Some of the important case laws published during 2015 pertaining to TDS u/s 195 and/or taxability of foreign companies/non-resident entit...
Some of the important case laws published during 2015 pertaining to TDS u/s 195 and/or taxability of foreign companies/non-resident entities in respect of source of income in India. Discussion and analysis (given in italics) pertain to relevance of judgement in future proceedings, subsequent developments, other relevant case laws on the same aspect, judicial decisions which are no longer relevant.
1. Interest by Indian branch to foreign Head office-TDS u/s 195- (Antwerp Diamond Bank NV vs. ADIT [2015] 152 ITD 446 (Mumbai - Trib.))
Interest was paid by assessee Indian branch of a Belgian bank to its head Office on subordinate debts and term borrowing. HELD, in view of domestic law as well as treaty same would not be chargeable to tax in India and thus, TDS provision of section 195 would not be attracted and, hence, question of disallowance under section 40(a)(i) did not arise.
1.1. Comments: However, the above judgement shall not hold good in respect of interest payments w.e.f. 1.4.2015 by Indian branch to foreign head office due to amendment in Finance Bill 2015 whereby interest paid by Indian branch to foreign head office has specifically been made chargeable to income tax in India. Concept of ‘Non-taxability of Income on grounds of mutuality/payment to self’ no longer holds validity after 1.4.2015 in respect of interest payment by Indian branch to foreign head office.
2. Royalty-Sale of Software – (Halliburton Export Inc. vs. ADIT [2015] 152 ITD 803 (Delhi - Trib.))
Assessee,
a US company, entered into agreements with various customers in India
for rendering software services - Assessing Officer held that payments
received by assessee from sale of software and provision of maintenance
and other support services to customers in India, were taxable as
'royalty' and accordingly made additions. HELD, in view of decision of
Jurisdictional High Court in case of DIT v. Infrasoft Ltd. [2014] 220
Taxman 273/[2013] 39 taxmann.com 88
(Delhi), payment received by assessee from sale of software and
provisions of maintenance and other supports services to customers in
India were not taxable as 'royalty', in terms of article 12 of India US
Double Taxation Avoidance Agreement.
2.1) Comments: There were two issues involved –taxability of sale of software and taxability of support services
2.1.1) Sale of Software:
The tribunal rightly concluded that sale of software is not royalty.
The decision again underlies that sale of prepackaged software is not a
sale of copyright and hence not royalty. The judgement could have been
different but for the Delhi High Court decision in the case of Infrasoft
Limited (supra) as the earlier Karnataka HC Decision held that sale of
licensed software amount to royalty. The decision of Infrasoft Ltd.
(supra) has now become an authority being the latest high court decision
as regards taxability of software is concerned. It overruled the
earlier Karnataka HC decision of Samsung Electronics on the ground that
‘The license 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’.
Though there was another decision of Delhi High Court (subsequent to Samsung Decision) in the case of DIT v. Nokia Networks OY [2013] 212 Taxman 68/[2012] 25 taxman.com 225 (Delhi) wherein
taxability of software sale was not held as royalty but on different
grounds. HC held that the software that was loaded on the hardware did
not have any independent existence and no separate payment was agreed
for it. On these facts it was held by the High Court that the payment
for software was not royalty. Hence decision of Nokia has no application
in the instant case of independent sale of software.
2.1.1a) Decisions on longer relevant:
Important decisions (which held software as copyright and hence taxable
as royalty and were relied upon by revenue) which are no longer
relevant after Infrasoft decision of Delhi high court include: CIT v.
Sunray Computers (P.) Ltd. [2012] 348 ITR 196 (Kar. HC); Citrix Systems
Asia Pacific (P.) Ltd., In re [2012] 343 ITR 1 (AAR - New Delhi); CIT v.
Samsung Electronics Co. Ltd. [2012] 345 ITR 494 (Kar.HC).
2.1.2) Software Support/Maintenance Services: Maintenance
/ other software support services to the customers in India were held
as non-taxable. However, no detailed reasoning for the same was given in
the judgement. The taxability of the same were also not discussed in
Delhi HC decision of Infrasoft Ltd.(supra). However there was another
decision viz. Infrasoft Ltd. v. Asstt. DIT (International Taxation) [2009] 28 SOT 179 (Delhi) wherein it was held that “The
other receipts on account of maintenance charges and training fees,
being incidental to the software receipts would assume the same
character as that of software receipts and the same were liable to be
taxed accordingly”. However, there is no High Court or Supreme Court
judgement on the matter. It may be regarded as fees for technical
services or royalty depending on the facts of the case. The issue needs
further clarification as regards taxability of charges for software
updates/support services/maintenance charges.
3. Royalty-Subscription Charges: (CIT vs. Infosys Technologies Ltd. [2015] 229 Taxman 335 (Karnataka))
Subscription charges paid to non-resident would amount to royalty liable to TDS
3.1) Comments: The
judgement of High Court relied on its earlier judgement CIT v. Infosys
Technologies Ltd. [2012] 204 Taxman 311 (Kar.) which relied on judgement
of CIT (IT) v. Wipro Ltd. [2011] 203 Taxman 621 (Kar. HC) and held that
subscription charges paid to non-resident would amount to royalty.
However, it is pertinent to note that Karnataka HC in the case of Wipro
Ltd had not given any detailed reasoning as to why subscription charges
would amount to royalty and how online access to database is different
from subscription
made to a journal or magazine. It relied on the reasoning given in its
earlier decision as regards taxability of shrink-wrapped software in CIT
v. Samsung Electronics Co. Ltd. [2012] 345 ITR 494 (Kar.HC) which has
since been distinguished by the subsequent decision of DIT v. Infrasoft
Ltd. [2014] 220 Taxman 273/[2013] 39 taxmann.com 88
(Delhi). Hence, the reasoning given in Karnataka HC decision of Wipro
ltd for taxing the subscription charges does not seem to hold good in
the present scenario and subscription charges can be argued to be not
representing fees for use of copyright and hence not taxable as royalty.
However,
there are other decisions where subscription charges/database access
fees have been held to be taxable as royalty on the ground of imparting
information concerning industrial and commercial knowledge, experience
and skill. The judgements include: Cargo Community Network (P.) Ltd., In
re [2007] 289 ITR 355 (AAR), ONGC Videsh Ltd. v. ITO [2013] 141 ITD 556
(Delhi-Trib.), ThoughtBuzz (P.) Ltd. [2012] 346 ITR 345.
4. Movie/Film Satellite rights as royalty: (S. P. Alaguvel vs. DCIT [2015] 228 Taxman 202 (Madras)(MAG.))
Transfer of Movie/Film satellite
rights to assessee under an agreement for a period of 99 years is a
sale and, therefore, excluded from definition of 'royalty' under clause
(5) of Explanation 2 to section 9(1)(vi).
4.1) Comments: Tribunal relied on the decision of High Court in Mrs. K. Bhagyalakshmi v. Dy. CIT [2014] 221 Taxman 225/[2013] 40 taxmann.com 350
which has considered elaborately the perpectual transfer of rights for a
period of 99 years in terms of section 26 of Copyright Act and also the
definition under clause (5) to Explanation 2 of section 9(1)(vi) in
relation to royalty and had come to conclusion that transfer in favour
of assessee is a sale and, therefore, excluded from definition of
royalty under section 9(1)(vi). Explanation 2.
5. Fees for Technical Services for Business Outside India: (DCIT vs. Hofincons Infotech & Industrial Services (P.) Ltd. [2015] 152 ITD 249 (Chennai - Trib.))
Assessee,
providing consultancy services, made payment pertaining to some support
services rendered by non-resident in Qatar qua its Nigerian projects.
HELD, since fees was paid to non-resident abroad for services utilized
in business carried outside India, same was not liable for any deduction
of tax at source.
5.1) Comments: The
decision once again outlines the non-taxability of payment to a
non-resident if it is for the purpose of business conducted outside
India covered by exclusion clause under section 9(1)(vii)(b). Other
important decisions which have dealt with exclusion clause under section
9(1)(vii)(b) are as under:
5.1.a) Selling commission to foreign agents-Non-Taxable: assessee
made payment of selling commission to its agent located abroad for
mobilising its sales in foreign countries, since said services were not
in nature of managerial services, payment in question was not taxable in
India as 'fee for technical services' under section 9(1)(vii)(b) (ACIT
vs. Lohia Starlinger Ltd. [2014] 65 SOT 155 (Lucknow - Trib.)(URO))
5.1.b) Testing services for export- Taxable: Assessee-company
was engaged in manufacture of switch gears, energy meters, cables and
wires, electrical fans, compact florescent lamp and related components -
It paid certain amount to US company for purpose of obtaining witness
testing of AC contractor as part of CB report and KEMA certification and
did not deduct TDS therefrom on ground that since it was making exports
to other countries, fees were paid for purpose of making or earning
income from a source outside India and, hence, payment was not
chargeable to tax in India in view of second exception in section
9(1)(vii)(b). HELD, in order to fall within second exception provided in
section 9(1)(vii)(b), source of income and not source of receipt,
should be situated outside India. Since, in instant case export activity
having taken place or having been fulfilled in India, source of income
was located in India and not outside and mere fact that export proceeds
emanated from persons situated outside India did not constitute them as
source of income. Therefore, fees for technical services was taxable in
hands of US company in India and assessee was liable to deduct tax at
source while making payment thereof. (Commissioner of Income-tax vs.
Havells India Ltd. [2012] 253 CTR 271 (Delhi))
5.1.c) FTS for running aircrafts in international routes only: Non-Taxable: Income
can be said to have been earned from a ‘source of income’ outside India
if source from which income is derived is situated outside India and in
context of an international transaction, source can be said to be
‘outside India’ if - (i) payer is a non-resident, or (ii) contract with
non-resident is made outside India, or (iii) activity yielding income
takes place outside India.
In
this case, Assessee, a domestic company, had acquired four Boeing Cargo
Aircrafts from a foreign company and obtained license from licensing
authority to operate those aircrafts on international routes only.
Assessee periodically made payments to a non-resident company on account
of overhaul, repairs of its aircrafts, engines sub-assemblies and
rotables (components) in workshops abroad. HELD, even assuming that
payments for such maintenance repairs were in nature of fees for
technical services, they would not be chargeable to tax as they were
made for earning income for sources outside India and, therefore, would
fall within purview of exclusionary clause of section
9(1)(vii)(b).(Lufthansa Cargo India (P.) Ltd. vs. DCIT [2005] 92 TTJ 837
(Delhi))
5.1.d) FTS for acquiring business outside India- Existence of source of Income is not relevant: Non-Taxable: Assessee-sugar
manufacturer engaged a Brazilian company to advice and assist in
acquisition of sugar mills and distilleries in Brazil and paid them fees
for technical services - Whether since assessee was contemplating to
create a source for earning income outside India, though source of
income had not yet come into existence, assessee would still get benefit
of exceptional clause (b) of section 9(1)(vii) as there is nothing in
section 9(1)(vii), clause (b) to show that source of income should have
come into existence so as to except payment of fees for technical
services. (ITO vs. Bajaj Hindustan Ltd. [2011] 47 SOT 74 (Mumbai)(URO))
5.1.e) FTS for rendering consultancy outside India: Non-Taxable: Assessee
paid consultancy fee to consultants for carrying out consultancy
services in Nigeria. HELD, consultants were used in business of assessee
abroad, and, therefore, section 9(1)(vii)(b) would apply and income of
such non-residents could not be deemed to accrue or arise in India.
(DCIT vs. Ajapa Integrated Project Management Consultants (P.) Ltd.
[2012] 49 SOT 37 (Chennai)(URO))
Exclusion
clause under section 9(1)(vii)(b) is the most underutilised clause for
arguing non-taxability of income of non-residents for the purpose of
business outside India. It offers a great tax planning opportunity for
reducing tax liability on foreign remittance.
6. Capital gains/Resident: (DIT vs. ICICI Bank Ltd. [2015] 370 ITR 17 (Bombay))
Where
capital gain accrued to residents of UAE from sale of Government
securities in India carried out through respondent bank, was not taxable
in UAE, said income generated in India could not be subjected to tax in
India and, therefore, respondent bank was not liable to deduct tax at
source while remitting amount in question to non-residents.
6.1) Comments: The
dispute arose from the fact that the DTAA with UAE requires that
capital gain be taxable in UAE, however there is no taxation of
individuals in UAE and hence it lead to double non-taxation. However,
the treaty provisions prevail and also the judgement of Asstt. DIT v.
Green Emirate Shipping & Travels [2006] 100 ITD 203 (Mum.) clearly
laid out that taxability in one country is not a sine qua non for
availing relief under treaty from taxability in other country and being
‘liable to tax’ in Contracting State does not necessarily imply that
person should actually be liable to tax in that State by virtue of an
existing legal provision but would also cover cases where other
Contracting State has right to tax such persons irrespective of whether
or not such a right is exercised by Contracting State.
6.1.a) Subsequent developments:
Transactions in the ICICI case pertained to financial year 2005-06.
However, there is subsequently revision in DTAA with UAE w.e.f. 1/4/2008
- wherein the
capital gains tax protection available to the UAE residents in respect
shares of Indian companies has been done away with. Also, it is now
provided that the capital gain would be liable to tax in India in the
hands of UAE resident, if underlying immovable property of the company
is situated in India.
Also, the definition of resident of UAE has been revised to ‘in
the case of the United Arab Emirates: an individual who is present in
the UAE for a period or periods totalling in the aggregate at least 183
days in the calendar year concerned, and a company which is incorporated
in the UAE and which is managed and controlled wholly in UAE.’ Hence
dispute as regards concept of ‘liable to tax’ for determining
residential status and hence applicability of treaty have been put to
rest.
Hence
the above decision will not hold good for transaction in shares of
Indian companies and hence transaction of sale of shares in Indian
company shall be liable to TDS u/s 195 even if seller is a resident of
UAE.
7. Business Profits/Attribution of Profits: (Galileo Nederland BV vs. ADIT [2015] 228 Taxman 11 (Delhi HC))
Assessee,
Dutch company, engaged in providing electronic distribution services to
travel industry through Computerized Reservation System (CRS) appointed
Indian distributor which only negotiated and entered into contracts
with various travel agents who wished to be connected to assessee's CRS -
Major functioning of collecting data bases with various airlines,
hotels, etc. and their analysis and development took place and all data
were stored in huge capacity computers in Denver, USA. Indian agent
merely provided connectivity to agents enabling them for booking
function. HELD, the
15 per cent formula, which was applied for assessment years 1995-96 to
1998-99 has been followed up to assessment year 2002-03. Hence,attribution of 15 per cent of assessee's profit to India was just and proper for subsequent assessment years as well.
7.1) Comments: It
is to be noted that 15% of profits and not revenue are to be attributed
to India as has been rightly held. Also, such attributed profit is
subject to further deduction of expenditure by PE in India. The Tribunal
has rightly observed that estimation of profits would be ideally based
upon number of bookings originating from India in comparison with the
bookings in a particular year and on consideration of global accounts.
However, HC did not agree with the submission as the Assessing Officer
had mentioned in the assessment orders that the facts and circumstances
of the case remain the same and no such Foundation and basis had been
first made in the assessment order.
Also, the HC relied on FAR analysis to determine the 15% rate of attribution of profits to India. The
major functioning, i.e., collecting data bases with various airlines,
hotels etc. and entering or feeding them into the computer took place
outside India. The role performed by the computers in India or the
Indian agents was to merely get connected or be configured so that the
travel agents could perform the booking function. The computers in India
were not capable of processing data, which was processed abroad. Thus,
it was looking at the nature and the character of the functions
undertaken in India viz., the functions and assets outside India, 15 per
cent was attributed to India.
However,
the concept of customers as asset was not brought up during the
proceedings. If revenue generating assets viz. Customers are more in
India, more profits be ideally allocated to India.
8. Usance Charges as Interest: (ACIT vs. Bhavani Enterprises [2015] 152 ITD 339 (Panaji - Trib.)):
Usance
charges paid to non-resident on import purchase by assessee would be
considered as 'interest' income and hence liable for TDS u/s 195.
8.1) Comments: The
tribunal relied on the Gujarat HC decision of Vijay Ship Breaking
Corpn. [2003] 261 ITR 113/129 Taxman 120 (Guj.) wherein it was held
that usance
charges are interest within the provisions of Sec. 2(28A) of the Income
Tax Act. However, arguments presented in another judgement of Gujarat
High Court viz. CIT v. Saurashtra Cement & Chemical Industries Ltd.
[1975] 101 ITR 502 (GUJ.)) was not discussed before the tribunal wherein
it was held that unpaid purchase price cannot be regarded as loan since
non-resident company could not be said to have lent amount of unpaid
purchase price to assessee-company either in cash or in kind, there was
no question of interest payable assessee-company to non-resident company
being deemed to be ‘income’ accruing or arising from any money lent at
interest and brought into India in kind.
9. Telecom Services as Fees for Technical Services: (ITO vs. Clear Water Technology Services (P.) Ltd. [2015] 67 SOT 15 (Bangalore - Trib.)(URO)) Payment
made by assessee, an Indian company to a US company for utilizing
telecom services in USA did not constitute fee for technical services as
said payments were for use of bandwidth provided for down linking
signals in US; and said payments were not in nature of managerial,
consultancy or technical services nor was it for use of or right to use
industrial, commercial or a scientific equipment.
9.1) Comments: This decision by the Bangalore tribunal is in line with the latest decision of Karnataka High Court in the case of CIT
vs. Infosys Technologies Ltd. [2015] 229 Taxman 335 (Karnataka))
wherein it was held that Down linking charges paid to foreign party
could not be treated as royalty.
Also, with regard to telecom services, The Madras High Court in the case of Sky Cell Communication Services Ltd. v. DCIT [2001]
251 ITR 53 (Mad.) has held that payment for use of mobile phone
services would not constitute royalties or fees for technical services.
Payments made for bandwidth are akin to the payments for use of mobile
phone services.
The Bangalore Bench of the ITAT in the case of Wipro Ltd. v. ITO 80
TTJ 191 has held that payment for bandwidth would constitute neither
royalties nor fees for technical services either under the Act or under
the agreement for Avoidance of Double Taxation with USA.
10. Capital Gains and Compensation: (ITO vs. Vinay P. Karve [2015] 152 ITD 58 (Mumbai - Trib.))
Income
earned by assessee, a French resident, from sale of shares of Indian
companies, could not be taxed under head 'capital gain' due to benefit
conferred in terms of article 14(6) of India-France DTAA.
Where
assessee, a non-resident, received certain amount of compensation from
his power of attorney holder towards damages for breach of trust in
respect of sale of shares of Indian companies, said amount being in
nature of capital receipt, could not be brought to tax.
10.1) Comments: The
DTAA with France provides that capital gains realised by French
resident on sale of shares in Indian Company would be taxable in France
(i.e. country of residence) only if shares do not represent more than
10% of capital of company.
France
has a progressive tax regime wherein tax rates vary from 0% to 45%
depending on income levels. However, capital gain on sale of shares is
subject to 65% reduction in income tax if period of holding is 8 years
or more. However, India exempts income tax on capital gains on listed
shares if period of holding is more than 1 year only. Also, for unlisted
shares maximum rate is 20% if period of holding is more than 1 year.
Hence, the provision of taxability of capital gain from sale of shares
in Indian company by French resident in state of residence i.e. France
is more of a disadvantage and should be planned properly.
Further
decision points out that damage for breach of trust as capital receipt
and not taxable in India. There are other recent judicial precedents
pertaining to treatment of damages/compensation as capital receipt:
10.1.a) Bernstein Litowitz Berger And Grossmann LLP v. UOI: [2015] 228 Taxman 334 (Delhi HC)(Mag.) -
Certain shareholders of American Depository shares filed suit against
Indian company and others, claiming damages on account of alleged fraud -
A settlement amount was arrived between them and same was transferred
to beneficiaries - Authority of Advance Ruling(AAR) determined that said
amount was taxable in India and deducted tax at source prior to payment
to beneficiaries. In this case, HC did not outrighly held the
compensation as capital receipt rather remanded the matter back to AAR
to determine whether the settlement amount is capital receipt or revenue
receipt.
10.1.b) Spaco Carburetors (I) (P.) Ltd. V. ACIT: [2010] 127 ITD 153 (MUM.): Assessee
was a manufacturer of different types of carburetors required for
automobile and two wheeler industries - It entered into a technical
collaboration agreement (TCA) with a Japanese company ‘K’ Ltd.. ‘K’
refused to provide any technology advice as regards newly developed
carburetor - As there was no amicable settlement, matter was referred to
Arbitration Tribunal before Internation Court of Arbitration. HELD,
compensation awarded by Arbitration Tribunal is a capital receipt.
10.1.c) Upaid Systems Ltd., In re [2011] 338 ITR 517 (AAR): Satyam,
Indian Company agreed to pay to applicant an amount of $ 70 million
under Settlement deed for extinguishment of all rights and obligations
between parties, for severing their business relationship arising out of
prior agreements, towards compensation for deficiency in its patent
found to exist by applicant, for grant of perpetual worldwide
royalty-free licence by applicant on all its patents to Satyam, subject
to Satyam not having a right to assign licence. HELD, compensation of $
70 million paid to applicant would be capital receipt in hands of
applicant.
Payment
of amount as settlement represents a tax loophole as it is held as
capital receipt and not liable to tax in India. The non-taxability of
settlement/compensation where such amount is paid on order of tribunal
or appropriate authority is understandable. However, treatment of out of
court settlement as capital receipt is a matter of concern and can be
misused to avoid taxation in India.
Thanks and best regards:
CA Rohit Gupta
B.Com, FCA, LLB,
CIA, DISA, CertIFRS
Certificate International Tax(IFA)
New Delhi-110063,India
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