International Taxation

Case Law Update

1. AUTHORITY FOR ADVANCE RULINGS

1. Non-resident – Applicability of s. 112(1), proviso – Tax payable on long-term capital gains arising to non-resident seller on the sale of originally acquired shares as also bonus shares will be @ 10 per cent in consonance with the proviso to s. 112(1)

Advance ruling – Maintainability of application – Application by resident on behalf of non-resident – A resident who has entered into a transaction with non-resident and liable to TDS in respect of payments made to such non-resident, can file an application for advance ruling in relation to tax liability of such non-resident arising out of such transaction by virtue of sub-cl. (ii) of cl. (b) of s. 245N

McLeod Russel Kolkata Ltd., In Re (2008) 215 CTR (AAR) 230 : 2008-TIOL-01-ARA-IT

Tax payable on long-term capital gains arising to non-resident seller on the sale of originally acquired shares as also bonus shares will be @ 10 per cent in consonance with the proviso to s. 112(1).

A resident who has entered into a transaction with non-resident and liable to TDS in respect of payments made to such non-resident, can file an application for advance ruling in relation to tax liability of such non-resident arising out of such transaction.

Facts:

1. The applicant, McLeod Russel Kolkata Ltd., a resident Indian company is engaged in the business of plantation and manufacture of tea.

2. The applicant purchased 15,20,000 equity shares of Moron Tea Company (India) Ltd. from Moron Holdings PLC, U.K. a non-resident company as per the sale & purchase agreement (in short SPA) executed between the purchaser (the applicant) and seller (Moron Holdings PLC, U.K.) wherein the purchaser agreed to purchase the said shares of Moron Tea Company held by the seller.

3. Out of the said shares, the original 5,18,000 shares were acquired by the seller in lieu of all the assets of the Moron Tea Ltd. (a U.K. company that was previously trading directly in India).

4. Subsequently, Moron Tea Company issued 10,28,000 fully paid-up equity shares of Rs. 10/- each as bonus shares during the years 1990 and 1998. Thus, 15,20,000 shares (listed securities) sold by Moron Holding PLC U.K. to the applicant consisted of original as well as bonus shares acquired from Moron Tea Company.

5. The transfer of aforesaid shares could not be effected through the stock exchange. The applicant remitted the sale proceeds after deducting tax @ 20%, inclusive of the surcharge, on the long term capital gains.

6. The applicant sought following advance ruling in relation to the determination of tax liability of a non-resident; i.e., Moron Holdings, PLC, UK pertaining to a transaction undertaken by the applicant with such non-resident.

7. a) Whether, the tax payable on long term capital gain arisen to Moran Holdings PLC on sale of originally acquired shares of Moron Tea Company (India) Limited will be 10% of the amount of capital gain as per proviso to section 112(1) of the Income-tax Act, 1961 (the Act)?
   
   b) Whether the tax payable on long term capital gain arisen to Moron Holdings PLC on sale of bonus shares of Moron Tea Company (India) Limited will be 10% of the amount of capital gain as per proviso to section 112(1) of the Act?
   
   c) Whether the long term capital gain arisen to Morgan Holdings PLC on sale of originally acquired shares and bonus shares of Moron Tea Company (India) Limited are to be computed by applying section 48 of the Act without having regard to either the first or the second proviso to the section?

Ruling

1. That on almost similar facts, in the case of Timken France SAS, 294 ITR 513 (AAR), the aforesaid issue was examined by this Authority at length. This Authority took the view that the benefit of the proviso to section 112(1) of the Act could not be denied to non-residents/foreign companies even if they are entitled to another relief in terms of the proviso to section 48 of the Act. The Authority also held that the proviso to section 112(1) of the Act was a special provision in relation to transfer of certain long-term capital assets viz. listed securities, units etc. and there was no warrant to limit the 10 per cent effective rate provided therein as against the normal rate of 20 per cent only to the three categories of resident assessees specified in clauses (a), (b) and (d).

2. The stand taken by the revenue is patently contrary to the ruling in Timken France (supra) which considered the same questions and provisions. The only difference in facts between the case of Timken France and the present case is that in the former case the non-resident company acquired the original shares by utilizing foreign currency, whereas in the case of applicant, it does not appear that foreign currency was so utilized. That means, according to revenue, the applicant may not be able to avail of the benefit under the first proviso to section 48. This distinguishing feature does not in any way support the contention of the Revenue.

Cases referred to

Timken France SAS, In re (2007) 212 CTR (AAR) 349 : (2007) 294 ITR 513 (AAR)

2. Non-resident – Income from investment in specified asset – Non-resident ordinary deposit in bank – NRO deposit made by the applicant with convertible foreign exchange in a banking company which is not a private company – Treated as ‘foreign exchange asset’ under cl. (b) of s. 115C – Income by way of interest earned from the said NRO deposit shall be treated as ‘investment income’ under cl. (c) of s. 115C – Liable to be taxed at the rate of twenty per cent under s. 115E – Non-repatriability of NRO deposit is of no relevance for purposes of ss. 115C and 115E

V. Ravi Narayanan, In Re (2008) 215 CTR (AAR) 234

NRO deposit made by the applicant with convertible foreign exchange in a banking company which is not a private company, shall be treated as ‘foreign exchange asset’ under cl. (b) of s. 115C; income by way of interest earned from the said NRO deposit shall be treated as ‘investment income’ under cl. (c) of s. 115C and shall be liable to be taxed @ 20% under s. 115E and the banks paying interest on the NRO deposit of the applicant are required to deduct tax at source @ 20%.

Facts

1. The applicant was living in the Kingdom of Saudi Arabia. As he had spent more than 182 days outside India, he claimed the status of a non-resident individual for the financial year 2007-08.

2. He proposed to open a non-resident ordinary deposit (NRO account) with banks in India with the help of remittances from Saudi Arabia. He claimed that the interest income arising from that account would be ‘investment income’ under s. 115C of the IT Act, 1961 (‘the Act’) taxable @ 20 per cent under s. 115E of the Act.

3. However, banks in India do not regard this type of income as ‘investment income’. They treat it as other income and deduct tax @ 30 per cent.

4. In the light of the above facts, the applicant sought advance ruling of this Authority on the following questions:

1. Whether the non-resident ordinary (NRO) deposit acquired with convertible foreign exchange can be treated as a ‘foreign exchange asset’ under s. 115C of the IT Act, 1961?

2. Whether the interest on such NRO deposits can be treated as ‘investment income’ under s. 115C of the IT Act, 1961 and liable to be taxed at 20 per cent only under s. 115E?

3. At what rate tax is required to be deducted at source by the person responsible for paying such interest?

4. Whether Form 15G can be accepted by the banks?

Ruling

1. ‘Investment income’ has been defined as income derived from a ‘foreign exchange asset’ and ‘foreign exchange asset’ means any ‘specified asset’ acquired or purchased or subscribed to in ‘convertible foreign exchange’. A deposit made in a banking company which is not a private company, would be regarded as ‘specified asset’ within the meaning of s. 115C(f).

2. Schedule 3 of the Foreign Exchange Management (Deposit) Regulation, 2000 made by the RBI under the FEMA, 1999 specifies the features of this account. This Schedule says that the balance in NRO account is not eligible for remittance outside India without the approval of the RBI; funds received by way of remittances from outside India in foreign exchange which have not lost their identity as remittable funds will only be considered by the RBI for remittance outside India.

3. Further, RBI Press Release No. 387 dt. 18th Sept., 2003 states that current income (i.e., interest) is freely repatriable from NRO account, but the principal amount is repatriable only up to US$ 1 million per financial year. So it would not be correct to say that the moneys lying in the NRO account cannot be repatriated at all. Indeed, there are restrictions on their repatriation.

4. The question here is not whether such repatriation is permitted or not, but whether repatriation is a requirement of ss. 115C, 115D and 115E. Repatriability of the balance in the bank deposit is not a requirement of the relevant provisions of law.

5. There is no whisper at all about this either in s. 115C or 115E. Thus the NRO deposit would be a foreign exchange asset and the interest income arising from it would be investment income. Since the interest income in question will be in the nature of investment income, cl. (b)(i)(A) of Part II of the First Schedule to the Finance Act, 2007 will be attracted and the banks paying interest on the NRO deposit of the applicant are required to deduct tax at source at the rate of 20%.

3. Double taxation relief – Agreement between India and USA – Payment for repair of hardware and software maintenance support to a US Company R by applicant – There is nothing to substantiate PE of R in India – Entire activity of repair of equipment and rectification of anomalies under the contracts in question took place outside India – Preparatory and auxiliary type of work stands excluded from the purview of PE under article 5(3) of the DTAA – Payment for repairs of hardware – Not taxable in India – Payment received by R for software maintenance support contract – liable to tax in India – U/s 195(1) @ 10 per cent plus surcharge

Advance ruling – Rejection of application – Pendency of proceedings before IT authorities – A resident who has entered into a transaction with a non-resident is an applicant within the meaning of s. 245N(b) – Such applicant can approach the Authority to determine a question which has bearing on the tax liability of its non-resident collaborator – Fact that such resident is a PSU notified under sub-cl. (iii) of cl. (b) would not make any difference – Question raised by the applicant relates to its obligation to deduct tax at source under s. 195(1) from the payments to be made to the non-resident R – Question raised before the Authority cannot be said to be identical to the question pending determination by the appellate authority – Application is not hit by the embargo laid down in the first part of cl. (i) of the second proviso to s. 245R(2) – Assuming that the applicant has the alternative remedy of filing an application before the ITO under s. 195(2), it does not operate as a legal bar to the maintainability of the application before the Authority

Airport Authority of India, In Re (2008) 215 CTR (AAR) 212

In the absence of any PE of the US company in India, the payment for repairs of hardware received by the US company is not taxable in India, but the payment received for software maintenance is liable to tax in India; applicant is liable to deduct tax at source under s. 195(1) @ 10 per cent, apart from applicable surcharge.

Determination of non-resident’s liability to pay tax on the amounts received by it from the applicant is incidental to the determination of the applicant’s obligation to deduct tax at source and, therefore, the application of the applicant seeking determination of its obligation to deduct tax under s. 195(1) is not hit by the embargo laid down in the second proviso to s. 245R(2) by reason of pendency of an appeal filed by the non-resident on the question of its liability under the provisions of the IT Act read with DTAA.

Facts

1. The applicant entered into two contracts with Raytheon Company, USA, one was supply contract and another was service contract. Supply and installation of equipment together with provision of spares, training, documentation, software, etc. were involved in these contracts.

2. Pursuant to those contracts, Raytheon delivered the equipment, software, etc. during the years 1998 and 1999 at Delhi and Mumbai and thereafter the applicant was operating and maintaining the equipment on its own without any assistance from Raytheon. After 4 or 5 years, some assemblies failed and needed repairs.

3. Further the need for repairs from time to time was also felt by the applicant. That is why the two contracts were entered into with Raytheon – one for the repair of hardware of MATS and second for modification and anomaly resolution of the software of MATS.

4. It was the contention of the applicant before this Authority that the payments made by the applicant to Raytheon under the terms of contract did not give rise to income-tax liability in India as all the activities took place outside India and even the property in the equipment passed outside India and the installation of the equipment was done by the applicant itself.

5. In the case of software maintenance support contract also, it was the contention of the applicant that substantial part of the activities took place outside India, though Raytheon deputed its software engineers at site for verification of the fixes/software build and testing the same in a simulator.

6. The applicant relied on the provisions of the Convention between USA and India for the Avoidance of Double Taxation with respect to taxes on income (DTAA) concluded on 18th Dec., 1990. The case of the applicant was that the amounts paid by it to Raytheon were in the nature of business profits and the same will not be liable to tax in India in view of article 7 of the Convention as Raytheon had no Permanent Establishment (PE) in India.

7. The applicant made it clear that the only clarification it would like to have is about the rate of tax applicable for deduction at source.

8. The Revenue’s counsel raised the point of maintainability of the application by contending that the applicant cannot invoke the jurisdiction of this Authority in view of the embargo laid down in cl. (i) of the proviso to s. 245R(2). That the identical question regarding Raytheon’s liability to pay income-tax in India was pending before the appellate authority even before the present application was filed. The application for advance ruling was, therefore, liable to be rejected in limine.

9. The advance ruling was sought primarily on the issue whether the applicant is under an obligation to deduct tax at source under s. 195 of the IT Act in connection with two contracts (i) Hardware Repair Support Contract; and (ii) Software Maintenance Support Contract, which the applicant entered into with Raytheon Company, USA, which is a non-resident foreign company.

Ruling

1. As regards software maintenance support contract, the reasons given and the earlier ruling pronounced by the Authority in the case of applicant itself, squarely apply to the present applications as well. Since, as regards the rate of TDS, there was no dispute, the applicable rate of tax is 10 per cent as per s. 195(1) r/w Schedule I, Part II, 1(b), H(II).

2. There was nothing in the assessment orders of R which substantiated the Revenue’s version that there was a PE of R in India in connection with the hardware repairs support contract or for that matter the software maintenance contract.

3. The fact that R admitted having a PE in India in the form of installation PE as seen from the assessment order for the A.Y. 1999-2000 had no bearing on the aspect whether in furtherance of the two contracts, any PE was set up by R in India. The PE referred to in the assessment order for the A.Y. 1999-2000 was in connection with a major contract for modernization of air traffic system awarded to R in the year 1993.

4. There was nothing in the assessment order or the statement of manager of the liaison office of R or from the salient features and terms of the present contracts which unerringly point to the existence of PE. On the other hand, the probability was that as the entire activity of repair of equipment and rectification of anomalies took place outside India and the applicant or its agent took delivery of the repaired equipments, there was very little part which the liaison office could have played in the implementation of contracts in question.

5. Moreover, under article 5(3) of DTAA with USA, preparatory and auxiliary type of work stands excluded from the purview of PE.

6. Four or five technical personnel deputed by R made visits for 14 days, 18 days, 25 days respectively during those 3 years. Most of the visits were in connection with software maintenance contract. From these sporadic visits of R’s personnel for a few days, it was difficult to draw any inference of existence of a PE.

7. There was no bar, either express or implied, against a resident applicant falling within the scope of sub-cl. (iii) invoking the jurisdiction of this Authority for a determination under sub-cl. (ii) of clause (a) of the same section. The fact that such resident was a PSU notified under sub-cl. (iii) of cl. (b) should not make any difference.

8. The question raised by the applicant relating to TDS was not the question which was pending for consideration by the appellate authority. The applicant, therefore, seeks determination that the foreign company R is not liable to pay income-tax in India on the amounts received by it from the applicant.

9. No doubt, R’s liability to pay income-tax looms large in the proceedings before this Authority also but the decision on this question is incidental to the determination of the applicant’s obligation to deduct tax at source.

10. They may be inter-related or allied issues but the question raised before this Authority cannot be said to be identical nor can it be said to be the very same question pending determination by the appellate authority. This distinction, though appears to be subtle, is real.

11. The applicant’s right to have recourse to advance ruling on the point of tax deduction cannot be defeated by reason of pendency of an appeal filed by R, though a related issue has to be decided in that appeal. The embargo under the proviso to s. 245R(2) should be strictly construed so that an eligible applicant is not denied the remedy to have an early ruling in the matter. The applicant need not be called upon to go on deducting and paying income-tax until and unless the appeal of R is decided.

12. Assuming that the applicant had the alternative remedy of filing an application before the ITO under s. 195(2), it does not operate as a legal bar to the maintainability of the application before this Authority. The concept of TDS under the IT Act has its own scheme and nuances. It stands as a separate issue although aligned with the substantive tax liability of the recipient of income. Therefore, the application was not hit by the embargo laid down in the first part of cl. (i) to the second proviso to s. 245R(2).

13. The phrase “in relation to” is of wide import. The issue relating to TDS regarding which determination is sought by the applicant, is an issue “in relation to” the tax liability of non-resident, namely, R. Therefore, it falls within the purview of sub-cl. (ii) of cl. (a) to s. 245N.

Cases referred to

Shyam Lal vs. M. Shyamlal AIR 1933 All 649 Application No. AAR/624/2003 & Application No. AAR/625/2003

2. SUPREME COURT

4. Double taxation relief – Agreement between India and Malaysia – Dividend income – Dividend income derived by the assessee from a company in Malaysia is not liable to be taxed in the hands of the assessee in India – As per article 11 of DTAA entered into between India and Malaysia, tax is liable to be levied in the country where the income had accrued – Thus, the question as to whether the income of the assessee accruing outside India could be taxed under the provisions of s. 5(1)(c) does not arise for consideration – High Court was justified in taking this view

DCIT vs. Torqouise Investment & Finance Ltd. & Ors. (SC) (2008) 215 CTR (SC) 209

Dividend income derived by the assessee from a company in Malaysia is not liable to be taxed in the hands of the assessee in India by virtue of provisions of DTAA between India and Malaysia.

Facts

1. Assessee filed its return of income declaring income by showing its business as investment and finance. Along with the return the assessee claimed refund on the basis of credit of deemed TDS on dividend received from a Malaysian company.

2. The AO raised a demand after rejecting the credit claimed by the assessee on the basis of deemed credit on dividend received from the Malaysian company.

3. The Hon’ble Tribunal disposed of the appeal with the observation that Double Taxation Avoidance Agreement (for short ‘DTAA’) entered into by the Government of India with the Government of Malaysia would override the provisions of the Act if they are at variance from the provisions of the Act. It was held that from a plain reading of article 11 of the DTAA, it was clear that dividend income would be taxed only in the contracting states where such income accrued.

4. The Hon’ble High Court, following the decision in the case of CIT vs. VR. S.R.M. Firm & Ors. (1994) 208 ITR 400 (Mad) which was affirmed by the Supreme Court in the case of CIT vs. P.V.A.L. Kulandagan Chettiar (Dead) Through LRs (2004) 267 ITR 654 (SC), held that the Tribunal was justified in holding that dividend income derived by the assessee from a company in Malaysia is not liable to be taxed in the hands of the assessee in India under any of the provisions of the Act.

5. In view of the Hon’ble High Court, the question as to whether the income of the assessee accruing outside India could be taxed under the provisions of s. 5(1)(c) did not arise for consideration.

Ruling

The Supreme Court followed the decision in the case of P.V.A.L. Kulandagan Chettiar (Dead) Through LRs (supra) and held that assessee was not taxable in India in view of DTAA between India and Malaysia.

Case referred to

CIT vs. VR. S.R.M. Firm & Ors. (1994) 120 CTR (Mad) 427 : ( 1994) 208 ITR 400 (Mad)

3. TRIBUNAL DECISIONS

5. Fees for Technical Services – Definition and scope of the term u/s 194J r/w section 9(1) (vii)

DCIT vs. Parasrampuria Synthetics Ltd. [2008] 20 SOT 248 (Delhi) Assessment Year 1999-2000

Rendering services by using technical knowledge or skill is different than charging fees for technical services inasmuch as in latter case technical services are made available due to which assessee acquires certain right which can be further used. Assessee made certain payment to a contractor in respect of inspection and maintenance support agreement, fabrication of chilled water line, work order for thermal insulation/erection, conversion of Partially Oriented Yarn (POY) into polyester textured yarn and twisted yarn. Such payment could not be treated as ‘fees for technical services’ as technology or technical knowledge of persons were not made available to assessee, but only by using such technical knowledge, services were rendered to assessee. Therefore, assessee would not be liable to deduct tax at source as per provisions of section 194J, on such payments.

Facts

1. The assessee-company made certain payment to a contractor in respect of inspection and maintenance support agreement, fabrication of chilled water line, work order for thermal insulation/erection, conversion of Partially Oriented Yarn (POY) into polyester textured yarn, and twisted yarn, and deduced tax at source as per the provision of section 194C.

2. The A.O. held that the payment in question amounted to payment of fees for technical services and not merely payment to a contractor and, therefore, the assessee should have deducted tax at source as per provisions of section 194J. He, therefore, treated the assessee as assessee-in-default u/s 201(1) and also levied interest u/s 201(1A) upon it.

3. On appeal, the Commissioner (Appeals) held that the amount paid in question was not towards professional services or fees for technical services. He, therefore, set aside the order passed by the A.O.

Decision

On revenue’s appeal, the Tribunal held in favour of the assessee as follows:

1. The term ‘fees for technical services’ as per Explanation (b) to section 194J means as defined in Explanation 2 below clause (vii) of sub-section (1) of section 9. As per said Explanation ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel), but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient chargeable under the head ‘Salaries’.

2. The Madras High Court in the case of Skycell Communications Ltd. vs. Dy. CIT [2001] 251 ITR 53 has held that the installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee.

3. In the instant case, there might be use of services of technically qualified persons to render the services, but that itself did not bring the amount paid as ‘fees for technical services’ within the meaning of Explanation 2 to section 9(1)(vii).

4. The amount paid was towards annual maintenance contract of certain machinery or for converting POY into textured/twisted yarn. The technology or the technical knowledge of the persons were not made available to the assessee but only by using such technical knowledge, services were rendered to the assessee. Therefore, it could not be said that the amount was paid as ‘fees for technical services’.

5. Further, rendering services by using technical knowledge or skill is different than charging fees for technical services. In the latter case, the technical services are made available due to which the assessee acquired certain right which can be further used. In the instant case, it was not so. The persons rendering services had only maintained machinery or converted yarn, but that knowledge was not vested with the assessee by which itself it could do research work. Therefore, the amount paid in question could not be considered as fees for technical services within the meaning of section 194J.

Case referred

Skycell Communications Ltd. vs. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.)

6. Exemption u/s 10(6A) – Compliance with Terms and Conditions – Requirements relating to obtaining approval of the Government of India

ADIT vs. Kaiser Aluminium Technical Services Inc. [2008] 20 SOT 226 (Mum.) Assessment Years 1998-99 and 1999-2000

In order to seek benefit of exemption u/s 10(6A), both conditions mentioned in sub-clauses (a) and (b) of section 10(6A) need not be satisfied. When a technology agreement is entered into between an Indian entrepreneur and foreign technology supplier in respect of high priority industries which are within specified parameters of Industrial Policy approved by the Government of India, in such a case, in order to seek benefit of exemption u/s 10(6A), no specific approval of technology agreement by Central Government is required because approval in such cases is automatic.

Facts

1. The assessee, a non-resident company incorporated in USA, was dealing in Metallurgical Industries, non-ferrous metal and their alloys. It entered into a technical collaboration agreement with an Indian company. During the relevant previous year, the assessee had received certain payment by way of fees for technical services from the Indian company and did not admit any tax liability on the same on the ground that it did not have permanent establishment in India during the year under consideration.

2. Further, the assessee claimed benefit of exemption u/s 10(6A) in respect of the tax borne by the Indian company on the payments made to the assessee.

3. The A.O. asked the assessee to furnish documentary evidence regarding approval of the Government for claiming exemption u/s 10(6A). Since the assessee, failed to furnish any such approval of the Government of India in respect of technical collaboration agreement, the A.O. denied the benefit of exemption u/s 10(6A) holding that the conditions mentioned in section 10(6A) had not been fulfilled by the assessee.

4. On appeal, the Commissioner (Appeals) held that since the payment had been made to the assessee as fees for technical services and further since as per the Statement on Industrial Policy, 1991, which did not require a specific approval from the Ministry of Industry, the agreement between the assessee and the Indian company was covered by the automatic route, the assessee was entitled to the benefit of exemption u/s 10(6A).

Decision

On revenue’s appeal, the Tribunal held in assessee’s favour as follows:

1. Reading of sub-clause (a) of section 10(6A) makes it clear that where the agreement relates to a matter, which is included in the industrial policy, for the time being in force, of the Government of India, and such agreement is in accordance with that policy, then while computing the total income of a previous year of any assessee, income specified above cannot form part of total income. In the light of Statement on the Industrial Policy, 1991 in respect of foreign technology agreement, in such cases, no specific approval is required. Approval is automatic. But, in any other case, the agreement is to be approved by the Central Government. Therefore, where the agreement entered into between an Indian entrepreneur and foreign technology supplier relates to such high priority industries within the specified parameters, the Government would provide automatic approval for technology agreement. If it is not falling within that high priority industry, then the agreement is specifically to be approved by the Central Government in accordance with section 10(6A)(b).

2. The assessee’s case fell within the enumerated list of high priority industries. As such, the order of the Commissioner (Appeals) was in agreement with the industrial policy approved by the Government of India and, therefore, section 10(6A)(a) squarely applied to the case of the assessee. It is not necessary that both the conditions stipulated in section 10(6A) should apply at the same time. Because if that be so, there was no need of using the following words in section 10(6A)(b), “in any other case, the agreement is approved by the Central Government”.

3. This means that it is not necessary to get approval in all cases. The instant case fell within the enumerated list of high priority industries. Therefore, section 10(6A)(a) would squarely apply in the instant case inasmuch as, the assessee would fall within the ambit of section 10(6A)(a), i.e., automatic approval. Only in cases that fall within section 10(6A)(b), approval is required. Therefore, the Commissioner (Appeals) had decided the issue correctly.

Case referred

Motorola Inc. vs. Dy. CIT [2005] 95 ITD 269 (Delhi) (SB) followed 

[Author’s Note: This decision will be equally useful in interpreting Sections 115A (1)(b) and 115A (1A) wherein similar language has been used.

7. Purchase of Designs and Drawings – Whether Royalty – section 9(1) (vi) and Article 12 of DTAA between India and Germany – Held : No.

DDIT vs. Tata Chemicals Ltd. [2008] 20 SOT 210 (Mum.) Assessment Years 1996-97 and 1997-98

Payment made on account of purchase of designs and drawings cannot be treated as payment of royalty. Assessee-company purchased designs and drawings from a German party. The A.O. held that payment for purchase of drawings constituted a payment of royalty u/s 115A, read with Explanation 2 to sub-section (1) of section 9 and directed to deduct tax. Since payment for purchase of drawings was made for acquiring right of ownership in such property, it could not be treated as royalty as per article 12 of DTAA, between India and Germany. Further since there was no Permanent Establishment (PE) in India of the German company, such payment was not taxable in India as business income or as capital gains in hands of German company.

Facts

1. The assessee-company had purchased designs and drawings in the book form from a German party for certain amount. The assessee contended before the A.O. that this amount should be allowed to be remitted without payment of any tax, and that the payment did not fall within the purview of provisions of section 115A.

2. The A.O. was of the opinion that the payment clearly constituted a payment of royalty as mentioned in section 115A, read with Explanation 2, to sub-section (1) of section 9. He directed the assessee to deduct tax on the entire amount as per article VIII of DTAA between India and Germany.

3. On appeal, the Commissioner (Appeals) held that the payment in question was for purchase of technical documents and it was not royalty as per article 12 of DTAA and section 9. It was also held that it was taxable only as business income or capital gains depending on the activity of German company and since there was no Permanent Establishment (PE) in India of German company, it was not taxable as business income or as capital gains in hands of the German company.

Decision

On revenue’s appeal, the Tribunal held in favour of the assessee as follows:

1. It was not in dispute that in the instant case, the payment was made by the assessee on account of purchase of designs from German party. The judgment of Calcutta High Court rendered in the case of N.V. Philips Gloeilampenfabrieke N. Eindhoven vs. CIT [1988] 172 ITR 521/[1987] 34 Taxman 274 (Cal.) relied upon by the Revenue is not applicable in the instant case because facts were different. In that case, there was no purchase of designs; but foreign party agreed to furnish to the Indian company technical information relating to manufacture, use, etc. of a product and such information could be used solely by Indian company and could not be disclosed to third party. The foreign party was to receive 5 per cent of the net selling price of product in consideration thereof. Facts in the instant case were different because in the instant case, the designs were purchased outright at a fixed price and there was no restriction that this design has to be used by the assessee only.

2. However, the facts in the case of Dy. CIT vs. Topack Industries (India) Ltd. [IT Appeal No. 3671 (Mum.) of 1996, dated 3-7-2003], were similar with the facts of the instant case. In that case also, payment was made by the Indian company to a foreign party, i.e., the party of Italy on account of purchase price of drawings. In that case also, the A.O. was of the view that the payment was on account of royalty and hence, liable to be disallowed u/s 40(a)(i) because no tax was deducted at source. Under these facts, it was held by the Tribunal that the payment on account of purchase of drawings is not payment of royalty. In that case Tribunal further held that the assessee did make the payment for acquiring the right of ownership in the property. The payment was not towards the user of the property. In view of the definition of the term ‘royalty’ as appearing in the DTAA, it could not be said that the assessee did make the payment of royalty. As such, the case of the assessee fell beyond the ken of section 40(a)(i) as because the assessee was not obliged to deduct any tax.

3. A recent amendment in section 9 made by the Finance Act, 2007 read with effect from 1-4-1976 provided that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.

4. From the above, it is clear that this Explanation 1 is applicable only to those incomes, which are covered by clauses (v), (vi) and (vii) of sub-section (1) of section 9. Clause (v) of section 9(1) is regarding payment of interest, clause (vi) of section 9(1) is regarding payment on account of royalty and clause (vii) of section 9(1) is regarding payment on account of fees for technical services. Since, in the instant case, the impugned payment was not covered by any of these clauses, this amendment did not make any change in the instant case and in spite of this amendment, the Commissioner (Appeals) was correct in holding that since the German company was not having PE in India, the impugned payment was not taxable in its hands as business income or as capital gains.

Cases referred

1. N.V. Philips Gloeilampenfabrieke N. Eindhoven vs. CIT [1988] 172 ITR 521/[1987] 34 Taxman 274 (Cal.) distinguished on facts;

2. Dy. CIT vs. Topack Industries (India) Ltd. [IT Appeal No. 3671 (Mum.) of 1996, dated 3-7-2003] followed.

3. Dy. CIT vs. Majestic Auto Ltd. [1994] 51 ITD 313 (Chd.)

4. Ishikawajima-Harima Heavy Industries Ltd. vs. Director of Income-tax [2007] 288 ITR 408/158 Taxman 259 (Mum.)

8. Expatriate working in India – Transit accommodation in luxury hotel – Valuation of perquisite – Disallowance out of food, beverages, laundry and telephone expenses – Whether justified – Rule 3(a)(iii)(A) and Rule 3(g) of the Income-tax Rules

ACIT vs. Andrew Holland [2008] 20 SOT 217 (Mum.) Assessment Year 1998-99

During the previous year relevant to A.Y. 1998-99, the assessee, a non-resident, was employed as a senior official in an organization of employer-company in India. For first six months of his stay in India, the assessee was provided a luxury hotel accommodation by employer-company. For the remaining period, he was provided an accommodation taken on lease by employer. While calculating value of perquisite of accommodation, assessee had claimed that since hotel accommodation was a temporary one, no amount was to be included in total income in respect of hotel accommodation. The word ‘accommodation’ has a very wide amplitude and it includes within its ambit hotel accommodation also. Therefore, there was no merit in contention of assessee that no perquisite value should be included in total income in respect of hotel accommodation. However, as per rule 3(a)(iii)(A) perquisite value of accommodation should be computed separately for each period when hotel accommodation and flat, respectively, were provided to assessee.

The A.O. also made certain additions to income of assessee on account of food, beverages and laundry expenses incurred in hotel by treating same as perquisite under rule 3(g). An addition being 50% of telephone expenses was also made treating the same as personal in nature. The Commissioner (Appeals) confirmed the said additions. Having regard to status of assessee and duration of his stay during year under consideration, the additions made by revenue authorities was reasonable.

Facts

1. During the previous year relevant to assessment year 1998-99, the assessee was employed as a senior official in an organization of employer-company in India. For first six months of his stay in India, i.e., from April 1997 to September 1997, the assessee stayed in luxury hotel accommodation provided by the employer-company. For the remaining period, the assessee was provided an accommodation taken on lease by the employer.

2. The assessee worked out perquisites in respect of rent-free accommodation period-wise. The A.O. held that computation of perquisite value of accommodation was to be done for the year as a whole and, accordingly, worked out the perquisite at certain sum comprising amount of rent paid in the second-half of the year and two-thirds of total room rent of hotel.

3. On appeal, the assessee contended that hotel accommodation was provided only as a temporary arrangement till regular accommodation could be arranged, hence, the same was not in the nature of perquisite and, consequently, no amount was to be included in the total income in respect of hotel accommodation, and that as per rule 3(a)(iii)(A), perquisite value of accommodation was to be computed separately for each period when hotel accommodation and flat, respectively, were provided to the assessee.

4. The Commissioner (Appeals), however, held that computation of perquisite value of accommodation was to be done for the year as a whole and not period-wise.

5. The A.O. made certain addition to income of the assessee on account of food, beverages and laundry expenses incurred in the hotel by the assessee treating same as perquisite. An addition being 50 per cent of telephone expenditure was also made treating the same as personal in nature. The Commissioner (Appeals) upheld the additions.

Decision

On Second Appeal, the Tribunal held as follows:

1. It was an admitted position that the assessee had remained in India throughout the previous year relevant to the assessment year 1998-99. It was also not in dispute that for the first 6 months, the assessee was put in a luxury hotel accommodation as a measure of transitional arrangement till such time regular accommodation could be arranged. Thus, it was not a case of compelling circumstances, rather it was a case of provision of such accommodation based upon the assessee’s status in the organization and as per the terms and conditions of his employment. The word ‘accommodation’ is wide enough to include hotel accommodation also. Hence, there was no merit in the contention of the assessee that no perquisite value should be included in the total income of the assessee in respect of hotel accommodation. However, there was merit in the contention of the assessee that as per rule 3(a)(iii)(A), the accommodation perquisite value should be computed separately for each period when the accommodation and the flat, respectively, were provided to the assessee because the language of this rule is very clear in this respect and the interpretation made by the revenue authorities was not correct.

2. Rule 2(a)(iii)(A) has got two provisos and there is an Explanation 2 below to item (B) of this rule which refers to the fair rental value and having regard to certain percentage of salary to determine the perquisite value. Explanation 2 refers to the determination of fair rental value on the basis of rent which similar accommodation would realize in the same locality or municipal valuation in respect of accommodation, whichever is higher. In such cases, the municipal valuation may not be there, but eventually, the rent for similar accommodation would always be higher from the municipal valuation in such cases, hence, the actual rent paid should be taken as the fair rental value and the perquisite value in respect of hotel accommodation should be worked out by applying provisos 1 and 2 accordingly.

3. There was also force in the contention of the assessee that Explanation 1 provides for what should be included in the term ‘salary’ for the purpose of computing the value of perquisite, therefore, the A.O. was directed to compute the perquisite value by taking salary for the relevant period according to the provisions of Explanation 1 to rule 3(a)(iii)(A). Thus, the issue was restored for the computation of value of perquisite in respect of residential accommodation to the file of the A.O. to be decided in the light of directions given hereinabove.

4. Admittedly, the assessee was a senior personnel and, therefore, he had been accommodated in a luxury hotel. Having regard to the status of the employee and duration of stay in India during the year under consideration, the additions made by the revenue authorities was reasonable. Accordingly, the ground of the assessee stood dismissed.

[NOTE: Following the decision of the Tribunal in the case of Jaydev H. Raja vs. Dy. CIT [IT Appeal No. 2021 (Mum.) of 1998, dated 30-3-1999], the ITAT held that the Commissioner (Appeals) rightly held that the assessee was entitled to compute the value of tax perquisite after reducing the component of hypothetical tax from tax liability borne by the employer of the assessee.]

Cases referred

1. Jaydevs. H. Raja vs. Dy. CIT [IT Appeal No. 2021 (Mum.) of 1998, dated
   30-3-1999],

2. Anand Kumar Datta vs. Jt. CIT [IT Appeal No. 943 (Delhi) of 2002, dated 20-4-2005] and

3. Addl. First ITO vs. R.V. Graafeiland [1990] 38 TTJ (Bom.) 578.