Understanding International payments with latest case laws : Part –IV.

We had earlier discuss in detail about the concepts of International taxation and payments  along with various case laws earlier in three  different articles. In case you want to refer, the same, please click on the link below:

http://taxbymanish.blogspot.in/2012/12/understanding-international-payments.html

Payment for VOIP Charges : Where assessee engaged in business of IT enabled services,
made payments to Novatel,  a U.S. company, towards voice charges, income of Novatel was in form of service charges payment and Novatel had not rendered services of managerial, technical or consultancy nature hence the assessee had no obligation to to deduct tax at source from payment made, to Novatel, therefore disallowance cannot be made. (AY 2008-09). Refer. Clearwater Technology Services P. Ltd. v. ITO, 139 ITD 479 (Bang)(Trib.).

Further, Mumbai ITAT in the case of WNS North America Inc v. ADIT, held that The assessee, a USA company, received Rs. 6.41 crores towards reimbursement of international telecom connectivity charges. The assessee claimed that the said amount did not fall within the definition of “royalty” in Article 12 of the India-USA DTAA apart from the fact that as it was a “reimbursement of expenses“, it was not income. The department claimed that irrespective of the position under the DTAA, in view of the retrospective insertion of Explanation 5 to s. 9(1)(vi) by the FA 2012 w.r.e.f. 1.6.1976, the said amount had to be assessed as “royalty“. On appeal by the assessee to the Tribunal Held allowing the appeal:

(i) A retrospective amendment to the Act has no bearing on the DTAA because s. 90(2) makes it clear that the provisions of the Act shall apply only to the extent that it is favourable to the assessee. While a retrospective amendment will alter the provisions of the Act, it will not per se have the effect of automatically altering the analogous provision of the Treaty. Further, though the DTAA provides that the laws in force in India shall govern the taxation of income, this is subject to the exception that there is nothing to the contrary in the DTAA. Similarly, under Article 3(2), as the term “royalty” is defined in Article 12, the definition in s. 9(1)(vi) will have no application;

(ii) On merits, even if the retrospective amendment applied, the amount would not constitute “royalty” because it was not received “for the use or right to use any industrial, commercial or scientific equipment” owned by the assessee. The equipment was owned by the telecom operators and the amount could be considered as royalty in their hands but not in the hands of an intermediary like the assessee who merely made the payment and got the reimbursement;

(iii) Further, the said amount, being a pure reimbursement of expenses without any mark up cannot be considered as income in the hands of the assessee. However, the onus is on the assessee to show, by leading evidence, that there is no element of profit in such reimbursement and that the contract price has not been bifurcated to show a portion thereof as reimbursement. Mere nomenclature of “reimbursement” is not relevant. On facts, as the assessee established that there was no mark up, the amount was not assessable. (A. Y. 2006-07)

 

Offshore Development (Facilitation) Agreement’: Under three separate service agreements, namely, marketing service, offshore development facilitation service and overseas services, assessee’s US subsidiary helped assessee in e-publishing business. US Subsidiary collected the manuscript from US customers, prepared soft copy and retrieved same in India and passed on technical instructions of customers. Assessee would typeset same accordingly and sent back to US – US subsidiary would take print and deliver same to US customers. It was held that with regard to Marketing Agreement and Overseas Services Agreement, no technical service whatsoever was involved since no technical knowledge or skill or experience was made when these services were rendered by US Subsidiary abroad. It was further held that in case of ‘Offshore Development (Facilitation) Agreement’, as assessee had to use instructions sent by US Subsidiary along with files for carrying out digitalization services and such instructions were in nature of technical knowledge which imbibed in assessee any technical expertise, which in turn could help it in its e-publication business and, thus, assessee received, an enduring benefit then of course, such services would come within the purview of clause (b) of Article 12.4 of Indo-US DTAA and, only in such cases, section 195 would apply. (AY 2007-08). Refer, ACIT v. TexTech International (P.) Ltd, 139 ITD 382 (Chennai)(Trib.).

 

Purchase of Software: In the case of Onmobile Global Ltd. v. Income-tax Officer (IT), 54 SOT 124 (Bang)(Trib.), it was held that Where assessee, providing mobile services, made payment to a US based company for purchase of software, said payment would amount to royalty taxable under section 9(1)(vii). (AY 2009-10).

Market development fee : Assessee-company was engaged in the manufacture and export of cotton yarn fabrics and garments. It was noticed that assessee paid market development fee to a UK company. It was noted from records that non-resident company was rendering services to assessee in course of their business and, therefore, such payment clearly went out of ambit of section 9(1)(vii) through exclusion specified in clause (b) there under. Moreover, even if one considered it as technical services, nothing was made available to assessee in nature of any technical knowledge, experience, skill, know-how or processes and, thus, payment in question could not be considered as fee for technical services in terms of DTAA between India and UK. Hence, it was held that amount paid by assessee to non-resident company was not taxable in India and, therefore, impugned revisional order passed by Commissioner was not sustainable. (AY 2006-07). Refer, Gama Industries Coimbatore Ltd. v. Commissioner of Income-tax, 54 SOT 104.

Supplying software personnel : Assessee, a non-resident company, entered into a base agreement with IBM-USA. As per the said agreement, IBM-India (a subsidiary of IBM-USA) made a deal with assessee through ISPL-India, for procuring software personnel in USA for projects of IBM in USA. In terms of agreement, orders were issued by IBM to ISPL who in turn passed that to assessee. Assessee’s case was that its activity was purely recruiting and supplying of skilled personnel to IBM-India through ISPL and these technical personnel were neither employee nor were they working under supervision of assessee and, thus, payment received by assessee was for personnel supplied to IBM for its projects outside India and it had no relationship or nexus with work or services or software developed by said personnel for the IBM’s client. Hence it was held that the amount received by assessee, a non-resident company, for supplying software personnel to an Indian company to carry out its projects outside India, was not taxable as fee for technical services either under Act or under article 12 of Indo-US DTAA. (AY 2005-06). Refer, Apollo Consulting Services Corporation Ltd. v. DCIT, 54 SOT 82 (Mum.)(Trib.).

Composite Agreement : In the case of Zuari Agro Chemicals Ltd vs. CIT, 78 DTR 297, it was held that as per India Japan DTAA, Composite agreement for technical work through technical personnel is chargeable to tax in India.(S.90,Art. 3,10,12 ).

Cinematographic films : Assessee company was a tax-resident of USA. It entered into an agreement with an Indian company for distribution of cinematographic films in India. It was held that assessee did not have any PE in India as the Indian Company who obtained rights was acting independently, therefore, amount received by assessee was not taxable in India. (AY 2007-08). Refer, Warner Bros. Distributing Inc. v. ADIT, 139 ITD 580 (Mum)(Trib.).

Online Advertisement :  Payment made by assessee to non-resident for uploading and display of banner advertisement on non-resident’s portal would not be liable for tax deduction at source in absence of any PE of non-resident in India. (AY 2006-07). Refer, Pinstorm Technologies (P.) Ltd. v. ITO, 54 SOT 78 (Mum.)(Trib.).

Interest paid to HO.: Interest paid by the Indian branch of assessee bank to its overseas head office in Japan was not chargeable to tax in India. Consequently, provisions of section 195 would not apply in respect of aforesaid payment. (AY 2004-05). Refer, Dy.DIT v. Mizuho Corporate Bank Ltd. 54 SOT 117 (Mum)(Trib.).

Liaison Office. : Assessee was a non-resident company dealing in cut and polished diamonds - A survey under section 133A was carried out. Assessing Officer on the basis of finding recorded by survey party issued a show-cause notice to assessee as to why its Liaison Office should not be treated as Permanent Establishment (PE) in India. Following order passed by co-ordinate Bench of Tribunal in assessee's own case in DDIT (IT) v. Fabricant & Sons Inc. [2011] 48 SOT 576 / 15 taxmann.com 358 (Mum.) it was held that where liaison office of assessee merely co-ordinated its purchases in India, it could not be regarded as assessee’s PE in India and, thus, no income could be attributed to it under section 9. (A.Ys. 2006-07 & 2007-08. Refer, DDIT(IT) v. M. Fabricant & Sons Inc, 54 SOT 135/20 ITR 118 (Mum.)(Trib.).

Foreign Branches: Assessee-bank sought relief in respect of its income from foreign branches based on respective Double Tax Avoidance Agreements. In all foreign countries, operation was carried out through its branches which was permanent establishment situated outside India, therefore, income attributable to these branches could not be taxed in India. (AY 2003-04). Refer, Bank of India v. Dy. CIT, 139 ITD 493 (Mum)(Trib).

Forward Contract: Assessee was a Singapore based bank registered in India as FII. It took loan in foreign currency to invest in debentures. To safeguard itself from foreign exchange fluctuation risk it entered into forward contracts. Before selling debentures, it terminated forward contracts on which it earned profit. It was held that gain arising from early settlement of foreign exchange forward contract was not income from other sources but had to be treated as capital gain exempt under Article 13 of DTAA. (A.Ys. 1998-99 & 2005-06). Refer, Citicorp Investment Bank (Singapore) Ltd. v. Dy. DIT, 54 SOT 119(Mum)(Trib.).

Commission: In the case of Adidas Sourcing Ltd. v. Assistant Director of Income-Tax, 21 ITR(ITAT) 697 it was held that foreign commission paid is not taxable in India.

Employee Secondment Agreement:  Abbey UK entered into an outsourcing agreement with an Indian company. As per the agreement services provided by Abbey UK were outsourced to Indian Company .To facilitate outsourcing agreement, a secondment agreement was entered into by Abbey UK with assessee which was its Indian group company. Under said agreement trained staff of Abbey UK was seconded to assessee. Under terms of secondment agreement, Abbey UK remained as employer of secondees – Abbey UK bore all expenses in relation to secondees and assessee reimbursed all such expenses to Abbey UK .Assessing Officer disallowed deduction of said expenditure by invoking section 40(a)(i) on ground that assessee was liable to deduct tax at source under section 195 on such payment, as said payment was made for receiving ‘managerial service’ from secondees, which constituted ‘fees for technical services’ under section 9(1)(vii). The Tribunal held that since payment made by assessee to Abbey UK was pure reimbursement of expenses without any profit element, it could not be regarded as income chargeable to tax in hands of Abbey UK. Further since agreement was for secondment of employees only, it could not tantamount to rendering of technical services and, therefore, reimbursement made could not be categorised as fees for technical services. Refer, Abbey Business Services (India) (P.) Ltd. v. DCIT, 53 SOT 401.

Foreign Vessels: Assessee Government undertaking was engaged in transporting coal from one port to another port. For said purpose, assessee was using its own vessels as well as hiring vessels from foreign companies .Payment made by assessee as hire charges was royalty and hence, on facts, provisions of section 9(1)(vi) were attracted(A.Y.2002-03 to 2004-5 , 2006-07)]. Refer, Poompuhar Shipping Corpn. Ltd. v. ADIT, 53 SOT 451(Chennai)(Trib.).

Section 44D.: The assessee a company was awarded a contract by State Government for renovation, modernization and up gradation of a power house. The scope of work included supply of imported equipments and materials from Germany and supervision of erection, start-up and commissioning of power project. The assessee offered the amount for taxation at the rate of 10% of contract value as per section 44BB of the Income-tax Act. The revenue taxed the consideration in respect of these activities as Business Profit. It was held that there was neither any other contrary view nor the assessee brought on record any material controverting the findings of the AO in this regards. Thus, the consideration be taxed under article 7 of DTAA r.w.s. 44D and S. 115A. Accordingly the appeal of assessee was dismissed. Refer, Voith Seimens Hydro Kraftwerkstechnik Gmbh & Co. KG, 140 ITD 216.

Royalty : Income deemed to accrue or arise in India- Royalty-Royalty earned by non-resident from another non-resident is not taxable in India even if payer uses the know-how for sale of products to India. Refer, Qualcomm Incorporated v. ADIT, ITAT Delhi.

Market Support Agreement: Assessee, a Swiss company, operated India specific websites. For this purpose, it entered into Marketing Support Agreement with two group companies in India. Assessee claimed that though it earned revenue from its websites in India, same was not taxable as business profits as it did not have PE in India. The Indian group companies at no stage negotiated or entered into contract for or on behalf of assessee. They simply provided marketing services to assessee or making collection from customer and forwarding same to assessee. Indian group companies were not required to manufacture or process goods or merchandise on behalf of foreign assessee. Further goods or merchandize were delivered by seller to buyer directly who enter into contract through assessee’s website. It was held that though group companies were dependent agents as per article 5(6) because they exclusively assisted assessee in carrying on business in India, they could not be considered as ‘Dependent agent PE’ because they did not perform any function specified in clauses (i) to (iii) of article 5(5). Thus, in absence of PE, article 7 pertaining to taxing business profits would cease to operate in assessee’s case. Refer, eBay International AG v. ADIT, 140 ITD 20/82 DTR 89 (Mum.)(Trib.).

Online Subscription: Assessee, a resident, was engaged in business of fashionable ready to wear garments. In order to get international trend analysis and other information relating to fashion design and style, it subscribed to internet site of a company located in United Kingdom and paid subscription charges of £ 17,000. Assessee sought certificate for payment without deduction of tax at source under section 195. Assessing Officer rejected application and directed deduction of tax at 15.30 per cent holding said payment as royalty. It was held that subscription made by garment manufacturer to online fashion website is royalty or not, to be decided in light of judgment of Karnataka High Court in CIT (International Taxation) v. Wipro Ltd. [2011] 203 Taxman 621/16 taxmann.com 275. Matter remanded to Commissioner (Appeals) for a specific finding on point of transfer of right to use copy right in the light of Karnataka High Court’s decision. (AY 2005-06). Refer, ADIT v. Globus Stores P. Ltd, 140 ITD 103/81 DTR 225 (Mum.)(Trib.).

Co-ordination fees: Assessee, USA based company, acted as a communication interface between its group concerns and group concerns and multinational clients. The assessee provided services to one of its group concern and received fees as creative fees, database cost and client coordination fees. It was held that fees under the head creative fees and database cost amounted to Fees for included services as per Art. 12 of DTAA and chargeable at the rate of 15%. However, client coordination fees which was taxed as business profit, could not be taxed in India, due to non existence of PE. Refer, DDIT (IT) v. Euro RSCG Worldwide Inc, 140 ITD 210 (Mum.)(Trib.).

Further, in the case of Yash Raj Films P. Ltd. v. ITO (Mumbai), 23 ITR (ITAT) 125 it was held that Non-resident--Payment for services in connection with shooting of films for arrangement for shooting locations, obtaining necessary permits, arrangement for shipping and custom clearances, arranging for “extras”, shooting equipment, meals, transport, obtaining visas, arranging for make-up of casts and coordinating necessary licences--Services commercial and logistic, not technical services--Payments therefor business profits not chargeable to tax in India in absence of permanent establishment in India--Assessee not liable to deduct tax at source.

Purchase of Computers with Software’s: Does not involve commercial exploitation thereof No intangible asset involved. Purchase of asset and claim to depreciation not covered under section 40(a)(ia) for disallowance. Refer, Sonic Biochem Extractions P. Ltd. v. ITO, 23 ITR(ITAT) 447 .

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