and there is no material to show that the accrual of income from this sale was attributable to any operations carried in India or that the PE of the assessee in India had any role to play in the off shore supply of equipment.
Consideration paid to foreign company was only for supervising the erection of machines which can not be said to be a payment for assembly of machines to fall within the exclusion clause of Explanation 2 to section 9 (1) (vii). However , as persons who rendered services were not present in India for the required number of days as envisaged by art 5 (j) of the DTAA read with art 13 (5) ,income was not chargeable to tax in India and there was no obligation to deduct tax at source on such payment. Refer, Aditya Biral Nuvo Ltd v Asst CIT, 56 DTR 100.
Non resident company is not liable to tax in India in respect of payments for off shore supply of equipments under the composite contracts for setting up transmission lines and consequently , no tax is required to be deducted at source from the payments made to it for the supply of equipments. Refer, Deepak Cables (India) Ltd, 242 CTR 469.
In the contract of the kind undertaken by the assessee, if there is a composite consideration, the same can be conveniently segregated in different components. If the profits from supply contract are held to be taxable separately, as the supply is a milestone in the whole contract, then the treatment meted out to profits on sale of equipment and onsideration received for supply of software will have to be different, as the two assets are of different nature involving different profitabilities. The A.O. bifurcated in the ratio of 30 : 70. As the assessee was unwilling to give the details the bifurcation made by the A.O. was justified. Refer, Raytheon Company v. DCIT, 62 DTR 1.
12. Liaison Office : Liaison office of the South Korean company being engaged in procuring purchase orders in India for the latter after negotiating the deal, there exists a business connection in India. Liaison office is also a PE, with in meaning of art 5 of the DTAA between India and South Korea as it is having freedom to fix the sale price and conclude the contract and therefore, its activities could not be of preparatory or auxiliary nature. Income attributable to the Liaison office is taxable under art 7 of the DTAA. Refer, Jebon Corporation India Liaison Office, 127 TTJ 98 (Bang).
However, in the case of Nike Inc, 21 DTR 107, Bangalore ITAT held that Assessee, having its main office in USA having opened a liaison office in India solely for the purpose of helping its affiliates located at different parts of the world to buy goods etc. for trading operations, acting through liaison office as purchasing agent, placing orders with local manufacturers specifying the quantity, price, the affiliate with address on whom the bill is to be raised and the destination and not in any way communicating with the manufacturers other than supervising the manufacturing operations to ensure quality as per approved samples and specifications, the same amounts to purchase in the course of export and Expln. 1(b) to s. 9(1)(i) is attracted, hence no income is deemed to accrue or arise to assessee in India.
Similar decision was given in the case of ADIT v M Fabrikant & Sons Limited, where it was held that No income arise or accrues to a liason office of a Non resident in India by virtue of purchase made by it for export. (dt.28‐01‐2011, A.Y. 1999–2000 to 2002‐03 & 2003 – 2004, BCAJ pg. 42, Vol. 43‐A, Part 2, May 2011.).
Further, In case real & substantive business operations of a non-resident are carried out by its Indian office, income from such operations would accrue or arise in India. Refer, Linmark International (Hong Kong) Limited v DDIT.
Liaison office of the applicant foreign company operating in India carrying on various activitiesit can not be said that the operations of the liaison office are confined to purchase of goods in India for the purpose of export and its income is not covered by Explanation ((b) to section 9(1) (i), even though no product of the applicant is sold in India. The liaison office can be termed as permanent establishment with in the meaning of art 5 .(1) of the Indo‐USA DTAA and cannot be excluded from the definition of Permanent establishment by reason of clause (d) and (e) of art 5 (3) , hence the applicant is liable to tax in India in terms of art 7 (1). Refer, Columbia Spots wear Company, 59 DTR 233.
13. Freight for Cargo : In view of article 9(1) of DTAA between India and UK, freight income earned by non–resident assessee on account of transportation of cargo in international traffic by ships operated by other enterprises under slot chartering, arrangement would be taxable only in State of residence and consequently, such income would be exempt from taxation under Indian Income tax law. Refer, Balaji Shipping (UK) Ltd., 121 ITD 61.
AAR in the case of Seabird Exploration FZ LLC, UAE, in re, 192 Taxmann 471, it was held that Mere physical presence of non-resident’s vessel in territorial waters of India pursuant to hiring of vessel on Bareboat Charter terms by applicant does not ,without anything more ,constitute a permanent establishment. Where agreement was executed outside India and delivery of vessel also took place outside India by reason of mere presence of vessel in India without volition of VPC, source of income cannot be said to be located in India and to this extent, hire charges paid by the applicant are liable to be excludedfrom taxable profits of VPC.
14. Test Report : Expression ‘fees for technical services’ as appearing in provision of article 13(4) of DTAA between India and France as well as in Explanation 2 to s. 9(1)(vii) means payment made to any person in consideration of managerial, technical or consultancy services. Since test reports had been used by assessee in India in manufacturing of cars payment made to “U” company of France were chargeable to tax in India. Refer, Maruti Udyog Limited, 34 SOT 480. (Delhi).
15. Telecast Rights : (i) To constitute “royalty”, it is not necessary that the process should be a “secret process”, nor that that the instruments through which the “process” is carried on should be in the control or possession of the payer. The context and factual situation has to be kept in mind to determine that whether the process was “used” by the payer. The fact that the telecasting companies are enabled to telecast their programmes by uplinking and downlinking the same with the help of that process shows that they have “use” of the same. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process; (ii) The consideration paid by telecasting companies to satellite companies is for the purpose of providing “use of the process” and consequently assessable as “royalty” under the Act and the DTAA. Refer, New Skies Satellites N, 119 ITD 333.
The assessee entered into an agreement with Nimbus, a Singapore entity, for receiving and broadcasting matches that were to be played in Bangladesh. The signals to be broadcast were on account of live matches as well as recorded matches. The assessee applied for a certificate u/s 195 in which it accepted that the payment on account of recorded matches was in the nature of “royalty” but claimed that the payment towards live matches was not “royalty”. The AO held that there was no distinction between the payment for live matches and that for recorded matches and both were assessable as “royalty”. He also held that as the matches were to be broadcast in Indian Territory and the income by way of advertisements and subscription was to be received by the assessee, there was a “business connection” between Nimbus and receipt in India. On appeal, the CIT (A) upheld the AO’s finding on “business connection” though he reversed the finding that the payment for live matches was “royalty”. On further appeal, HELD deciding both issues in favour of the assessee: refer, ADIT vs. Neo Sports Broadcast Pvt, 202 taxmann 309.
16. Software License : Amount received under license agreement for allowing use of software, not royalty but business profits. Receipts on account of maintenance charges and training fees incidental to software receipts is of same character. Refer, Infrasoft Ltd., 1 DTR 390.
Similar decision was provided in the case of Reliance Industries Ltd, 43 SOT 506, where it was held that where the payment is made in respect of the software which is granted on terms of non-exclusive, perpetual, irrevocable, royalty free worldwide license to use the number of copies of the software enumerated in the agreement solely for internal operation, and not directly accessible to third party could not be considered as a “Royalty” under the Act. As the payment was “business income” of the party receiving the payment, as that non-resident party did not have a Permanent Establishment in India and thus as per D.T.A.A. the same cannot be taxed in India. The assessee is not liable to deduct tax at source.
However, in the case of Gracemac Corporation v ACIT, it was held that, Payments received by Microsoft corporation from sale of its products to Indian distributors is taxable.
Similar decision was given in the case of In Re Millennium IT Software Ltd, where it was held that Software is “copyright”; Even if “copyrighted article”, License fee taxable as “royalty”
The applicant was the developer of software. It granted a non-exclusive and non-transferable license to an Indian company to use the software without any sub-licensing rights. The licensee was not allowed to modify the software programme and could make copies only for its own use. The applicant filed an application for advance ruling in which it claimed, relying on Dassault Systems 322 ITR 125 (AAR) and Tata Consultancy Services 271 ITR 401 (SC), that the transaction involved the use/ right to use of a “copyrighted article” but not the “copyright” itself and so the license fees were not assessable to tax as “royalty” u/s 9(1)(vi) of the Act & Article 12 of the India-Sri Lanka DTAA. HELD rejecting the applicant’s plea:
17. Web-hosting charges : Payments made to non-residents on account of rentals for hosting of websites on servers are not in nature of interest of royalties or fee for technical services or other sum chargeable to tax in India. Provisions of Article 26(3) DTAA between India and USA neutralizes rigor of provisions of s. 40(a)(i). Refer, Millennium Infocom Tech Ltd., 309 ITR 18.
ITAT Mumbai in the case of Yahoo India (P) Limited had given the similar view. It was held that For “Equipment Royalty” u/s 9(1)(vi), control of equipment by payer essential The assessee, an Indian company, remitted Rs. 34 lakhs to Yahoo Holdings (Hong Kong) Ltd, a Hong Kong company, for placing banner advertisements on the web portal of Yahoo Hong Kong. The AO & CIT (A) took the view that the payment was “for the use or right to use any industrial, commercial or scientific equipment” (i.e. the server) and had the character of “royalty” under clause (iva) of Expl 2 to s. 9(1)(vi). On appeal by the assessee, HELD allowing the appeal:
18. Legal Fees : In the landmark decision of Linklaters LLP v ITO, 132 TTJ 20, it was held that In view of Explanation to section 9 (1), as amended retrospectively by Finance Act, 2010, the fees for professional services earned by the assessee a UK based partnership firm, in connection with projects in India is taxable in India under the domestic law.
19. Dry Lease : In the case of DY CIT v Nederlandsche Overzee Baggermaatsehappiji bv ( 2010), 39 SOT 556, it was held that Receipt of bare boat rentals i.e. rent for use of or payment for use of equipment cannot be brought to tax as royalty. As the assessee had no personnel located in India for purpose of execution of contract entered into by it with HAM, it could be said that it had no PE in India and lease in question was merely a dry lease of an equipment, hence receipt in question cannot be taxed in India.
20. Activation Charges : Payment made by assessee to an Irish Company towards activation charges of a standard product/ software is not fees for technical service for purpose of section 9. Refer, DDIT v Avaya Global Connect Limited.
21. Royalty : Royalty income earned by a resident of Germany from India has to be assessed to tax at the rate of 10% as provided in Article 12 of DTAA. Refer, ADIT v Chiron Behring Gmbh & Co KG.
ITAT Delhi in the case of Microsoft Corporation held that payment made for grant of licence in respect of Copy right by end user is taxable as royalty as per s.9(1)(vi),domestic tax legislation to override treaty provisions in case of irreconcilable conflict.
Fee for “user of name” and “accreditation” not taxable as “royalty”. Refer, ACIT vs. Anchor Health and Beauty Care Pvt Ltd.
22. Drawings : Purchase of drawings and data documents and deleivered abroad - No income accrue to India. CIT v Maggronic Devices (P) Limited, 329 ITR 442.
Similar judgments was provided in the case of Grasim Industries Limited, 332 ITR 276, where it was held that Design drawings & data delivered to person outside India is consideration received by NR not assessable in India The summary of the case is given below:
An Indian Company, entered in to technical assistance agreement with an American company, under which American Co. agreed to render, outside India certain engineering and other related services in relation to its sponge iron plant in India. In accordance with agreement, the American Co. delivered total basic engineering package to representative of the Indian Co. in USA between November 1989 and August 1990 and also imparted training to 22 keys personnel of Indian Co. in Mexico. As a consideration, the Indian Co. paid certain amount to the American Co. The issue for consideration was whether income received by American Co. could not be deemed to have arisen / accrued in India because services under agreement were not rendered with in India though drawings /designs received from American Co. might have been utilized by Indian Co. in India. The Court held that an income received by non resident (Such person) by way of a payment from a resident for technical services rendered to him would be subject to Indian income tax only if it satisfies twin test, namely ,that income was received in respect of services (i) rendered in India and (ii) utilised in India or has such a live link with India that it can be treated as accrued or arisen in India. The expression “by such person “ appearing in section 9 (1) (vii) (b) refers to recipient of income and not to person making payment.
23. Reimbursements : Amount received by assessee, a Danish shipping company, from its agents in India towards their share of cost of global telecommunication facility provided to the agents to enable them to have access to variety of information regarding tracking of cargo, transportation schedule, etc., to facilitate international shipping business being only reimbursement of cost and not involving any profit element, cannot be considered as fees for technical services. Refer, Dampskibsselskabet AF 1912 A/S Akties Iskabet vs. Addl. DIT, 51 DTR 148.
24. Telecom Network : Payment made by Indian customers to Singapore company for use of telecom network infrastructure is royalty for the use of process. Refer, Verizon Communication Singapore Pte Limited v ITO.
25. Talo process : In the case of DCM Limited, it was held that Remittance for acquisation of TALO process by an assessee on a non exclusive basis from UK cant be constructed as royalties.
26. Onshore Salary : Assessee did not deduct tax at source on salary payments made to staff at Netherlands. Assessing officer invoked the provisions of 40 (a) (iii) , and disallowed the payments made on the ground that the tax was not deducted under section 192.The Tribunal held that since salaries had been paid to non-residents for services rendered abroad ,provisions of Explanation to section 9 (1) (ii) were not applicable to assessee. Since salary paid to non resident’s for services rendered in Netherlands was not chargeable to tax in India , provisions of section 192 can not be applied hence disallowance made by applying the provisions of section 40(a) (iii) were liable to be deleted. Refer, Dy CIT v Mother Dairy Fruits & Veg (P) Ltd, 45 SOT 186.
27. Fees for Included Service (FIS) : Applicant a wholly owned subsidiary of US company, procured the services of US based personnel who are under the employment of GTE‐OC, and affiliate of its parent company. Personnel secondment agreement specifically provides that the seconded employees shall remain the employees of GTE‐OC and continue to get their salaries from GTE‐OC as long as they remain in its employment. The authority held that (1) Amounts reimbursed by the applicant represent income accruing to GTE –OC (ii) The amounts reimbursed by the applicant are taxable as “ Fees for Included Services (FIS) “under the DTAA and also under the Act. (iii) Fees for Included Services (FIS) is taxable at the rate of 20 percent as provide under article 12 (4) (b) of the DTAA. Accordingly TDS would be deductible as per section 195. Refer, Verizon Data Services India (P ) Ltd. 241 CTR 393.
28. Training : Assessee company during relevant assessment year made payment to non resident party for training its personnel or customers to explain proposed buyers salient features of products imported by assessee in India and to impart training to customers to use equipment . The payment made could not be said to be fees for technical services and not liable for deduction of tax at source. Refer, ACIT v PCI Limited, 46 SOT 183.
Assessee was non resident incorporated as corporation under Laws of USA. Main object of assessee was to provide high quality medical training and enhance quality of patient care and research by teaching training and sharing medical and technological know how with scientists and health care professionals in various countries. During the relevant assessment years the assessee received certain amount from hospitals located in India. Assessing Officer held that 90 percent of receipts taxable as royalty under Article 12(3) of DTAA between India and USA and 10 percent of payment was in nature of Fees for included services (FIS) taxable under Article 12(4). The Tribunal held that consideration received by assessee could not be said to be royalty as it was not a payment for right to use any copy right, trade mark or industrial, commercial or scientific experience. Assessee also did not make available any technical knowledge, experience, skill for included services. Therefore, it could be concluded that entire payment received by ssessee from WHL was in the nature of business profits and since assessee did not have permanent establishment in India, same could not be brought to tax in India. The assessee received certain amount as reimbursement of expenses. Assessing Officer was of the view that reimbursement of expenses was also part of consideration for rendering the services he applied the same ratio. The Tribunal held that if it is held to be business income the same cannot be taxable in India applying as the assessee does not have any permanent establishment. If it is held to be other income the same cannot be brought to tax in view of Article 23(1) of DTAA. Accordingly the Tribunal deleted the addition made by the Assessing Officer. Refer, Jt. Director v. Harward Medical International, USA, 48 SOT 623.
29. Hotel : Assessee running business of Hotel making payments to US based interior Landscaping consultants M. Work done by M is basically inspection of hotel, reviewing of the facilities , comparing the same with M’s standards and suggesting improvements / change wherever required to M standard , which did not amount to technical services and therefore no tax was deductible at source. Similarly , fees paid to UK company A was also for work of design , documentation and did not fall under art 13 of Indo –UK DTAA , likewise, fees paid to Thailand company BD, for rendering services of landscape architectural consultancy was not assessable in India. Refer, Asst CIT v Viceroy Hotels Ltd, 60 DTR 1.
30. Misc. : ITAT Delhi in the case of Rio Tinto Technical Services vs. DCIT decided that The assessee, an Australian company, set up a permanent establishment (PE) in India to render technical services for evaluation of coal deposits and conducting feasibility studies for transportation of iron ore. The AO accepted that the income was business profits under Article 7 of the DTAA but held that as no rate of tax was prescribed in the DTAA and the nature of the income was “fees for technical services”, the income was assessable u/ss 115A & 44D. This was upheld by the CIT (A). On appeal by the assessee, HELD allowing the appeal:
(i) The assessee was not rendering simple technical or consultancy services but was rendering specific activities through the PE. Accordingly, Article 12 of the DTAA was not applicable. Income attributable to a PE is assessable under Article 7 of the DTAA. Under Article 7(2), the PE is deemed to be a wholly independent enterprise and under Article 7(3) deduction in accordance with the subject to the law relating to the tax in India is allowable. Since Article 7 of the DTAA comes into play, s. 9(1)(vii) is not applicable. Since Article 7 (2) of the DTAA specifies that the PE in India is to be treated as a wholly independent enterprise in India, ss. 44D and 115A will not apply in so far as they relate to foreign companies.
In the case of WSA Shipping (Bombay) (P) Ltd. v. ADIT, 48 SOT 551, it was held that One “W” Ltd. was engaged in the business of Cargo Consolidation. It received Cargo from various shippers / consignors at Mumbai Port / Container Freight Station Mumbai / JNPT for shipments to various destinations world wide. A delivery schedule of Cargo had to be strictly adhered to. Assessing Officer noticed that “W” Ltd. had payment to assessee, a company located at Singapore on which no tax was deducted at source. Assessing Officer issued show cause notice to “W” Ltd. calling upon to why it should not be treated as an agent of Non-resident under section 163. Assessing Officer estimated profitability at 10 percentage of freight income earned by assessee and same was treated as business income. Commissioner of (Appeals) confirmed the order of Assessing Officer. Tribunal found that “W” Ltd. was acting on behalf of several nonresidents and therefore, Article 5(9) was not attracted as the “W” Ltd. had no permanent Establishment in India, even if income accrued or arose to it in form of business income, same could not be taxed in India.
In the case of DIT v. Ericsson AB, it was held that The assessee, a Swedish company, entered into contracts with ten cellular operators for the supply of hardware equipment and software. The contracts were signed in India. The supply of the equipment was on CIF basis and the assessee took responsibility thereof till the goods reached India. The equipment was not to be accepted by the customer till the acceptance test was completed (in India). The assessee claimed that the income arising from the said activity was not chargeable to tax in India. The Assessing Officer & CIT(A) held that the assessee had a “business connection” in India under section 9(1)(i) & a “permanent establishment” under Article 5 of the DTAA. It was also held that the income from supply of software was assessable as “royalty” under section 9(1)(vi) & Article 13. On appeal, it was held that as the equipment had been transferred by the assessee offshore, the profits therefrom were not chargeable to tax. It was also held that the profits from the supply of software was not assessable to tax as “royalty”. On appeal by the department to the High Court, HELD dismissing the appeal held that (i) The profits from the supply of equipment were not chargeable to tax in India because the property and risk in goods passed to the buyer outside India. The assessee had not performed installation service in India. The fact that the contracts were signed in India could not by itself create a tax liability. The nomenclature of a “turnkey project” or “works contract” was not relevant. The fact that the assessee took “overall responsibility” was also not material. Though the supply of equipment was subject to the “acceptance test” performed in India, this was not material because the contract made it clear that the “acceptance test” was not a material event for passing of the title and risk in the equipment supplied. If the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. Consequently, the assessee did not have a “business connection” in India. (ii) The argument that the software component of the supply should be assessed as “royalty” is not acceptable because the software was an integral part of the GSM mobile telephone system and was used by the cellular operator for providing cellular services to its customers. It was embedded in the equipment and could not be independently used. It merely facilitated the functioning of the equipment and was an integral part thereof. The fact that in the supply contract, the lump sum price was bifurcated is not material. There is a distinction between the acquisition of a “copyright right” and a “copyrighted article”.
Kindly note that above are not the view of the author but the extract of some of the latest case laws. However, please take your decision based on all the facts and after proper consultation as there is a high tax impact of all these foreign payments. The above will only help you in reaching the final conclusion.