A] SUPREME COURT
I. Section 245R(2) – Delhi High Court judgment in Sin Oceanic and NetApp BV, wherein it held that AAR applications inadmissible once tax return filed set aside and restored to the file of AAR, in the light of recent AAR ruling in Mitsubishi Corporation wherein AAR held that mere
return filing not a bar under Section 245R(2)
Sin Oceanic Shipping ASA Norway vs. Authority for Advance Rulings  41 taxmann.com 444 (SC)
1. The assessee, Sin Oceanic Shipping ASA Norway, had filed a Special Leave Petition (“SLP”) before the Hon’ble Supreme Court on the issue of maintainability of the application under Section 245R(2) of the Income-tax Act, 1961 ("the Act") before the Hon’ble AAR when a return of income is filed prior to the date of filing the application.
2. The Hon’ble AAR had declined to entertain the application as the assessee had already filed its return of income for the relevant A.Y. 2009-10 before filing of the application before the Hon’ble AAR.
3. The Hon’ble Delhi High Court had confirmed the AAR order in cases involving Sin Oceanic Shipping ASA and NetApp BV & Ors.  wherein it was held that filing of a return of income fell within the sweep of “pending proceedings”, attracting the bar of Section 245R(2) for admitting the application and rejected the assessee’s petitions.
4. Aggrieved, the assessee preferred an SLP before the Hon’ble Supreme Court.
1. The Hon’ble Supreme Court observed that in light of the order of the Hon’ble AAR in Mitsuibishi Corporation, Japan, In re  264 CTR 113 (AAR), the learned counsel for the common appellant in both the appeals and learned senior counsel for the respondents agreed that the impugned order may be set aside and the matter may be restored to the file of the Authority.
2. Accordingly, the Hon’ble Supreme Court set aside the impugned order dated 14-8-2012 passed by the Hon’ble Delhi High Court and restored the matter to the file of the Authority for fresh ruling in accordance with law.
B] AUTHORITY FOR ADVANCE RULINGS
II. Section 245N – 'Transaction' or ‘proposed transaction’ should not be mere 'intention' – Applicant intends to set-up 100% subsidiary in India which further intends to set-up a partnership consortium with another Indian company, who shall take up infrastructure project – Applicant sought ruling on allowability of deduction under Section 80IA(4) to partnership consortium – Held, 100% subsidiary has to exist in reality and partnership consortium has to be set up in order to constitute a ‘transaction’ or ‘proposed transaction’ u/s 245N
Trade Circle Enterprise LLC, In re  42 taxmann.com 287 (AAR)
1. The applicant, a company registered in UAE, engaged in the business of developing and investing in infrastructure and real estate sector intends to invest in a 100% subsidiary company in India.
2. The Indian subsidiary company intends to set up a consortium by way of partnership firm under the Partnership Act, 1932 with another Indian Company namely, MEP Infra Private Limited (MEPPL).
3. The consortium proposes to acquire the undertaking of MEPPL which is engaged in the business of operating and maintaining 20 road bridges in Mumbai and in consideration collects toll at five Mumbai entry points pursuant to a contract dated 19th November, 2010 entered into with the Maharashtra State Road Development Corporation, a Corporation (MSRDC) owned by the Government of Maharashtra (‘Undertaking’) for a period of 16 years.
4. The present Undertaking is eligible for tax deduction of 100% of its profits and gains from such undertaking for a period of 10 consecutive assessment years out of the 20 assessment years as per provisions of Section 80IA(4)(i) of Income tax Act, 1961 (‘Act’). MSRDC and MEPPL have not claimed any income tax benefit under the said section.
5. The above transaction is expected to be completed by the month of December, 2011, subject to necessary approvals.
6. The applicant sought an advance ruling on the eligibility of claim of benefits of Section 80IA(4)(i) deduction in the hands of partnership firm and the period thereof.
7. The Revenue objected to admission of the application u/s. 245R(2) stating that the questions posed before the AAR do not fall under any of the clauses of section 254N of the Act.
1. The Hon’ble AAR held that in order to bring in the question within the scope of Section 245N of the Act, there has to be either a transaction undertaken or proposed transaction to be undertaken by the non-resident applicant. This is not the case in the present application. “Transaction” or “proposed transaction” are not the same as mere intention.
2. It observed that in present application, the applicant intends to invest in a 100 per cent subsidiary company in India which in turn intends to set up a consortium by way of partnership firm with the Indian company and the partnership firm propose to acquire the undertaking of the Indian company which is stated to be eligible for deduction under Section 80IA of the Act. It held that the 100 per cent subsidiary company has to exist in reality and the partnership firm has to be set up in order to make transaction or proposed transaction of
the applicant with the Indian company/subsidiary.
3. It further held that the question relates to proposed setting up of the subsidiary and the partnership firm with the Indian company and as to whether the subsidiary or the partnership firm will be eligible to 100 per cent deduction under Section 80IA of the Act. It observed that the ruling in the case of Umicore Finance vs. CIT (318 ITR 78) was also not applicable.
4. Accordingly, the Hon’ble AAR agreed with the stand of Revenue that the questions posed do not fall under the purview of the Authority.
III. A taxpayer who is obliged to perform independent personal services without having a PE of his own, is deemed to have a PE where he performs his services – On the issue of Agency PE the relevant question is "business connection"
Booz & Company (Australia) (P.) Ltd. & Others, In re  42 taxmann.com 288 (AAR)
1. The applicants, Booz & Company entities, filed 10 applications before the Hon’ble AAR involving identical disputes concerning Double Taxation Avoidance Agreements (‘DTAA’) of different countries in which these entities were resident viz. Australia, USA, UK, Germany, Italy, Japan, Netherlands, China and France (“the DTAA”) except Cayman Islands wherein the questions placed were in respect of taxability under the Act.
2. It sought an advance ruling on the taxability of the payments received / receivable in connection with the provision of services of technical / professional personnel to Booz India in India as Fees for Technical Services (“FTS”) under Article 12 of the respective DTAA’s in the absence of Permanent Establishment (“PE”) in India.
3. The Revenue contended that the various terms and conditions governing the relationship between the applicants and Booz India, the global character and profile of the Booz Group, the interdependence amongst the various companies of the Booz Group, the nature of the services rendered and exchanged between the companies of the Booz Group and the location of Booz India's office in India combined to give rise to a case for Booz India being a PE in India for the applicants from multiple angles.
4. The Revenue relied on various terms and conditions governing the relationship between the applicants and Booz India as under to contend that Booz India can be simultaneously/alternatively a service PE, an agency PE and also a fixed place PE:
• Booz Group is a global network of group companies and in order to optimise the benefits of Booz Group's global business network and expertise, affiliates of Booz Group provide/avail services from each other.
• The entire Booz Group is being catered by a basket of approximately 2,200 technically/professionally qualified personnel which is utilized for executing any project won by the group/its affiliates.
• Booz India would execute the client's project using its own employees and to the extent required, procure services of technical/professional/personnel from the applicant/and other affiliates of the group. This combine of professionals would work together as one team to execute the projects.
• The applicants will have the power to recall its technical/professional/personnel and replace them with other technical/professional/personnel.
• The technical/professional/personnel of the applicants will work under the supervision of Booz India with respect to the concerned project. However, the overall control over the technical/professional/personnel shall be with the applicants.
• The technical/professional/personnel will abide by the employment agreement entered into with the applicants.
• Any financial and/or other responsibility in respect of any claim made by the third party on Booz India for an actual or alleged infringement of any industrial or other rights of third parties vice versa usage by Booz India of Technical information, data, etc made available by the applicant to Booz India will be borne by the applicants.
• The applicants will also impart on the job training to the employees of India.
This can be treated as one primary contention.
5 The Revenue contended the existence of PE on following arguments:
• Agency PE: Since all entities of the applicants were interdependent, they could not attain optimal efficiency without receiving services from each other. Therefore, these inherent and specific dependencies made it very clear that Booz India was a dependent agent of the applicants.
• Service PE: The number and high level of qualified personnel deployed by the applicant to Booz India clearly established that Booz India was a service PE.
• Fixed PE: The access given by Booz India to the technical and professional personnel deployed to work in a given space
also rendered that place as a fixed place PE.
6. The Hon’ble AAR has not produced / dealt with the submissions of the applicant.
1. The Hon’ble AAR observed that one of the sine qua non of a fixed place PE is that the fixed place of business through which the business is carried on should be 'at the disposal' of the taxpayer which is called the "disposal test". OECD does not expressly define what constitutes the place to be 'at the disposal' of the taxpayer and instead gives examples wherein it may or may not tantamount to 'right of disposal'. Conducting trading operations generally require a fixed place which the taxpayer uses on a continuous basis. However, taxpayers rendering service usually do not require a place to be at their constant disposal and therefore application of 'disposal test' is generally more complex in such cases. In some jurisdictions the 'disposal test' is satisfied by the mere fact of using a place. In some other jurisdictions it is stressed that something more is required than a mere fact of use of place. The Hon’ble AAR quoted the judgment of Rolls Royce Plc vs. DIT  339 ITR 147 and Seagate Singapore International Headquarters (P.) Ltd., in re.  322 ITR 650 (AAR) rendered in the context of fixed place PE.
2. The Hon’ble AAR held that a taxpayer who is obliged to perform independent personal services without having a PE of his own, is deemed to have a PE where he performs his services. It further highlighted how a factual distinction can bring about a different approach by citing the judgment of Motorola Inc. vs. DCIT  147 Taxman 39 (Del.) (SB).
3. The Hon’ble AAR observed that various factors have to be taken into account to decide a fixed place PE which inter alia includes a right of disposal over the premises. No strait jacket formula applicable to all cases can be laid down. Generally the establishment must belong to the Employer and involve an element of ownership, management and authority over the establishment. In other words the taxpayer must have the element of ownership, management and authority over the establishment. It further quoted the judgment of Western Union Financial Services vs. ADIT  104 ITD 34 (Del), DIT vs. Morgan Stanley and Co. Inc.  292 ITR 416 (SC) and Aramex International Logistics (P.) Ltd., 248 ITR 159 (AAR).
4. The Hon’ble AAR further held that on the issue of Agency PE the relevant question is "business connection". Relying on the judgment of CIT vs. R. D. Aggarwal & Co.  56 ITR 20 (SC) it observed that the essential features of "business connection" may be summed up as follows:
• A real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India
• Such relation shall contribute, directly or indirectly, to the earning of income by the non-resident in his business
• A course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of 'business connection' in India.
5. The Hon’ble AAR held that the facts of the instant case would also fulfil the essential features of business connection. The factual position as highlighted by the Revenue clearly support the stand taken by it that a PE does exist.
6. It thus concluded that the incomes received by them from the Indian Company were taxable as business profit under Article 7 of the respective DTAA’s except M/s. Booz & Co. (ME) Ltd. Cayman Islands (AAR/1026) with which there is no DTAA by India.
[Editor’s Note: As evident from above it is respectfully submitted that:
1. The Hon’ble AAR has not produced/dealt with the submissions of the applicant.
2. The Hon’ble AAR has not concluded which PE [i.e. fixed place PE,
Dependent Agency PE or Service PE] exists.
3. The reasoning of the Hon’ble AAR in the context of Fixed Place PE that “a taxpayer who is obliged to perform independent personal services without having a PE of his own, is deemed to have a PE where he performs his services” seems incorrect and contrary to the decision of DIT vs. E Funds IT Solutions Group Inc.  42 taxmann.com 50 (Delhi) that Article 5(1) cannot be invoked and applied if the premises are not at the disposal, legally or otherwise of the assessee.
4. The reasoning of the Hon’ble AAR that for determining Agency PE under the DTAA the relevant question is business connection under the Act seems incorrect and contrary to the decision of DIT vs. E Funds IT Solutions Group Inc.  42 taxmann.com 50 (Delhi) wherein despite concluding that the assessee had a business connection it held that the assessee did not have an Agency PE since the conditions mentioned in Article 5(4) of the DTAA was not satisfied.
5. The Hon’ble AAR failed to appreciate that a service recipient (i.e. Booz India) can never be considered to be an Agent, much less a DAPE of the applicants.
6. It seems that the Hon’ble AAR got influenced by the interdependence amongst the various entities of the Booz Group global having regard to the character and profile of the Booz Group. However, in case of DIT vs. E Funds IT Solutions Group Inc.  42 taxmann.com 50 (Delhi) it was held that for determining PE under the DTAA following factors such as – close association between two entities, providing various services to the other entity and being dependent on them for its earning, assignment of a contract or sub-contract – are not relevant.]
IV. Section 245R(2) – Question cannot be said to be already pending for adjudication before the Income-tax authority unless notice under section 143(2) is issued before the application is filed – Pending proceeding in general and question already pending for adjudication are not the same
LS Cable & System Limited, Korea Hyderabad Project  42 taxmann.com 289 (AAR)
1. The applicant, LS Cable & System Limited (‘LSCSL”), a Korean Company had received offshore supplies contracts from M/s. Indu Projects Limited (‘Indu’) for offshore supply order for design, manufacture, supply of UG Cable and Accessories.
2. The title of the plant and equipment supply under the offshore supply contract shall be transferred in favour of Indu outside India. The applicant will receive payment in consideration for the scope of work from Indu outside India through irrevocable Letter of Credit.
3. The applicant sought advance ruling on whether the amounts received by it from Indu Project Limited for Offshore supply of Equipments & Materials, etc., would be liable to tax in India.
4. The Revenue objected to admission of application on the ground that question was already pending before Income-tax authority as return of income for A.Y. 2011-12 in respect of the said contract, was already filed by applicant before filing of application for advance ruling. It further contended that the notice under Section 143(2) was issued within the limited time permitted under the Act though the same was issued after filing of the application. Therefore, the question was pending before the Assessing Officer (“AO”) till the time available to him under the proviso to Section 143(2) of the Act.
1. The Hon’ble AAR observed that the AO assumes jurisdiction to adjudicate all the questions arising out of the return by issue of notice under section 143(2) only. It relied on the ruling of Hyosung Corporation, Korea, In re  36 taxmann.com 150 (AAR - New Delhi) wherein it was held that mere filing of return does not attract bar on the admission of the application as provided in section 245R(2).
2. It further observed that the question raised in the application would be considered as pending for adjudication before Income-tax authority only when the issues are shown in the return and notice under section 143(2) was issued.
3. The Hon’ble AAR held that the revenue's contention, that notice under 143(2) was issued within the stipulated time, would not affect the stated position because without issuance of the notice, the AO does not have jurisdiction to examine and adjudicate the issues raised.
4. It further held that pending proceeding in general and question already pending for adjudication are not the same. For example, when a return of income is filed, it can be said that proceeding is pending till it is processed or deemed to have been processed under section 143(1). However, that does not mean the issues raised before this Authority are already pending for adjudication by the Income-tax Authorities.
5. It thus concluded that the question cannot be said to be already pending for adjudication before the Income-tax authority unless notice under section 143(2) is issued before the application is filed. In the instant case, though return of income was filed before filing of the application before this Authority, since notice under 143(2) was issued after the application was filed the question could not be said to be already pending before the Income-tax authority.
[Note: One more application was filed by the same applicant LS Cable & System Limited, Korea Ukai Project (AAR No 1320 of 2011) . The Hon’ble AAR admitted the application based on the same ruling given for above case.]
V. Section 6(1) – Explanation (a) to Section 6(1) for person leaving India for employment, applicable only in year in which person leaves India – Explanation (b) to section 6(1)(c) is applicable only when a person comes to India on a visit while retaining his/her employment in foreign country
Mrs. Smita Anand  42 taxmann.com 366 (AAR)
1. The applicant, Mrs. Smita Anand, an Indian citizen and a person of Indian origin was working with Hewitt Associates (India) Private Limited from April, 2002 till September, 2007. On September 22, 2007, the applicant left India for the purpose of employment with Hewitt Consulting (Shanghai) Company Ltd.
(“Hewitt, China”), a company incorporated in China.
2. During her employment in China, she visited India and her stay in India in a particular year never exceeded 182 days. She returned to India on February 12, 2011 after resigning from her employment in China with effect from January 31, 2011. For A.Y. 2011-12, which is the relevant year in this application, her total stay in India was 119 days.
3. The applicant was awarded following stock options by her employer in China and which were vested as well as exercised by her during the tenure of her employment with Hewitt, China:
• Historic Restricted Stock Units (“RSUs”) awarded under an Employees Stock Incentive Scheme by her employer Hewitt, China.
• Converted stock options of AON Corporation awarded in lieu of historic stock options of Hewitt (“ ESOP”), as a result of global merger of Hewitt with AON Corporation.
4. During A.Y. 2011-12, the applicant realised proceeds from exercise of ESOPs and RSUs which were credited in applicant's name to her individual account with Morgan Stanley Smith Berne US from where the money was remitted to her Indian savings account after conversion into Indian rupees before returning to India on
12th February, 2011.
5. The applicant sought an advance ruling on the taxability in India of the proceeds received from exercise of ESOP and RSUs.
6. While admitting the application under Section 245R(2), the Authority left the question as to whether the applicant is a resident or a non-resident, to be considered while deciding the application under Section 245R(4).
1. The Hon’ble AAR observed that there are two conditions in Section 6(1) of the Act, when an individual is said to be resident in India in any previous year namely sub-section (a) and sub-section (c). The requirement of sub–section (a) was not met by the applicant as her stay during any of the previous year after going abroad for employment was less than 182 days.
2. It observed that as regards the requirement of subsection (c), it observed that following two conditions should be satisfied:
• Stay in India during preceding four years to the relevant year should be 365 days or more, and
• Stay in India in relevant year to be 60 days or more.
3. The Hon’ble AAR further observed that Explanation (a) to Section 6(1) providing for extension of period for Indian Stay of 182 days in place of 60 days in sub-section (c) to Section 6(1) of the Act was applicable only in a particular year when a person leaves India. The words "In relation to that year" relates to the previous year in which a person leaves India. Since the applicant left India on 22nd September, 2007 for the purpose of employment with Hewitt, China, the relevant F.Y. was 2007-08 which was not the subject matter of the application. Besides, the applicant left India in September, 2007 and came back to India on 12th February, 2011 after resigning from her employment in China effective on 31st January, 2011. Relying on the decision of Hon’ble ITAT in the case of Manoj Kumar Reddy Nare vs. ITO  132 TTJ 328 (Bang.) wherein it was held that if the assessee had come to India after leaving his employment outside India, the Explanation (a) to section 6(1)(c) will not be applicable.
4. It thus held that since the total stay in India of the applicant for the preceding four years was for a period amounting to more than 365 days and also total stay in India for the F.Y. 2010-11 was for a period amounting in all to 119 days which is more than 60 days, requirements of sub-section (c) of section 6(1) was met by the applicant to become a resident in India.
5. The Hon’ble AAR also held that as regards Explanation (b) to section 6(1)(c) of the Act, the test was whether the applicant had come on a visit to India in the previous year 2010-11 as a non-resident. It cannot be said that the applicant is a non-resident in that particular year as this is the point in dispute now. If she is not a non resident, one limb of the Explanation falls. The other issue is whether she came to India only for a visit.
6. As regards the second limb, it held that having regard to the facts and circumstances, it can be concluded that the applicant did not come to India only for a visit. It observed that the applicant's argument that the applicant's employer card was valid upto 31-3-2012, the applicant was considerably exploring possibility of job outside India, the residential house property owned by the applicant jointly with her husband had been let out till June, 2011, the applicant visited her friends and relatives in different parts of India and also travelled different locations on holidays, the children of the applicant were staying abroad at the time when applicant came to India etc., were not sufficient to conclude that the applicant came to India on a visit only. The applicant could very well resign even during the validity period of the employer's card and that was what she had done. The activities mentioned by the applicant need not be necessarily proof of a visit, even a person staying permanently in India also does those activities. When the applicant resigns from her employment in China, the reason for return to India does not seem to be only for a visit. Further the applicant failed to give any information as to whether the applicant left India thereafter for any employment.
7. Accordingly, it held that the applicant was a resident in India and thus the amount of proceeds received in India on conversion of ESOPs and RSUs awarded to her by her employer in China will be taxable in India.
C] HIGH COURT JUDGMENTS
VI. Indian subsidiary of a foreign company providing back office support operations does not constitute a PE in India if the conditions mentioned in Articles 5(1), 5(4) and 5(5) are not satisfied – Employees of e-Fund India did not become other personnel of the assessee’s, once and if the said persons were de facto and de jure employed by the Indian entity/enterprise – MAP cannot be determinative or primary basis to decide whether the assessee had PE in India
DIT vs. E Funds IT Solutions Group Inc.  42 taxmann.com 50 (Delhi)
1. The assessees, E Funds Corporation (“e-funds Corp”) and E Funds IT Solutions Group Inc. (“e-funds Inc”), are companies incorporated and resident in USA. E Funds International India Private Ltd. (“e-funds India”), a company incorporated and resident of India. E-funds Corp was the ultimate holding of e-funds India and also e-funds Inc.
2. The assessee’s had four main business lines, namely electronic payments, ATM management service, decision support & risk management and professional services. E-funds India had performed back office operations in respect of the first three. This included data entry operations etc. in respect of decision support and risk management.
3. The pertinent issue involved in the case was whether e-funds India would be deemed as PE of assessee in India and how much income could be attributed and taxed in the hands of the assessee in India.
1. The Hon’ble High Court held that there was a business connection of the taxpayers in India, because the e-funds India was providing information and details to the taxpayers in USA for the purpose of entering into contracts with third parties and subsequently the said contracts were performed fully or partly by e-funds India as an assignee or sub-contractee.
Mutual Agreement procedure
2. The Hon’ble High Court observed that Mutual Agreement Procedure (MAP) procedure as envisaged under Article 27 of the tax treaty was resorted to for the earlier years. As per the communication by US treasury department, they did not agree that taxpayers had a PE in India but they had agreed to mutual agreement to divide income to avoid double taxation. The tax department contended that taxpayer has a PE as India and USA had resorted to MAP as envisaged under Article 27 of the tax treaty.
3. It held that the MAP procedure and agreement is relevant but cannot be the primary basis to decide whether the taxpayer had PE in India. Whether or not PE exists is a matter of law and fact, and there has to be determination of the said issue on merits.
Fixed Place and Subsidiary PE
4. The Hon’ble High Court held that a perusal of Article 5(6) indicates that even carrying on business in the other country by either the “controlled company” or the “controlling company”, would not make them, i.e. the two companies, a PE of each other. However, a subsidiary can become a PE of the holding/controlling company or the related company, if it satisfies the postulates and requirements of other paragraphs of Article 5, notwithstanding and negating the protection provided under paragraph 6 of Article 5, which recognises legal independence of the two entities for tax purposes.
5. The Hon’ble High Court observed that none of the authorities including the tribunal held that the two assessees had right to use any of the premises belonging to e-fund India. It was not adverted to or stated that premises of e-fund India were at the disposal, legally or otherwise, of the two assessees. In the absence of any such finding Article 5(1) cannot be invoked and applied. Also, even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location PE.
6. It also held that the fact that the subsidiary company was carrying on core activities as performed by the foreign assessee does not create a fixed place PE. Paragraph 3 is not a positive provision but a negative list. The said paragraph does not create a PE but has a negative connotation and activities specified when carried on do not create a PE.
7. It further held that following factors relied upon by the lower authorities were not relevant to determine and decide PE under Articles 5(1), 5(4), or 5(5):
• Close association between e-fund India and the assessee’s
• E-fund India provides various services to the taxpayers and was dependent on them for its earning
• E-Fund India did not bear sufficient risk
• E-Fund India was reimbursed the cost of the call centre operations plus 16 per cent basis or that the basis of margin fixation was not known
• Direct or indirect costs, and corporate allocations in software development centre or BPO
• Assignment or sub-contract to e-fund
• Whether or not any provisions for intangible software was made or had been supplied free of cost
• Details of or number of employees of e-fund India which are part of the e-fund group
8. The Hon’ble High Court observed that subsidiary by itself cannot be considered to be a dependent agent PE of the Principal. However, a subsidiary may become dependent or an independent PE agent provided the tests as specified Articles 5(4) and (5) are satisfied.
9. The Hon’ble High Court held that conditions of Article 5(4) were not satisfied in the present case. It observed that it was not the case of the Revenue that e-fund India was authorised and habitually exercised authority to conclude contract or was maintaining stock or merchandise from which it delivered goods or merchandise on behalf of the assessee or secured orders on behalf of the assessee. The fact that e-fund India had provided necessary inputs to e-fund Corp or e-Fund Inc. to enable them to enter into contracts which were assigned to e-fund India will not make e-fund India a PE of the assessee.
10. As per Article 5(5), an agent is not considered to be an independent agent if his activities are wholly or mostly wholly on behalf of foreign enterprise and the transactions between the two are not made under arm‘s length conditions. The twin conditions have to be satisfied to deny an agent, the character of an independent agent. It held that the transactions between the taxpayers and e-fund India were at arm‘s length and were taxed on arm‘s length principle and therefore, requirements of Article 5(5) were not satisfied.
11. The Hon’ble High Court held that the employees of e-fund India were their employees, i.e. employees of an Indian entity and not employees of the taxpayers. The employees of e-fund India did not become other personnel of the assessee’s, once and if the said persons were de facto and de jure employed by the Indian entity/enterprise. The words ‘employees and other personnel’ under the Article 5 of the tax treaty have to be read along with the words ‘through’ and ‘furnishing of services’ by the foreign enterprise within
India. Thus, the employees and other
personnel must be of non-resident to create a Service PE.
12. It further observed that assessment order also does not record any other relevant finding for creation of service PE under Article 5(2)(l), other than payment received by e-fund India for providing management and support service by the President and Sales Team to overseas group entities. Such a fact was relevant with reference to Article 5(2)(a) but the said provision was not invoked by the lower authorities. It held that extent and timing of applicability of the ‘Place of Management’ principle in such cases, require findings of facts at the first instance and cannot be made matters to be decided for the first time in an appeal before the High Court under section 260A of the Act.
13. The Hon’ble High Court relied on the Supreme Court decision in the case of DIT vs. Morgan Stanley and Co. Inc.  292 ITR 416 (SC) and held that merely because the non-resident taxpayer to protect their interest, for ensuring quality and confidentiality has sent its employees to provide stewardship services, will not make the Indian subsidiary or another entity, a PE of the non-resident company even if the employees of the non-resident taxpayer were taken on deputation.
VII. Section 195 – Explanation 2 to Section 195 by Finance Act, 2012 w.r.e.f. 1-4-1962 providing that tax has to be deducted whether or not the non-resident has PE or not would not impact the provisions of DTAA – Judicial discipline requires that orders of higher appellate authorities should be followed by the subordinate authorities
M/s. Anand Transport (Private) Ltd. vs. Assistant Commissioner of Tax (WA 952/2013 & WP 11360/2013, Madras HC)
1. The assessee, engaged in the business of transportation of coal through ships between Indian ports, entered into agreement with M/s. Jaldhi Overseas Private Limited (“JOPL”), a tax resident of Singapore, wherein JOPL agreed to provide suitable ships to the assessee for transportation of coal between the Indian ports. The payment was to be made in foreign currency. JOPL did not have any Permanent Establishment (“PE”) in India.
2. For A.Y. 2010-11, assessee filed an application for nil deduction of tax at source for quarter ended June 2009. The AO however observed that the contract between the assessee and JOPL was for 5 years and if the activities continue for a period of 90 days in aggregate for a fiscal year, JOPL would be deemed to have a PE in India. Accordingly, it directed the assessee to deduct tax at the rate of 3.167%.
3. Aggrieved, the assessee preferred revision under Section 264 before DIT (Int’nl Tax). The revisional authority held that JOPL was not having a PE in India and the income of JOPL was liable to be taxed in Singapore and not in India by virtue of the Double Taxation Avoidance Agreement between India and Singapore (“the DTAA”). The Revenue did not challenge the revisional authority’s order and thus it became final.
4. Further in assessee’s own case for A.Y. 2009-10, the AO had disallowed the payments made to JOPL for non deduction of TDS. On appeal to CIT(A), the appellate authority took into consideration the order passed by the revisional authority above and held that no evidence was brought to show that JOPL was not a resident of Singapore and thus the income from Indian operations were not taxable in India by virtue of Articles 7 & 8 of the DTAA and directed the deletion of disallowance.
5. For A.Y. 2010-11, the AO held that as per Explanation 2 to Amendment of Section 195, the said Section was amended with retrospective effect from 1-4-1962, and in accordance with the amendment, tax had to be deducted for the payments made to JOPL, hence disallowed payments made u/s. 40(a)(i) of the Act. The AO issued a notice of demand and further issued a show cause notice as to why an order imposing penalty should not be made.
6. Aggrieved, the assessee filed a Writ Petition against the order and also moved a Miscellanous Petition praying stay of operation of the said order pending disposal of the main Writ Petition.
7. The court granted conditional order of stay. Challenging legality and vires of the
said order the assessee filed the instant writ appeal.
1. The Hon’ble High Court rejected the Revenue’s contention that in view of the amendment to Section 195 by Finance Act, 2012 w.r.e.f 1-4-1962 tax has to be deducted whether or not the non-resident has PE or not, since in terms of the DTAA the remittances to JOPL were not chargeable to tax. The said issue was precisely considered by the revisional authority as well as the appellate authority in respect of A.Y. 2009-10, wherein findings were given that the income arising out of the transaction was not chargeable to tax in India under the DTAA. Relying on the judgment of GE India Technology Centre P. Ltd. it held that the assessee
was not liable for payment of tax under Section 195.
2. The Hon’ble High Court further relying on the judgment 1991 (55) ELT 433 (SC) (Union of India vs. Kamalakshi Finance Corporation Ltd.), held that the principles of judicial discipline require that the orders of the higher appellate authorities should be followed by the subordinate authorities and the stand taken by the AO, on the face of it was unsustainable both in law and on facts.
3. As regards the Revenue contention that in view of the availability of alternate appeal remedy, it observed that in light of the orders passed by revisional authorities, the stand taken by the AO that tax should be deducted at source, on the face of it was unsustainable and therefore for the said reason, the non-availment of the appeal remedy cannot be put against the appellant / writ petitioner / assessee.
4. Accordingly, the said writ petition was allowed. Consequently the writ appeal
and connected miscellaneous petition were closed.
D) Tribunal Decisions
VIII. Whether salary received in an Indian bank account by a non-resident, employed outside India, is taxable in India – Held : No; in favour of the assessee
Arvind Singh Chauhan vs. ITO  42 Taxmann.com 285 (Agra) Assessment Years : 2008-09 and 2009-10
1. The assessee, an employee of Executive Ship Management Pte Ltd., Singapore (ESM), worked as a crew member on merchant vessels plying on international routes. The assessee qualified as a Non-Resident in the financial year and offered to tax in India his interest income from the Indian bank account and pension income from the Indian Army (previous employer).
2. Salary income from ESM was credited at the request of the assessee to his NRE bank account in Mumbai from the employer’s bank account in Singapore. He did not offer his ESM salary on the understanding that the same is not liable to tax in India.
3. The Assessing Officer (AO) made an addition on account of the salary, considering it taxable in India owing to its accrual and receipt in India. Aggrieved by the decision of the AO and subsequent decision of the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee appealed before the Tribunal.
1. The Tribunal observed that an employee has to render the services to get a right to receive a salary. Accordingly, the Tribunal opined that situs of accrual of salary income is the place where the services are rendered. Reliance was placed on the Bombay High Court ruling in the case of CIT vs. Avtar Singh Wadhwan  247 ITR 260 (Bom) in this regard. Thus, the Tribunal held that the salary was accrued outside India where the services were performed.
2. The Tribunal observed that the assessee received USD denominated salary. Further, the assessee had the right to receive such salary at the place of employment (Singapore) i.e. the assessee had the right to disposal of such salary. It was thus noted that in lieu of such right to disposal of the salary, the assessee exercised his discretion to receive it in his Indian bank account.
3. The Tribunal opined that for the purpose of section 5(2) of the Income-tax Act, 1961, receipt of income refers to the first occasion when the assessee gets the money in his own control – whether real or constructive. What is material is the receipt of income in its character as income, and not what happens subsequently once the income, in its character as such, is received by the assessee or his agent. The Tribunal thus distinguished between ‘receipt of income’ and ‘receipt of amount pertaining to the income’. Reliance was placed on the Madras High Court ruling in the case of CIT vs. AP Kalyankrishnan  195 ITR 534 (Mad) in this regard.
4. Thus, the Tribunal held that salary income was accrued outside India and was also received outside India. Accordingly, the same is not taxable in India.
Note: Other Favourable Decisions are as follows:
(ADIT vs. Nandan Singh Chauhan [ITA No. 1171/Del/2009])
(Ranjit Kumar Bose vs. ITO  18 ITD 230 (Cal))
IX. Taxability of Liaison Office – Sales promotion activity of Liaison Office is taxable in India
Browne & Sharpe Inc vs. ACIT (2014) 41 taxman.com 345 (Del) Assessment Years : 2003-04 to 2005-06
1. The assessee a US company, set up a Liaison Office in India with the RBI approval. The RBI approval was granted on the condition that the LO will not render any services, directly or indirectly, in India.
2. The LO was established only as a communication channel between the assessee and its customers or prospective customers in India. The LO did not render any service for the procurement of order or sale of the product in India. Hence there was no income earned in India. The assessee contended that the RBI had never alleged that it has violated the conditions put forth.
3. In this regard, the assessee referred to various decisions like Angel Garment Ltd., U.A.E. Exchange Centre Ltd. , K.T. Corporation  etc. Furthermore, the payments made to the LO were merely reimbursement of expenses incurred by the LO on behalf of the assessee. Hence, it cannot be liable to tax in India.
4. The Tax Department contended that the LO was not merely a communication channel but it was also promoting the assessee’s product brands in India, which was evident from the fact that the performance incentive
of LO’s employees was calculated on the
basis of number of orders received by the assessee.
5. The Tax Department contended that the assessee was also registered with the Registrar of Companies in India and had filed a return of income claiming loss under the head “Profits and gains of business or profession”, which shows that the assessee itself believes that it derives income from business in India. Thus, income attributable to the LO in India should be taxable in India.
The Tribunal held in favour of the Tax Department are as follows:
1. The LO was engaged in promoting the assessee’s product brands in India. Other than the Chief Representative Officer, the LO had also appointed a Technical Support Manager. The employees of the LO were offered sales incentive plan as per which they were to be provided with remuneration, based on the achievement of the sales target of the assessee in India.
2. The assessee was registered with the Registrar of companies for carrying on business in India. It had also, on its own volition, filed a return of income declaring loss under the head “Profits and gains of business or profession”. Thus, the assessee itself has taken a
stand that it derives income from business in India.
3. In the decisions relied on by the assessee, the activities carried which were held to be of preparatory and auxiliary nature. However, the assesee’s employees were promoting the sale of the Assessee’s goods in India. Thus, income attributable to LO is taxable in India.
4. There is no doubt that the reimbursement of expenses can, under no circumstances, be treated as income. The LO, however, has received, on year-on-year basis, an amount exceeding the expenses actually incurred by it on behalf of the assessee. Thus, the amount over and above the expenses has to be treated as income.
Other favourable decisions are as under:
1. Metal One Corporation vs. DDIT (ITA No. 5377/Del/2011)
2. St. Jude Medical (Hong Kong) Ltd. vs. DDIT (ITA Nos. 4626 and 4627/Mum/2005) - Taxsutra.com
X. Transfer pricing – Justification for the payment of Management fees – Furnishing of evidence /Documentary proof in respect of services provided
TNS India Pvt. Ltd. vs. ACIT [TS-21-ITAT-2014(HYD)-TP] – Assessment Years: 2003-04, 2004-05 &2005-06
1. The assesee was engaged in conducting quantitative and qualitative market research. It had entered into several international transactions with its associated enterprises (AEs), of which the disputed transaction was that of payment of management fees. The other international transactions were accepted as having arm’s length pricing, after being aggregated and benchmarked using Transaction Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) challenged the management fee transaction and determined its arm’s length price (ALP) to be NIL.
2. As a part of its business strategy, the Group had centralised key management functions in AEs which were set up exclusively for this purpose. These AEs provided management services, and were non-profit entities. The services/process/know-how/ systems/ knowledge were available to the assessee on a real-time and continuous basis through the Group intranet. The assessee received the advantage of specialisation, skills and expertise, know-how and technology, which was developed in-house by the Group in all core areas of its business of market research. Other benefits were in the form of global consistency in business practices, economies of scale, and improvements in efficiency.
3. The assessee submitted the following documentary evidence:
a. documentation including a detailed description of services received from AEs;
b. inter-company service agreement;
c. financial statements and tax return of AEs;
d. confirmation that such payments had been made by other group companies too (average management fee as a percentage of sales paid by other group companies was 6.07%, which was higher than 4.5% paid by the assessee);
e. basis of allocation of costs by the global headquarters and regional headquarters; and
f. details of withholding tax on management fee payments.
The Tribunal held in favour of the assessee as follows:
1. Providing concrete evidence with reference to services provided in the nature of specific activities in day-to-day business was difficult as they were not tangible in nature. However, by the way business is conducted, one could perceive the same. Unless the TPO observed the role of AEs in the assessee’s business, it would be difficult to place on record the sort of advice given in day-to-day operations. Accordingly, the TPO’s contention that services were not rendered, was not acceptable.
2. Assessee had placed a lot of evidence in support of its claim. The detailed write-up of services provided and benefit received, as provided by the assessee, had neither been contradicted by the Revenue authorities, nor had they specified any other evidence that would satisfy them.
3. The role of a TPO was to determine the ALP of a transaction. By rejecting outright the entire payment of management fee, the TPO went beyond his jurisdiction. In the guise of determination of ALP, the TPO could not question the business decision of payment and determine that no services were rendered. [The Tribunal placed reliance on Delhi High Court ruling in case of EKL Appliances Ltd. (ITA Nos. 1608 & 1070/2011)].
4. While determining the profit level indicator (PLI) for the assessee under TNMM, the management fee transaction had been considered. After paying management fee, the assessee’s PLI under TNMM was higher than that of comparables. Considering this, adjustment on account of management fee was not proper.
5. Inter-company service agreement was entered into in an earlier year and the assessee had been paying and claiming management fee in earlier and later years.
6. The management fee amount was within the norms prescribed for payment of
fees to various group companies of similar nature.
In view of the above, the Tribunal, in principle, allowed the claim of management fees. However, it observed that since the TPO had not examined whether or not the payment of management fee was in accordance with the pricing methodology laid out in the inter-company service agreement, the matter relating to quantification of the claim was restored back to the TPO.
A] AUTHORITY FOR ADVANCE RULINGS
I Section 245R(2) – Mere filing of return of income before date of filing application for advance ruling does not attract the bar under Section 245R(2) of the Act since no notice under Section 143(2) was issued before the date of filing application
Mitsubishi Corporation, Japan, In re  40 taxmann.com 335 (AAR)
1. The applicant, a company incorporated in Japan and a tax resident of Japan, established a Branch Office in India in April, 2008 after obtaining the necessary approvals from the Reserve Bank of India.
2. The activities carried out by the Branch Office in India primarily relate to provision of support services to the applicant.
3. The applicant received offshore supplies contract from Power Grid Corporation India Ltd. and entered into two separate contracts with the Power Grid Corporation India Ltd., i.e. Offshore supply contract and Onshore service contract.
4. The applicant sought advance ruling on the taxability of the consideration received under the Offshore supply contract and whether MC Japan and Allcargo Global Logistics Limited (“assignee”), for the purpose of executing the Onshore service contract for all services to be performed in India, could be assessed as independent companies under Section 2(31)(iii) of the Income-tax Act (“the Act”) in India or as an Association of Persons (“AOP”) under Section 2(31)(v) of the Act.
5. The Department objected to the admissibility of the application stating that return of income was filed before filing the application.
1. The Hon’ble AAR observed that the ruling of SEPCO III Electric Power Construction Corporation  340 ITR 225 (AAR) and NetApp BV  347 ITR 461 (AAR) confirmed by Delhi High Court in  253 CTR 164 (Delhi) were based on the premise that by filing a return, an assessee invites adjudication of the question arising out of the returns. From an analysis of provisions under Sections 143(2) and 142(1) of the Act, it is seen that this was not so. By issue of notice under Section 143(2) only, the AO assumes jurisdiction to adjudicate all the questions arising out of the return. In the case of Jagtar Singh Purewal reported in (1995) 213 ITR 512, this Authority held that though the applicant had declared amount in question in return, the application for advance ruling was maintainable as there was no pending dispute between the applicant and the Income-tax Department because the return had been processed under Section 143(1) and the refund as prayed for by the applicant had been granted. Secondly, even in the return the assessee raised no dispute regarding the assessability of the amount. On the other hand, he voluntarily showed it and paid tax thereon claiming refund of only the balance. Further, in the case of Hyosung Corporation Korea  36 taxmann.com 150 (AAR) it was held that mere filing of return does not attract bar on the admission of the application as provided in Section 245R(2) of the Act.
2. The Hon’ble AAR held that that only when the issues are shown in the return and notice under Section 143(2) is issued, the question raised in the application will be considered as pending for adjudication before the Income-tax Authorities. In the present case, the return of income was filed before filing the application. However, notice under Section 143(2) was issued after the date of the application. Thus, following the ruling in Hyosung Corporation it ruled that the question raised by the applicant was not already pending before the Income-tax Authorities and therefore, the application was maintainable.
II. Section 245R(2) – Mere filing of return of income before date of filing application for advance ruling does not attract the bar under Section 245R(2) of the Act since no notice under Section 143(2) was issued before the date of filing application
Aircom International Ltd., In re [AAR No. 1329 of 2012 Order dated 10th January, 2014]
1. Aircom International Ltd. (“the applicant”), a company incorporated in England and Wales, entered into a Management Service Agreement (MSA) with its wholly owned subsidiary in India, Aircom India. Under the agreement, the applicant provided various Management Support Services to Aircom India with a view to rationalise and standardise the business conducted by Aircom India in India in accordance with the international best practices.
2. The applicant sought an advance ruling on the taxability in India in respect of the payments received from Aircom India under the India – UK Double Taxation Avoidance Agreement (“the DTAA”).
3. The Revenue objected to the admissibility of the application stating that return of income was filed before filing the application.
4. The applicant submitted that mere filing of return of income does not attract the bar unless the question raised in the application is an issue pending for adjudication before the Income-tax Authorities. It further submitted that particulars of the issues raised before the Authority for Advance Rulings were not disclosed in the return of income filed.
1. The Hon’ble AAR observed that in the present case return of income was filed before filing application to the Authority for Advance Rulings. However, notice under Section 143(2) was issued after the application was filed before the Authority. There was no dispute about the facts. Relying on the decision in the case of Hyosung Corporation Korea  36 taxmann.com 150 (AAR) and in other cases it ruled that the question cannot be said to be already pending before the Income-tax Authorities, as no notice under Section 143(2) was issued before filing the application though return was filed.
2. Accordingly, the Hon’ble AAR admitted the application under Section 245R(2) of the Act.
III. Section 245R(2) – Since not only return of income was filed but even notices under Sections 143(2) and 142(1) were already issued before filing of the application and the particulars of the issue were shown in the revised return in the form of TDS details, the bar under Section 245R(2) was attracted.
J & P Coats Limited, In re [AAR No. 1077 of 2011 Order dated 10th January, 2014]
1. J&P Coats Limited (“the applicant”), a company incorporated under the laws of the U.K., entered into a Master Global Framework Agreement with BT UK under which BT UK was to provide the Coats Group entities with two-way transmission data through telecom bandwidth and interconnects the Coats group companies of UK located across the globe with managed wide area network (referred to as “data connectivity”). The applicant, in turn was to recoup the cost so incurred to its Coats group companies for the connectivity utilised.
2. As part of the agreement entered into between the applicant and BT UK, Madura Coats Private Limited (“MCPL”), an Indian company was also provided connectivity. The applicant had also entered into an Applications Support and Wide Area Network Support Services Agreement (“Agreement”) with MCPL for recouping the cost so incurred on behalf of MCPL based on usage.
3. The applicant sought an advance ruling on the taxability in India as regards the payments received by it.
4. The Revenue objected to the admissibility of the application submitting that the return of income was filed prior to the date of filing of advance ruling application. It further pointed out that even notices under Sections 143(2) and 142(1) were issued before the filing of the application.
1. The Hon’ble AAR held that only when the issues are shown in the return and notice under Section 143(2) is issued, the question raised in the application will be considered as pending for adjudication before the Income-tax Authorities.
2. It observed that in the present case not only return of income was filed but even notices under Sections 143(2) and 142(1) were already issued before filing of the application. Return of income for the relevant assessment year was filed on 30-9-2008 and a revised return was filed on 31-3-2010 i.e. before filing the application to the Authority for Advance Rulings on
19-5-2011. Notice under Section 143(2) was issued on 20-9-2010 which was before filing the application. The assessment was also completed under Section 143(3) of the Act by the Assessing Officer on 1-2-2012.
3. Further, the submission of the applicant that the particulars of the issue were not shown in the return was also not factually correct as it was found that in the revised return, the transaction was shown in the form of details of TDS. It thus held that the question was already pending before the Income-tax Authorities and the application was barred by Proviso (1) of Section 245R(2) of the Act.
IV. India-Netherlands DTAA –
When “considerable experience, knowledge and expertise" of the holding company is to be rendered for which payments are made by the Indian company, the payments fall within definition of fees for technical services under Section 9(1)(vii) – However, since the assessee merely took assistance of the holding company in its business activities outside India and there was no material to suggest that the technical know-how, skill, knowledge and expertise were transferred to the assessee so as to enable it to apply this technical know-how etc., the requirement of “make available” was not satisfied
Endemol India (P) Ltd., In re  40 taxmann.com 345 (AAR)
1. The applicant, Endemol India Private Limited, a resident company incorporated under the Companies Act, 1956 is engaged in the business of providing and distributing television programmes.
2. The applicant requires assistance from Endemol Holding to carry out its business efficiently and in a profitable manner and for that purpose entered into a Consultancy Agreement with Endemol Holding B.V., a tax resident Netherlands, on 10-1-2011 for procuring certain consultancy services from Endemol Holding.
3. Under the agreement, Endemol Holding would provide the applicant services such as General Management, International Operations, Legal advisory, Tax Advisory, Controlling and Accounting & reporting, Corporate Communications, Human Resources, Corporate Development and Mergers & Acquisitions.
4. The applicant sought an advance ruling on the taxability in India of amount paid to Endemol Holdings under the agreement.
1. The Hon’ble AAR observed that since material evidences of the actual services rendered were not furnished by the applicant reliance had to be placed on the services mentioned in the Consultancy Agreement. Article 1 of the consultancy agreement clearly showed that it is the "considerable experience, knowledge and expertise" of the holding company that is to be rendered and for which payments are to be made. Also, from the nature of the services listed in Schedule 1 to the Management Consultancy Agreement it is clear that it requires technical knowledge, experience, skill, know-how or processes. Thus, they cannot be termed as merely administrative and support services as tried to be made out by the applicant. The services rendered by Endemol BV to the applicant cannot but be technical in nature. Therefore, the services rendered were technical services both under the provision of the Act and under the India-Netherlands Double Taxation Avoidance Agreement (“the DTAA”) subject to fulfilment of requirements of the "make available" clause.
2. The Hon’ble AAR observed that the requirement of "make available" is met if the technology, knowledge or expertise can be applied independently by the person who obtained the services. In this case the applicant merely took assistance of the Holding company in its business activities outside India and there was no material to suggest that the technical know-how, skill, knowledge and expertise were transferred to the applicant so as to enable the applicant to apply this technical knowhow, etc. independently. Therefore, the requirement of the “make available” clause in the Article 12(5) of the DTAA was not satisfied and hence the payment for the services rendered by Endemol BV would not come under “Fees for technical services” under the DTAA.
3. It further held that there was no material to show that Endemol Holding had any presence in India. There was also no material to suggest that the applicant was fully dependent on Endemol. Thus Endemol did not have any PE in India and the payment would not be taxable as business income in India under the DTAA.
V. In view of CBDT's Circular No. 715, dated 8-8-1995, services rendered by non-resident for production of programmes for purpose of broadcasting and telecasting shall be specifically characterised as 'work' under Section 194C – Since services are categorised as 'work' under Section 194C the income therefrom would be treated as business income and thus the payment made could not be treated as Fees for Technical Service.
Endemol India (P) Ltd., In re  40 taxmann.com 340 (AAR)
1. The applicant, Endemol India Private Limited, a resident company incorporated under the Companies Act, 1956 was engaged in the business of providing and distributing television programmes.
2. During the financial year 2010-11, the applicant had produced the reality show “Wipe Out” ('the show') which was aired by Viacom 18 Media Private Limited on Imagine TV. As per the format of the show the shooting was to take place outside India (primarily in Argentina). For the purpose of show, the applicant has engaged Endemol Argentina SA (“Endemol ARG”) for providing line production services in Argentina and accordingly entered into an agreement in the form of DEAL MEMO.
3. The applicant sought an advance ruling with regards to its withholding tax obligations on the payments made to Endemol ARG in respect of the services rendered.
1. The Hon’ble AAR observed that as per the agreement, the applicant has to pay the amount towards composite services (including provision of equipment). Details of the agreement did not support the argument that the services provided by Endemol ARG to the applicant are only administrative and logistical services for shooting the programme outside India. On perusal of Annexure 1 to production services agreement, it was evident that the main provision of the services were technical crew, production crew and technical equipments. The other services were ancillary necessary for the technical/production crew and the technical equipments only.
2. As regards the applicability of Section 194C vis-à-vis Section 194J, the Hon’ble AAR held that if there is a specific provision for specific item of payment that provision will override the general provision. It observed that the Delhi High Court in the case of CIT vs. Prasar Bharati  158 Taxmann 470 (Delhi) held that broadcasting and telecasting including production of programmes for such broadcasting and telecasting do not fall under the provision of Section 194J as they are specifically covered by definition of “work” in Section 194C of the Act. Also, CBDT's Circular No. 715, dated
8-8-1995 stated that payments made to advertising agencies for production of programmes, which are to be broadcasted / telecasted, would be subject to withholding tax under Section 194C of the Act.
3. The Hon’ble AAR thus held that since the payments made by the applicant to Endemol were for production of programmes for the purpose of broadcasting and telecasting, the services rendered by such non-resident would be specifically characterised as “work” for the purpose of Section 194C. Therefore, it will not be appropriate to treat it as FTS under Section 9(1)(vii) of the Act.
4. Accordingly, if the services were characterised as “contact work” under Section 194C of the Act, then the income received should be treated as business income. The non-resident company did not have PE in India. Also, the services were rendered and utilised outside India and the payments for the services rendered was also received outside India. Hence, there was no business connection in India and thus the income of the non-resident company was not taxable in India.
VI. India-Singapore DTAA – Even if the services rendered by the non-resident is in the nature of supervision but when the supervisory role requires special skill, knowledge or expertise, then it will become managerial. Such services are also consultancy services – However, since there was no material to support that the technical knowledge, expertise, skill/know-how or process is made available to the applicant by enabling it to apply the technology independently the same cannot be taxed under Article 12(4) of the DTAA.
Endemol India Private Limited [AAR No. 1076 of 2011 Order dated 6th December, 2013]
1. The applicant, Endemol India Private Limited, a resident company incorporated under the Companies Act, 1956 was engaged in the business of providing and distributing television programmes.
2. During the financial year 2010-11 the applicant had produced the reality show Khatron Ke Khiladi – Series 3 (“the show”) which was aired on Colors Channel. As per the format of the show, the shooting was to take place outside India (primarily Brazil). For the purpose of shooting the show outside India, the applicant engaged Noise Associates Private Ltd. (“NAPL”), a Singapore company, to procure the services of Ms. Chantal Prud’ Homme as an executive producer for the show.
3. Under the agreement, NAPL was responsible for the overall production and also for handling business issues. The agreement also provided that NAPL will provide specialised services to Endemol to aid in the production of applicant show programmes for which NAPL agreed to commission its representative to Ms. Chantal Prud’ Homme who was an executive producer for the applicant shows/programmes.
4. The applicant sought an advance ruling on the taxability of the payments made to NAPL under the agreement.
1. The Hon’ble AAR observed that the agreement clearly stated that NAPL will provide specialised services to applicant to aid in the production of applicant’s shows /programmes for which NAPL agreed to commission its representative Ms. Chantal Prud’ Homme as an executive producer of the show. The services may be in the nature of supervision as contended by the applicant but when the supervisory role requires special skill, knowledge or expertise, then it will become managerial. A person cannot do the job of supervision of the shows and programmes undertaken by the applicant without having technical knowledge or expertise. The nature of the role played by Ms. Chantal Prud’ Homme also fits in with consultancy services as submitted by the Department. Thus the services provided by the NAPL through Ms. Chantal Prud’ Homme, therefore was covered by the definition of Fees for technical services (“FTS”).
2. It further observed that there was no material to support that the technical knowledge, expertise, skill/know-how or process is made available to the applicant by enabling it to apply the technology independently. Thus, none of the conditions in (a)(b)(c) of the Article 12 (4) of the India-Singapore Double Taxation Avoidance Agreement (“the DTAA”) was fulfilled and thus the same was not taxable under the DTAA.
3. It further held that there was nothing on record to show that NAPL had a PE in India and thus in the absence of PE the profits arising out of the transactions for services rendered by NAPL were not taxable in India under Article 7 of the DTAA.
B] HIGH COURT JUDGMENTS
VII. Section 40(a)(i) not applicable on salary of foreign crew reimbursed to service provider as the payment was not royalty or FTS but salary –Foreign crew also eligible for short stay exemption under Section 10(6)(viii) and hence, salary payment not liable to TDS under Section 192.
DIT vs. Dolphin Drilling Ltd. [Income Tax Appeal No. 38 of 2009 Order dated 19th December, 2013]
1. The assessee, Dolphin Drilling Ltd., entered into a contract with Alfa Crew, pursuant to which it provided crew services to the assessee. The assessee engaged all such crew as its own employee.
2. Under the contract, Alfa Crew became entitled to receive from the assessee:
• a fixed fee of U.S. $ 869 per day
• salary of crew to be provided by Alfa Crew in U.S. dollar as per invoices and
• handling charge of 5 per cent on such salary.
3. During AY 2004-05, the assessee paid
Rs. 2.03 crores to Alfa Crew on account of fixed fee and handling charges, on which tax was deducted at source (‘TAS’) and a sum amounting to Rs. 26 crores on account of salary payable to crew on which it did not deduct any tax at source.
4. The AO disallowed Rs. 26 crores
u/s. 40(a)(i) holding that the same was part of fees for technical services (“FTS”).
5. On appeal, the Hon’ble ITAT concluded that the payment, was in the nature of salary and not technical services and since the entire salary was paid to different people, who were foreigners and who earned those salaries by serving in India for a period of less than 90 days during the relevant assessment year the same was not taxable in view of Section 10(6)(viii) of the Act.
6. Aggrieved, the Revenue filed an appeal before the Hon’ble High Court.
1. The Hon’ble High Court observed that the facts upon which the Hon’ble ITAT arrived at the said conclusion, were not being disputed in the appeal. It thus held that if those facts were not disputed, then the one and the only conclusion would be that the payments was for salary and not technical fees.
2. It observed that under Section 192 of the Act, it was obligatory on the part of the assessee to deduct tax, but, as stated in Section 192 of the Act, on the estimated income of the employee. In the instant case, since the employees, being foreigners and they having earned those salaries while working in India during a period less than 90 days, those salaries, in view of Section 10(6)(viii) of the Act, were not income of the employees in India.
3. It further held that the Revenue erred in applying the provisions of Section 40(a)(i) which provides for disallowance on account of non-deduction of tax in respect of royalties or FTS. It referred to Section 40(a)(iii) which provides for disallowance on account of non-deduction of tax on any payment chargeable under the head “Salaries”.
4. The Hon’ble High Court held that Section 192 of the Act applies only when there is an income chargeable under the head “Salaries”. The payments made by the assessee and the income derived thereby by those, who received the same, was though regarded as salary but never regarded as salary chargeable under this Act, as the same was outside the purview of the provisions of the Income-tax Act by reason of Section 10(6)(viii) of the Act and thus disallowance under Section 40(a) could not be attracted.
VIII. India – Korea DTAA – Tax liability cannot be fastened on the assessee without establishing that it was attributable to tax identity or PE situated in India – Revenue cannot arbitrarily fix a part of the revenue to the PE of assessee in India.
Samsung Heavy Industries Co. Ltd. vs. DIT [Income Tax Appeal No. 1 of 2012 Order dated 27th December 2013] – Assessment Year : 2007-08
1. The assessee, a tax resident of Korea, had entered into a contract with ONGC and had earned certain revenues under the contract.
2. The assessee claimed that a part of such revenue was earned by carrying out activities ‘within’ India which was offered to tax in India against which it claimed deduction of certain expenses. The remaining revenue was claimed to be generated by carrying out activities ‘out of India’, which was not offered to tax in India.
3. Separately, the assessee had a Project Office (‘PO”) in Mumbai. However, the AO held that 25% of revenues received for 'outside India' activities, should be taxed in India and passed an order accordingly. On appeal, the same was confirmed by the Hon’ble ITAT.
4. Aggrieved, the assessee filed an appeal before the Hon’ble High Court.
1. The Hon’ble High Court noted that the assessee had a tax identity in India and a tax identity outside India and, accordingly its tax liability in India was required to be apportioned. Referring to para 1 of Article 7 of the Double Taxation Avoidance Agreement between India and Korea (“the DTAA”), it observed that the mechanism to be adopted to apportion the same was, however, not provided.
2. The Hon’ble High Court observed that in terms of para 1 of Article 7, the assessee would acquire its tax identity in India only when it carried on business in India through a permanent establishment (“PE”) situated in India. By submitting the return of income, the assessee has held out that it is carrying on business in India through a PE situated in India. It thus held that the contention of the assessee, whether the PO of the assessee opened at Mumbai can be, or cannot be said to be a PE within the meaning of the said Agreement is of no consequence.
3. It further observed that the assessee held out that a part of the revenue was received by it for doing certain work in India. It did not contend that even those works were done by or through its Project Office at Mumbai. Also, there was not even a finding that 25 per cent of the gross revenue of the assessee was attributable to the business carried out by the PO. It held in terms of Article 5 of the DTAA, PE means a fixed place of business through which business of an enterprise is wholly or partly carried on. In the instant case, according to the Revenue, the PO of the assessee in Mumbai was the PE through which it carried on business during the relevant assessment year and 25 per cent of the gross receipt was attributable to the said business. Neither the AO, nor the Hon’ble ITAT had made any effort to bring on record any evidence to justify the same.
4. It thus concluded that the tax liability could not be fastened on assessee without establishing that the same was attributable to the tax identity or PE of assessee situated in India. Thus, the Revenue cannot arbitrarily fix a part of the revenue to the PE of assessee in India.
IX. Transfer Pricing – Determination of ALP considering entire FOB value of goods sourced for AE, as profit determining denominator, contrary to TP provisions – Rejection of assessee's TP analysis not warranted as orders of lower authorities do not show how and to what extent Li & Fung India bore significant risk or its AE enjoyed locational advantage.
Li & Fung India Pvt. Ltd. vs. CIT  40 taxmann.com 300 (Delhi)
1. The assessee, a wholly owned subsidiary in India of Li & Fung (South Asia) Ltd., Mauritius, was set up as a captive offshore sourcing provider. It entered into an agreement with Li & Fung (Trading), Hong Kong, an associated enterprise, for rendering “sourcing support services” for the supply of high volume and time sensitive consumer goods. The assessee was entitled to receive cost plus a mark up of 5% for the services rendered to the AE.
2. The assessee claimed that it was a low risk captive sourcing service provider performing limited functions with minimal risk. It adopted the TNMM and computed the Profit Level Indicator (“PLI”) at operating profit margin/ total cost. Since the operating profit margin at 5.17% exceeded the weighted average operating margin of 26 other comparable companies, the assessee claimed that its remuneration was at arm's length.
3. During the course of assessment, the TPO did not dispute the TNMM or the comparables but held that the assessee ought to have received 5% on the FOB value of the goods sourced through the assessee (i.e., the exports made by the Indian manufacturers to overseas third party customers). He also held that the assessee was a risk bearing entity and an independent entrepreneur and it could not be said that the assessee is a risk-free entity.
4. The DRP upheld the TPO’s order though it reduced the mark up to 3% of FOB value of exports. On appeal, the Hon’ble Tribunal upheld the stand of the Revenue.
1. The Hon’ble High Court observed that the assessee’s compensation model was based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. It held that to apply the TNMM, the assessee’s net profit margin realised from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Rule 10B(1)(e) of the Rules does not enable imputation of cost incurred by third parties to compute the assessee’s net profit margin for application of the TNMM. Thus, the approach of the TPO in essence imputes notional adjustment / income in the assessee’s hands on the basis of a fixed percentage of the FOB value of export made by unrelated party venders which is contrary to provisions of the Act and Rules.
2. It further held that the finding that the assessee assumed substantial risk was not based on any material. The assessee made no investment in the plant, inventory, working capital, etc., nor did it bear the enterprise risk for manufacture and export of garments. It merely rendered support services in relation to the exports which were manufactured independently. Thus, attributing the costs of such third party manufacture when the assessee did not engage in that activity and when those costs were clearly not the assessee’s costs, but those of third parties, was clearly impermissible.
3. The Hon’ble High Court also observed that the tax authorities should base their conclusions that the assessee bears “significant” risks on specific facts, and not on vague generalities, such as “significant risk”, “functional risk”, “enterprise risk”, etc. without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reason, based on objective facts and the relative evaluation of their weight and significance.
4. Also, as the TPO did not discard the exercise conducted by the assessee of comparing its operating profit margin with that of the comparable companies, and it was not shown that the profit margin and cost plus model adopted by the assessee was distorted, he could not have proceeded to his own determination and calculations. The TPO must first reject the assessment carried out by the assessee before making further alterations. Where all elements of a proper TNMM are detailed and disclosed in the assessee’s study reports, care should be taken by the tax administrators and authorities to analyse them in detail and then proceed to record reasons why some or all of them are unacceptable.
5. It thus concluded that the Hon’ble Tribunal’s order, upholding the determination of 3% margin over the FOB value of the AE's contract, was in error of law.
C) Tribunal Decisions
X. Reimbursement of salaries of seconded employees is not in the nature of Fees for Technical Services
Temasek Holdings Advisors (I) P. Ltd. vs. DCIT  38 taxmann.com 80 (Mumbai - Trib.) – Assessment Years : 2007-08 and 2008-09
Facts of the case
1. The assessee, an Indian company, is a wholly owned subsidiary of Temasek Holding Pte Ltd. (THPL) which is an Asia investment firm based at Singapore.
The assessee renders investment advisory services to THPL which includes identifying and analysing potential investment particulars in India, evaluating political and economic scenario for the investment purpose in India and monitoring and making recommendation to THPL in respect of specified investment in India, specifically for unlisted companies.
2. By virtue of secondment agreement, THPL has seconded two of its employees to the assessee, to assist in rendering of investment advisory services. Further, since the said employees were on the payroll of THPL, the salary of these employees was paid by THPL after deducting taxes.
3. Salient Features of the ‘Secondment Agreement’ are as follows:
a) Supervision, direction and control of the deputed employees is with the assessee.
b) THPL does not bear any responsibility or risk for the results produced by the work of the deputed employees
c) The salary cost of the deputed employees is borne by the assessee and the cost of the deputed employees is charged back by THPL to the assessee on actual basis without any mark-up.
Agreements between the assessee and THPL are unregistered and, date and place in the agreement has not been mentioned. These agreements are colourable device with an intention to avoid tax liabilities in India. Since these payments have been made, without deducting Tax Deducted at Source (TDS) under Section 195 of the Act, the AO disallowed the expenditure under Section 40(a)(i) of the Act. The CIT(A)/DRP confirmed the order of the A.O.
1. An agreement between the two parties need not necessarily be registered as there is no provision under the law which provides that such secondment agreement needs to be registered or any approval from the Government of India is required. The signed secondment agreement was duly filed and in which the date has already been mentioned in the operating part of the agreement. Accordingly, the secondment agreement cannot be held to be a colourable device.
2. Even if the relationship between the assessee and the THPL is that of an independent contractor and reimbursement of salary is a contractual payment, there is no requirement to deduct tax since the THPL has paid the salary after withholding of tax under Section 192 of the Act.
3. The assessee was not a beneficiary of the expenditure because the seconded employees have been paid salary by THPL who are working in India for the assessee and the assessee is merely reimbursing the same.
4. By rendering service to THPL, the assessee is earning business income and salary paid is a business expenditure on which tax has already been deducted by THPL since the liability to withhold the tax on salary falls within the purview of Section 192 of the Act. There cannot be a double deduction of tax - once at the time of payment of the salary and again on the reimbursement.
5. The decision of the AAR in the case of Verizon Data Services Pvt Ltd  337 ITR 192 (AAR) is not applicable to the facts of the present case since in that case the seconded employees of US Company were rendering services in India and those services were rendered only through the Indian company. Whereas, in the present case the assessee is rendering service to THPL on a mark-up basis and THPL was not rendering any service in India through the assessee.
6. The decision of Danfoss Industries Pvt. Ltd.  268 ITR 1 (AAR) was not applicable to the facts of the present case. Further, THPL is not rendering any service to the assessee and seconded employees are working for the assessee. Accordingly, managerial or consultancy services were not rendered by THPL either directly or through the seconded employees. Hence, provisions of Section 9(1)(vii) of the Act do not apply.
7. Further, such reimbursement is not taxable under Article 12(4) of the tax treaty since the THPL is neither rendering any services to the assessee nor they are making available any kind of technical knowledge, experience, skill or process to the Indian company.
8. The Service PE would exist only when THPL is rendering services in India through its seconded employees. However, in the present case THPL is not rendering any service to the assessee through seconded employees.
9. Accordingly, on the reimbursement of salary, reimbursement of expenditure, expenditure relating to information technology and business promotion, withholding of tax was not required and therefore, there would be no disallowance under Section 40(a)(i) of the Act.
10. The expenditure relating to seconded employees such as meals, travelling, training, etc, was not liable for TDS under the Act. Further, business promotion expenditure and information technology expenditure are also not liable for TDS since they are neither for technical services nor for any professional services. The Supreme Court’s decision in the case of Kanchanganga Sea Foods Ltd vs. CIT  325 ITR 540 (SC) is not applicable to the facts of the present case.
11. In the case of professional fees, the expenditures have been incurred for the purpose of the assessee in India and these payments were made by the THPL which has been reimbursed by the assessee. TDS provisions are attracted to the payment for professional services and it does not make any difference whether the payment was made by THPL and reimbursed by the assessee.
The reader may also refer to the following favourable decisions:
• Abbey Business Services India Pvt. Ltd. vs. DCIT  53 SOT 401 (Bang.),
• ACIT vs. CMS (I) Operations & Maintenance Co. P. Ltd.  135 ITD 386 (Chen),
• DIT vs. HCL Infosystem Ltd. 274 ITR 261 (Del.),
• HCL Infosystems Ltd.  76 TTJ 505 (Del.),
• Dolphin Drilling Ltd. vs. ACIT  29 SOT 612 (Del),
• Cholamandalam MS General Insurance Co. Ltd. Re  309 ITR 356 (AAR),
• DDIT vs. Tekmark Global Solutions LLC (Tekmark)  38 SOT 7 (Mum),
• IDS Software Solutions (I) P Ltd. vs. ITO  32 SOT 25 (Bang.)
• Marks & Spencer Reliance India P. Ltd.  38 taxmann.com 190 (Mumbai - Trib.)
• ITO vs. Ariba Technologies (I) Pvt. Ltd. [TS-258-ITAT-2012(Bang.)]
• ACIT, New Delhi vs. Karlstorz Endoscopy India Pvt Ltd [2010-TII-135-ITAT-DEL-INTL.]
XI. Marketing, turnkey, e-publishing and quality assurance services provided by a foreign company did not ‘make available’ technical knowledge, skills, etc. and therefore, charges paid for such services cannot be treated as FTS under the India-USA tax treaty
ACIT vs. TexTech International Private Limited  27 taxmann.com 190 (Chennai) – Assessment Year : 2007-08
Facts of the case
1. The assessee, an Indian company was engaged in the business of e-publishing. The assessee entered into three types of Agreement with its US based subsidiary, Tex Tech Inc. USA (Tex Tech Inc.), as follows:
• Marketing Agreement – To provide support to the customers with regard to billing, collection of such amounts and payment to the assessee. Tex Tech Inc. was required to provide market information as and when required by the assessee.
• Offshore Development Agreement – For scanning of manuscripts and uploading it to India and also for notifying the assessee through e-mail. Once the assessee had done the typesetting in India and uploaded it back to Tex Tech Inc., they were to download such formatted pages, print the pages and courier it to the ultimate customers.
• Overseas Services Agreement – For e-publishing and preparation of typesetting from manuscripts, printing pages and shipping it back to clients.
2. The assessee filed a tax return wherein it claimed deduction of outsourcing cost paid to Tex Tech Inc. on which tax was not deducted at source.
3. According to the assessee, services provided by Tex Tech Inc. were rendered outside India and it was not chargeable to tax in India. Therefore, withholding of tax was not required under Section 195 of the Income-tax Act, 1961.
4. The AO held that Tex Tech Inc. was rendering technical services and such services falls within the definition of Explanation 2 to Section 9(i)(vii) of the Act. However, since tax was not deducted on such payments, it would be disallowed under Section 40(a)(i) of the Act.
5. The CIT(A) held that payments made by the assessee did not fall within the definition of FTS under the tax treaty and therefore, withholding of tax was not required under Section 195 of the Act. Accordingly, the CIT(A) deleted the disallowance made by the AO.
1. The definition of FTS under Explanation 2 to Section 9(i)(vii) of the Act and Article 12(4) of the tax treaty is not pari materia. The AO had not made any study on Article 12(4) of the tax treaty before fastening on the assessee, the liability to deduct tax at source on the payments effected by it.
2. Services rendered by the Tex Tech Inc can fall under Article 12(4)(b) of the tax treaty if the entity abroad ‘makes available’ technical knowledge, skill, knowhow or process to the assessee in India; or otherwise, the services rendered by entity abroad should consist of development and transfer of technical plan or technical design.
3. As per the Marketing Agreement, no technical service was involved in marketing services because no technical knowledge or
skill or experience was made available to the assessee.
4. As per the Overseas Services Agreement, Tex Tech Inc. had to use its expertise, tools and infrastructure for receiving manuscripts for production of book using its own resource, including servicing the customers and effecting dispatches to customer locations. Since the whole of the work was done by Tex Tech Inc., it could not be said that assessee was receiving any technical knowledge, skill, know-how, etc., from Tex Tech Inc.
5. On a perusal of the scope of the Offshore Development Agreement it is clear that the services would involve technical know-how, but, there was no technical knowledge as such made available to the assessee which will give it an enduring benefit.
6. The Offshore Development Agreement specifies that the assessee had to use the instructions sent by Tex Tech Inc. along with files, for carrying out digitisation services. If such instructions were in the nature of technical knowledge which imbibed in the assessee any technical expertise, which in turn helped it in its e-publication business, such that an enduring benefit was received by it, then such services would fall within the purview of Article 12(4)(b) of the tax treaty.
7. On a interpretation of term ‘making available’ given by the Karnataka High Court in the case of CIT & ITO vs. De Beers India Minerals Pvt. Ltd.  72 DTR 82 (Kar.), it was clear that except for the work mentioned in the Offshore Development Agreement, there was no technical knowledge or service made available to the assessee in any of the other work.
8. Separate invoices were raised by Tex Tech Inc. to the assessee, based on the three different agreements therefore, three agreements were not a composite one. The scope of work of these agreements shows that different types of services were rendered by Tex Tech Inc.
9. With regard to the Marketing Agreement, and Overseas Services Agreement, no part thereof was having income element which was chargeable to tax in India in view of Article 12(4) of tax treaty. Therefore, the assessee was not liable to deduct tax on these payments.
10. However, for Offshore Development Agreement one of the services rendered could have an element of income chargeable to tax in India, which could make available technical services to the assessee in India. However, this aspect has not been examined by the lower authorities. Therefore, the issue of payments made by the assessee to its subsidiary abroad with regard to Offshore Development Agreement was remitted back to the AO.
XII. Leather testing charges – Whether taxable as Fees for Technical Services under the Act as well as India-Germany tax treaty – Held: Yes; Scope of Exclusion u/s 9(1)(vii)(b) – Disallowance u/s 40(a)(i) – Whether payment was made before the retrospective amendment by the Finance Act, 2010 – could it be disallowed under the Act – Held : No
Metro & Metro vs. ACIT  39 taxmann.com 26 (Agra - Trib.) Assessment Year : 2008-09
Facts of the case
1. The assessee, a partnership firm, was a manufacturer and exporter of leather goods. The assessee was 100% export oriented unit. The assessee made payments to a German company, in respect of leather testing charges. The
assessee did not deduct taxes from these payments.
2. The Assessing Officer (AO) held that testing charges are technical-cum-consultancy services and it is deemed to accrue or arise in India under the Act. Accordingly, the same would be taxable in India under the Act as well as under the tax treaty. However, since the assessee did not deduct the taxes on the same, it would be disallowed under Section 40(a)(i) of the Act.
3. The assessee contended that the provisions of Section 9(1)(vii) of the Act will not apply in the present case because the entire testing process is automated. The provisions of Section 9(1)(vii) of the Act can apply only in respect of such a technical service which involves human skills and interplay. Relying on the decision of Siemens Ltd. vs. CIT  142 ITD 1 (Mum.) it was contended that the leather testing services are rendered with the help of machines and, therefore, the same were not in the nature of technical services under Section 9(1)(vii) of the Act. The human element, even if involved, was not more than that of a rather routine process for making the reports, while the core analysis work was done by the machines.
4. The assessee further contended that a 100% exporter and the source of income arises outside India. Therefore, by the virtue of exception of Section 9(1)(vii)(b) of the Act, the FTS was not taxable.
5. With regards to disallowance u/s 40(a)(i), the assessee contended that the retrospective amendment was made in the Finance Act, 2010. However, the payment to the German company was made before the retrospective amendment and therefore, the assessee cannot be penalised for non deduction of tax. In order to support its contention the assessee relied on decision of Channel Guide India Ltd. vs. ACIT  139 ITD 49 (Mum.) where it was held that the disallowance cannot be made in a situation where the taxability was confirmed as a result of retrospective amendment in the Act.
1. In the case of Ashapura Minichem Ltd. vs. ADIT  131 TTJ 291 (Mum.), the Tribunal observed that, in order to attract taxability in India, it was not necessary that the services must also be rendered in India. The utilisation of services is enough to attract its taxability in India. Further, the Special Bench Tribunal’s decision in the case of ADIT vs. Clifford Chance  154 TTJ 537 (Mum.) covers only the scope of Section 9(1)(i) of the Act and the other segments of Section 9(1) of the Act have not been dealt in the said decision.
2. The Supreme Court in the case of GVK Industries Ltd. vs. ITO  332 ITR 130 (SC) did not hold against the constitutional validity of Section 9(1)(vii) of the Act. Perusal of the said decision indicates that the law enacted by the Parliament has a nexus with India, even if such laws require extra territorial operation. The laws so enacted cannot said to be constitutionally invalid and it is only when the ‘laws enacted by the Parliament with respect to extra territorial aspects or causes that have no nexus with India’ and such laws ‘would be ultra vires’.
3. There is a nexus between the taxability of services rendered to residents of a tax jurisdiction with that jurisdiction itself. The Tribunal held that the assessee itself contended that the intention of introducing the source rule was to bring to tax interest, royalty or FTS by way of creating a fiction in Section 9 of the Act, the source rule would mean that irrespective of the situs of services, the situs of assessee and the situs of utilisation of services will determine the tax jurisdiction.
4. Section 9(1)(vii)(b) of the Act has two distinct segments i.e. (i) in respect of services utilised in a business or profession carried on by Indian resident outside India, and (ii) in respect of services utilised in respect of earning any income from a source outside India.
5. No doubt whether an India based business is 100% export oriented unit or not, it is still a business carried on in India, and it cannot be covered by the first limb of exception envisaged in Section 9(1)(vii)(b) of the Act.
6. Even if entire products are sold outside India, the fact of such export sales by itself does not make business having been carried outside India. Once the business is set up and carried on in India, irrespective of where the end consumers are, the business is carried on in India.
7. The scope of second limb of this exception is rather narrow. In order to be covered by this exception, what is material is that, irrespective of where the business was situated, the services need to be used for earning income from any source outside India. A business outside India and a source outside India are used together in contrast, and can be viewed as reflecting relatively active and passive activities. The source of income, whether customers are inside India or outside India, continues to be business in India.
8. The services were required because of the foreign importers and that aspect itself was not decisive and sufficient for the purpose of exclusion from the scope of Section 9(1)(vii) of the Act. The services should be for the purpose of earning an income from a source outside India. A customer is not the source of income, he is an important part of the business, which, in turn, is the source of income.
9. In the case of Havells India Pvt Ltd vs. ACIT  140 TTJ 283 (Del.) not only the customers but also certain manufacturing facilities were located outside India. Once the manufacturing facilities are outside India and the customers are also outside India, such a situation will indeed be covered by the exception of Section 9(1)(vii)(b) of the Act.
10. Just because the user of services is a 100% export unit, it cannot be said that the technical services are used ‘for the purpose of making or earning any income from any source outside India’, and accordingly, outside the ambit of FTS under Section 9(1)(vii) of the Act.
11. In view of above discussion, the payments made to a German company were taxable in India and, it cannot be said that the assessee did not have obligation to withhold taxes from the remittances made to German company.
12. Section 40(a)(i) of the Act debars the deduction of ‘any interest, royalty, FTS or other sum chargeable under the Act, which is payable outside India, on which tax has not been paid or deducted.
13. The provisions of Section 40(a)(i) of the Act cannot be interpreted in such a manner so as to restrict the scope of section to only amounts remaining payable at the end of the year. Such an interpretation will make the section redundant.
14. In the case of Channel Guide India Ltd. vs. ACIT  139 ITD 49 (Mum.), the Tribunal has observed that the amount paid to the foreign entity was not taxable in India in view of the legal position prevailed during the period of time and it cannot be disallowed under the Act. In the present case also the taxability arises on account of amendment made by the Finance Act, 2010 in Section 9(1) of the Act. Accordingly, following the decision of Channel Guide, the Tribunal held that the disallowance
under Section 40(a)(i) of the Act cannot be invoked.
A] HIGH COURT JUDGMENTS
I. Royalty Amount received by the assessee under the license agreement for allowing the use of the software would not be royalty under the DTAA since what was transferred was neither the copyright in the software nor the use of the copyright in the software, but the right to use the copyrighted material or article which was clearly distinct from the rights in a copyright.
DIT vs. Infrasoft Ltd.  39 taxmann.com 88 (Delhi)
The assessee, M/s Infrasoft Ltd., is primarily into the business of developing and manufacturing civil engineering software.
MX software, a customised software, developed by the assessee is used for civil engineering work and for design of highways, railways, airports, ports, mines, etc. The said software is used by private consultants.
The assessee opened a branch office in India, which imports the package in the form of floppy disks or CDs depending on the requirements of their customers. The system is delivered to a client/customer.
The delivery of the system entails installation of the system on the computers of the customers and training of the customers for operation of the system.
The assessee vide its return of income, declared a loss of Rs. 21,75,246/-. However, the Assessing Officer (AO) taxed the receipts on sale of licensing the software as "royalty" as per Article 12 of India-USA Double Taxation Avoidance Agreement (the DTAA).
On appeal, the ITAT held that the amount received by the assessee under the licence agreement for allowing the use of the software was not royalty either under the Income-tax Act or under the DTAA.
Aggrieved, the Revenue filed an appeal to the Honble High Court.
The Honble High Court referred to the decision of DIT vs. M/s Nokia Networks OY  253 CTR (Delhi) 417 approving the Special Bench decision of Motorola Inc vs. Deputy CIT  147 Taxmann 39 (Del) (SB), DIT vs. Ericsson A.B.  343 ITR 470 (Delhi) and TATA Consultancy Services vs. State of Andhra Pradesh  271 ITR 401 (SC).
It observed that the licence is non-exclusive, non-transferable and the software has to be used in accordance with the Agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the software are the exclusive property of Infrasoft.
The Honble High Court held that there is a clear distinction between royalty paid on transfer of copyright right and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Thus, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of the DTAA.
It thus held that the incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA.
The High Court distinguished the Karnataka High Court decision in the case of Samsung Electronics Co. Ltd.  345 ITR 494 (Kar.) and held that the licence granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product.
The Honble High Court did not examine the effect of the retrospective amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof as the assessee was covered by the DTAA, the provisions of which were more beneficial.
II. Writ petition disposed of with a direction to the taxpayer to first file its objections before the DRP on the basic issue of jurisdiction, i.e., whether there must be income arising and/or affected or potentially arising and/or affected by an International Transaction for application of Chapter X Grant of opportunity of hearing before referring matter to TPO must be read into sec. 92CA(1) where jurisdiction is challenged by assessee Vodafone can challenge DRP's decision on preliminary issue in writ petition, if DRP's decision on preliminary issue is patently illegal, notwithstanding availability of alternate remedy before ITAT Vodafone India Services (P) Ltd. vs. UOI  39 taxamann.com 201 (Mumbai)
Vodafone India Services (P) Ltd. (the petitioner), a wholly owned subsidiary of a Mauritian Entity issued 2,89,224 equity shares of a face value of Rs. 10/- each at the premium of Rs. 8,591/- per share aggregating to a total consideration of Rs. 246.38 crores to its holding company.
For AY 2009-10, the petitioner filed its Return of Income along with Form 3 CEB in accordance with section 92E of the Act. In the said Form, the transaction of issuance of equity shares by the petitioner to its holding company (undisputedly an Associated Enterprise) was declared as an International Transaction and also the Arm's Length Price ("ALP") of the shares so issued, was also determined.
However, a note was appended by the accountant to its Form 3 CEB report making it clear that the transaction of issue of equity shares did not affect the income of the petitioner and was being reported only as a matter of abundant caution.
During the assessment proceedings, the AO referred this transaction to the Transfer Pricing Officer (TPO) for determining ALP of this transaction of share issue.
Consequently, the TPO issued show cause notice (SCN) to the petitioner. The petitioner in its replies before the TPO contended that Chapter X doesn't apply to issue of equity shares as no income arises from issue of equity shares and the transaction is a capital account transaction.
However, the TPO rejected assessee's contentions and observed that the issue whether any income has arisen and/or affected by the International Transaction for purposes of Chapter X would be determined by the AO. The jurisdiction exercised by him is only to determine the ALP of International Transactions and not to compute the income arising out of such International Transactions.
The TPO determined ALP of shares at Rs. 1,555.30 crores as against price charged by assessee of Rs. 246.38 crores. The TPO made following TP adjustments:
The shortfall of Rs. 1308.92 crores as compared to ALP
Shortfall of Rs. 1308.92 crores treated as deemed interest-free loan to holding company and arm's length interest of Rs. 88.35 crores.
Consequent to TPO order, the AO issued a Show Cause Notice to the petitioner. The petitioner reiterated its objections regarding application of Chapter X to issue of equity shares and also objected to re-characterisation of bona fide issue of shares as consisting of two transactions Share issue & deemed loan.
However, the AO passed draft assessment order wherein he didn't deal with petitioner's objections on the ground that in terms of section 92CA(4) of the Act, the AO has to compute the total income in conformity with the ALP determined by the TPO. Aggrieved, the petitioner filed a writ petition before the Honble Bombay High Court challenging AO's draft assessment order.
The Honble Court distinguished Revenues reliance on co-ordinate bench ruling in Vodafone India Services Pvt. Ltd.  37 taxmann.com 250 (Bom.). It observed that as regards alternate remedy the Court in that case had also entered a caveat that the existence of alternate remedy by itself will not bar the Court from exercising its extraordinary jurisdiction if the facts of the case so warrant. Further, the fact situation in the present case is fundamentally different from the fact situation in Vodafone II case where the petitioner had submitted to the jurisdiction of the revenue authorities and had not challenged and/or protested to the same till such time the TPO had passed an order.
The Honble High Court held that the contention of the petitioner that the filing of objections to the DRP from the draft assessment order is not an efficacious remedy on the ground that issues other than quantification/valuation could not be raised and that DRP cannot set aside any variations in draft assessment order or remand matter to AO for further enquiry is not correct in view of the judgment of Vodafone (supra). It observed that that the DRP has jurisdiction to consider all issues including the question whether a transfer is an international transaction and the question whether income has arisen or has been affected by the international transaction.
It observed that declining to exercise writ jurisdiction due to availability of an alternative remedy is a rule of discretion and in an appropriate case, the Court would exercise its writ jurisdiction notwithstanding availability of an alternative remedy or mould the reliefs appropriately even while relegating the petitioner to the alternate remedy.
The Honble High Court observed that when an assessee challenges the above premise, then the issue must be decided. Such an issue must be dealt with at the very threshold that is before determination of ALP. This is so because in case it is held that in the International Transaction there is no income or potential of any income arising and/or being affected on determination of an ALP, the entire exercise of determining the ALP would become academic.
In cases of transaction referred to the TPO, it would be for the AO to first determine the issue of any income arising and/or being affected or potentially arising on determination of ALP before referring the transaction to the TPO, when specifically contended by the petitioner/assessee. This is also indicated in section 92CA(1) which requires an Assessing Officer to refer an International Transaction for determination to the TPO only if he considers it "necessary or expedient" to refer the matter to the TPO. The grant of personal hearing before referring the matter to the TPO has to be read into section 92CA(1). In the absence of it being considered at this stage, the same could only be considered by the DRP.
It observed that as no final assessment order has yet been passed by the AO and the issues are still at large before the DRP the same could be urged before the DRP. It thus held that instead of remanding the matter to the AO to examine this question, the merits of this question must be considered by DRP under section 144C(5) read with section 144C(8). In a given case if the DRP requires any further material, DRP may exercise its powers either under section 144C(7) or (5) i.e. by directing the AO to make enquiry into this aspect of the matter and report or alternatively decide it itself and give final directions to the AO.
It further observed that the process before the DRP is a continuation of the assessment proceedings as only thereafter would a final appealable assessment order be passed. Till date there is no appealable assessment order. The proceeding before the DRP is not an appeal proceeding but a correcting mechanism in the nature of a second look at the proposed assessment order by high functionaries of the revenue keeping in mind the interest of the assessee.
The Honble High Court rejected the assessees submission that one of the members is the Director of Income Tax (Transfer Pricing) and in terms of CBDT Instruction No. 3/2003 a Director of Income Tax (Transfer Pricing) is required to approve the order passed by the TPO on the ALP and hence the hearing before the DRP would not be fair hearing as a person of equal rank has already approved the order of TPO. It observed that this submission completely overlooks the fact that the proceedings before the DRP are not appeal proceeding but a proceeding to finalise the assessment on the basis of the draft assessment order. Besides, the DRP consists of three members and does not have the Director of Income Tax (Transfer Pricing) in particular who had approved the order of the TPO as a member.
Accordingly, it disposed of the petition with following directions:
The petitioner shall within two weeks submit before the DRP its preliminary objections to Draft Assessment Order and the TPO's order by raising jurisdictional issues.
The DRP shall decide the issue of jurisdiction as a preliminary issue within two months from the date on which the petitioner files its objections on the question of jurisdiction.
Since the question of jurisdiction for applicability of Chapter X for the A.Y. 2009-10 is raised independently of the challenge to the orders of the TPO and the AO for the A.Y. 2008-09, the DRP shall decide the preliminary issue about applicability of Chapter X to the assessment for the AY 2009-10, without awaiting the decision on the dispute relating to the A.Y. 2008-09.
In case the decision of the DRP on the above preliminary issue is adverse to the petitioner, it would be open to the petitioner to challenge the order of the DRP on the preliminary issue in a writ petition if a case is made out at that stage that the decision of the DRP is patently illegal, notwithstanding the availability of alternative remedy of filing an appeal before the Honble ITAT.
III. India France DTAA Interest earned by a non-resident on income-tax refund is not taxable in India at concessional rate of 10% as per the DTAA if such non-resident has a PE in India DIT vs. Pride Foramer SAS  40 taxmann.com 100 (Uttarakhand)
The Department sought interpretation of Article 12 sub-Articles (1), (2) & (5) of the Double Taxation Avoidance Treaty between India and France (the DTAA).
The Honble High Court held that a plain reading of the provisions makes it absolutely clear that sub-Articles (1) & (2) will apply inter alia when the recipient of interest does not have a permanent establishment in the country, where he has received interest.
In the instant case, there was no dispute that the assessee had a permanent place of business in India and accordingly, submitted to the taxing jurisdiction of India and paid tax on its income except income from interest under section 44BB of the Act. Thus, the interest earned in India on the refund of income tax is, therefore, not covered by sub-Articles (1) & (2) of Article 12 of the DTAA.
B) Tribunal decisions
I) Export commission paid to a non-resident director is taxable under the Income-tax Act as well as under the India-Switzerland DTAA Held: Yes On facts of the case, against the assessee ITO vs. M/s. Device Driven (India) Pvt. Ltd. [TS-613-ITAT-2013 (Coch)] Assessment Year: 2009-10
The assessee was engaged in development and sale of software. During the year under consideration, the assessee paid export commission to its non-resident director, acting as a commission agent, without deduction of tax. The assessee claimed export commission as a deduction while computing its taxable income.
The agent was not having any Permanent Establishment (PE) in India. The non-resident director was a qualified architect and has got vast experience in the technical field, especially in mobile communication.
The terms of the commission agency agreement entered into between the assessee and commission agent provided as follows:
The commission agent will facilitate marketing of the assessees services in the territory and will provide support as well as sales expertise for projects to be executed at the customer site or at the assessees centre in India.
The commission agent shall be responsible for generating leads and initiating interaction with end customers in the relevant competency areas of the assessee.\
The commission agent shall if required, provide support to assessee in evaluation from a business perspective, in the light of his relationships with the proposed clients and local expertise. He will also provide support to the assessee for presentations and other collateral proposals and contracts.
The Assessing Officer (AO) held that the terms of the agreement are beyond the scope of normal commission agency agreement, and the technical skills of the director have been utilised by the assessee. Accordingly, the payment made to a commission agent was accruing and arising in India and liable for deduction of tax. However, since the assessee did not deduct tax, the AO disallowed the payment under section 40(a)(i) of the Act. The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld the order of the AO.
The Tribunal held in favour of the Revenue, as follows:
Reference to the terms of the agreement, indicates that the responsibilities and obligation placed upon the commission agent is more than what is normally placed upon agents working in normal business transactions.
The work of the assessee does not end upon developing and installing the software at the clients site. It requires onsite monitoring, especially when the customised software is developed. Hence, it cannot be equated with the commodities, where the role of a commission agent normally ends after supply of goods and receipt of money.
In the present case, the commission agent has vast technical knowledge and experience. Further, he is also one of the directors of the assessee. He is able to secure orders only because of his vast technical knowledge and experience.
As per the clauses of the agreement, the commission agent is responsible in securing orders and for that purpose he has to assist the assessee in all respects including identifying markets, making introductory contacts, arranging meeting with prospective clients, assisting in preparation of presentations for target clients.
The commission agents duty does not end on securing the orders, but he has to monitor the status and progress of the project, meaning thereby, the commission agent is responsible for ensuring supply of the software and also for receiving the payments. All these activities could be carried on only by a person who has vast technical knowledge and experience. Accordingly, the payment made to a commission agent constitutes towards technical services.
The commission agent was the director of the company and also the sole foreign marketing agent. Hence, he has got responsibility to take care of business interests of the assessee. Hence, the office of the assessee can be treated as the fixed base of the commission agent, as per Article 14 Independent Personal Services of the tax treaty.
As a director, he has every right to look into and is required to take care of the affairs of the assessee. Hence, the office of the assessee can be treated as fixed base for the commission agent. The certificate/affidavit given by the assessee was not of any help due to the closeness of the non-resident director with the assessee.
The assessee would be liable to deduct tax on the payments made to a commission agent. Since tax has not been deducted under section 195 of the Act, the payment was disallowed under section 40(a)(i) of the Act.
II. Transfer Pricing Corporate Guarantee Commission in respect of Bank Loans and LC Facilities available by AEs Bank Guarantees and Corporate Guarantees distinguished Naked bank quotes not good external CUPs Tribunal upholds guarantee commission charged on loans and letter of credit facility at 0.53 per cent and 1.47 per cent respectively as arms length Glenmark Pharmaceuticals Limited vs. ACIT [TS-329-ITAT-2013 (Mum)-TP] Assessment Year: 2008-09
The assessee is engaged in the business of manufacturing and marketing of pharmaceutical products and related Research and Development activities.
During the year under consideration, the assessee had charged guarantee commission of 0.53% and 1.47% in respect of guarantee provided in connection with bank loans and LC facilities availed by its Associated Enterprises (AEs); Glenmark Holding SA, Switzerland and Glenmark Generics SA, Argentina respectively. In the Transfer Pricing study (TP study) undertaken by the assessee, the guarantee commission charged of 0.53% for loan guaranteed and 1.47% for LC facility was determined to be at arms length applying the Comparable Uncontrolled Price (CUP) method.
The Transfer Pricing Officer (TPO) rejected the TP study stating that the assessee failed to discharge its primary onus of benchmarking the transaction and determined arms length guarantee commission at three percent of the guaranteed amount based on guarantee commission rates charged by various banks, i.e. Allahabad Bank (3 per cent per annum); Dutch State, FMO (2.5 per cent per annum); HSBC Ltd. (0.15 per cent to 3 per cent per annum); and EXIM Bank of USA (3 per cent per annum) resulting in an adjustment of INR 115.1 million.
The assessee filed an appeal before the Commissioner of Income-tax (Appeals) [CIT(A)] against the above adjustment and submitted that following points should be considered while determining arms length price of the assessees guarantee commission: (a) Interest saving, (b) Adjustments towards negotiations, (c) Risk undertaken by the assessee while providing guarantee to the AEs, etc. The CIT(A) however, upheld the adjustment made by the TPO and determined the guarantee commission at 3 per cent as arms length. Aggrieved by the order of CIT(A), the assessee filed an appeal before the Tribunal.
The Tribunal held in assessees favour as follows:
There are conceptual differences between a bank guarantee and a corporate guarantee. In corporate guarantee, guarantee of payment is made by a corporation on behalf of another business entity. The guarantee is provided in consideration of a vendor providing credit to a business, on whose behalf the guarantee is made. Corporate guarantee operates not for business considerations, but to provide safeguards for the financial health of the AEs. Bank guarantee is a surety bond in finance, a promise by one party to assume responsibility for the debt obligation of a borrower if the borrower defaults. Commercial considerations are paramount in fixing charges in case of a bank guarantee. Hence, a bank guarantee comparable may not clear the Functions, Assets and Risks (FAR) analysis test in case of a corporate guarantee.
Bank guarantee rates cannot be applied mechanically. These need to be adjusted for various factors, such as (a) risk profiles of the respondents for the guarantee, (b) financial position of the loan applicants, (c) terms of the guarantee, (d) securities involved, (e) quantum of guarantee, (f) amount involved, (g) period of guarantee, (h) past history of the customers, etc.
The ruling of Technimont ICB Ltd. is an aberration and the facts are distinguishable vis-à-vis assessees case. The Tribunal has analysed various rulings like Asian Paints Ltd., Everest Kanto Cylinder Ltd., and Reliance Industries Ltd. on guarantee commission and concluded that the guarantee commission rates of 0.53 per cent and 1.47 per cent on loans and LC facility are at arms length.
Taxation of FIIs Whether loss on derivative transactions incurred by FIIs is in the nature of capital gains and not business income Held: Yes Section 115AD and Section 43(5) of the Income-tax Act, 1961 Platinum Asset Management Ltd., A/c Platinum Asia Fund vs. DDIT [TS-610-ITAT-2013(Mum.)] Assessment Year: 2006-07
The assessees are the sub-accounts of the FII Platinum Asset Management Ltd., registered in Australia and operating in India, registered with the Securities and Exchange Board of India (SEBI). The assessees are involved in purchase and sale of securities in India and trading in derivatives.
For Assessment Year (AY) 2006-07, the assessees filed NIL return of income respectively and claimed carry forward of short-term capital loss after setting off losses from index derivative transactions against short-term and long-term capital gains respectively.
The Assessing Officer (AO) held that the loss arising from index derivative transactions were business losses and assessable under the head business income and could not be claimed as capital loss.
Accordingly, the AO taxed the capital gains earned by the assessees. The Commissioner of Income Tax (Appeals) upheld the AOs order.
The Tribunal held in favour of the assessee as under:
The decision of CIT vs. Bharat R. Ruia (HUF)  337 ITR 452 (Bom.) is not applicable in the present case.
The issue is squarely covered by the decision of Platinum Investment Management Ltd., A/c. Platinum International Fund that relied on LG Asian Plus Limited, wherein the following observations were made:
On a close scrutiny of the SEBI (FII) Regulations, 1995 together with section 115AD of the Act, seen in the light of the Memorandum explaining the provisions of the Finance Bill, 1993, a FII is allowed to invest only in the `securities and further the income from securities, either from their retention or from their transfer, is to be taxed as per this section alone.
Once it is noticed that a FII can only invest in `securities and tax on the income from the transfer of such securities is covered by a special provision contained in section 115AD of the Act, the natural corollary which follows is that tax should be charged on income arising from transfer of such securities as per the prescription of this section alone, which refers to income by way of short-term or long-term capital gains.
If the tax authorities venture to make a distinction between such securities as constituting capital asset or stock-in-trade, which is not contemplated by the Central Government, as is evident from SEBI (FII) Regulations and the definition of FII in Explanation (a) to section 115AD of the Act, then this provision will become otiose.
If FII receives any income in respect of securities or from the transfer of such securities, the same can be considered under section 115AD(1) of the Act alone and section 115AD(2)(b) of the Act cannot be invoked to construe it as `Business income.
From the earlier Press Note (F No. 5(13) SE/91-FIV dated 24th March, 1994 issued by Ministry of Finance, Department of Economic Affairs (Investment Division), New Delhi) issued by the Ministry of Finance, it is abundantly clear that FIIs have been considered as investors (and not traders). Secondly, income from the transfer of securities has been viewed as chargeable to tax under the head Capital gain, as long-term or short-term capital gain, depending upon the period for which such securities are held.
It is noticed that section 115AD of the Act falls in Chapter XII of the Act which deals with determination of tax in certain special cases. It is a well settled legal position that specific provisions override the general provisions. In other words, if there are two conflicting provisions in an enactment, the special provisions will prevail and the subject matter covered in such a special provision shall stand excluded from the scope of the general provision.
Further section 43(5) of the Act defining a speculative transaction is relevant only in the context of income under the head `Profits and gains of business or profession. It has no application to FIIs in respect of securities as defined in explanation to section 115AD of the
Act, income from whose transfer is considered as short term or long-term capital gains.
Income arising from the derivative transactions to the assessee, being a FII cannot be treated as business profit or loss, whether speculative or nonspeculative, but the same has to be capital gain or loss. Further, loss from derivative transactions is to be considered as short-term capital loss on sale of securities eligible for adjustment against short-term capital gains on sale of shares.
Following the decision of the Co-ordinate Bench of the Tribunal, the Tribunal held that income from derivative transactions in case of the assessees cannot be treated as business profit or loss.
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