Manish Kumar Agarwal, FCA
Understanding Double Tax Avoidance Agreement (DTAA) with Latest Case Laws
In Today’s modern world of advanced globalization, business is not restricted to a single geographical territory & crosses all border of the countries. This had emerged a complex world of business along with complex world of Accounting & Taxation.
The country has a right to tax on the profits earned in its land by anyone and also to tax the global income of its residence. This leads to taxation of same income more than once in different countries.
To avoid this double taxation of same income, countries are entering into Double tax avoidance agreement (DTAA) with each other. There is generally bi-lateral agreement which is entered between two countries. However, there are also Multi –lateral agreements which are entered between more than two countries.
The Meaning of Tax Treaty (DTAA) means a tax treaty is a formally concluded and ratified agreement between two independents nations (bilateral treaty) or more than two nations (multilateral treaty) on matters concerning taxation normally in written form.
There are two kinds of DTAA. Comprehensive Agreements & Limited Agreements. Comprehensive Agreements scope is to addressing all source of income whereas Limited Agreements scope to cover only
(a) Income from Operation of Aircrafts & Ships
(c) Inheritance &
Currently there are 90 Comprehensive Agreements & 13 Limited Agreements India. All this DTAA are available in the website: http://incometaxindia.gov.in/
The DTAA will provide bilateral relief to the assessee under section 90 of the Income Tax Act, 1961 and in the case where there is no DTAA with the country then the assessee can get unilateral relief under section 91 of the Income Tax Act, 1961. Now let us read section 90, 90A & 91 of the Income Tax Act, 1961.
“Agreement with foreign countries or specified territories.
90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—
(a) for the granting of relief in respect of—
(i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be,
and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.
Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.
Explanation 2.—For the purposes of this section, “specified territory” means any area outside India which may be notified as such by the Central Government.]
Adoption by Central Government of agreement between specified associations for double taxation relief.
90A. (1) Any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for adopting and implementing such agreement—
(a) for the granting of relief in respect of—
(i) income on which have been paid both income-tax under this Act and income-tax in any specified territory outside India; or
(ii) income-tax chargeable under this Act and under the corres-ponding law in force in that specified territory outside India to promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that specified territory outside India, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corres-ponding law in force in that specified territory outside India, or investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corres-ponding law in force in that specified territory outside India.
(2) Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India under sub-section (1) and such agreement has been notified under that sub-section, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette5 in this behalf.
Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such company.
Explanation 2.—For the purposes of this section, the expressions—
(a) “specified association” means any institution, association or body, whether incorporated or not, functioning under any law for the time being in force in India or the laws of the specified territory outside India and which may be notified as such by the Central Government for the purposes of this section;
(b) “specified territory” means any area outside India which may be notified as such by the Central Government for the purposes of this section.]
Countries with which no agreement exists.
91. (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.
(2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him—
(a) of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or
(b) of a sum calculated on that income at the Indian rate of tax;
whichever is less.
(3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.
Explanation.—In this section,—
(i) the expression “Indian income-tax” means income-tax [***] charged in accordance with the provisions of this Act;
(ii) the expression “Indian rate of tax” means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this [Chapter], by the total income;
(iii) the expression “rate of tax of the said country” means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country;
(iv) the expression “income-tax” in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. “
Generally the treaty obligations, which a country enters with another country have sometimes become law of the land without the formality of law enacted by the legislature. It is because Government of the day may have been given power to negotiate and arrive at such treaty . It is note that all treaties become part of the domestic law( as in the case of US). It is in this context that it had to be incorporated in the Indian constitution with the result that the Government of the day is authorized to enter into international agreements but in most matters, such agreements may have to be followed up by local legislation as was found in respect of arbitrations, patents etc. The Tax payer may opt to be governed by the Act of the tax treaty, whichever is more beneficial but cannot pick & choose the provisions.
– Circular No. 333 of 1982
– Azadi Bachao Andolan 263 ITR 706 (SC)
– Vishakapatnan Port Trust 144 ITR 146 (AP)
Now, to understand the DTAA , following should be understood first in respect of DTAA:
- Tax Treaties
– Treaty Position in India
– Discussion of the Articles
- Limitation of Benefits
- Interpretation of Treaties
There are Two major types of DTAA Model
- OECD MODEL
- UN MODEL
OECD Models are generally adopted by developed nations and their emphasis is on the residency based taxation.
UN Model emphasis is on the source based taxation and generally adopted by the developing nations.
There are also US model Convention & Indian Model Convention too.
In this Treaties Importance has been given to Residence than citizenship. The Tax Treaties follow a fairly well established procedure which is given below:
(5) Entry into force
(6) Effective Date
Components of Tax Treaty
An analysis of any tax treaty would have the following components:
1) The date on which it come into effect.
2) Applicability – Applies to a person who is resident of one or both the countries. “Resident” is defined under domestic law of different counties differently. Article 4 expects that it should based upon domicile, physical residence, place of management or such other criteria but makes it clear that where a person is a resident in both the countries, it is the location of the permanent home or where vital interests are located or where there is fixed abode or where he is citizen, in that order, will decide the residential status.
There may be cases, when it has been found that the assessee is resident in both the countries then tie-breaker rule has to apply to determine the residential status.
(a) In the case of individual his personal & economic ties determine his residential status.
(b) In the case of others, it is the place of effective management.
3) General Definitions – Article 3 of DTAA generally covers general definition of Person, Company, contracting state, Enterprise of a contracting state, Competent Authority, national etc, which all are applicable to the respective DTAA.
4) The Tax which it covers – What kind of tax the treaty covers should be known as there are different form of tax in different countries & the DTAA will provide the relief on the specified tax as mentioned in the DTAA.
5) The definition which will be applicable in both countries irrespective of domestic law, as for example on such vital issues as residence, which may be different from the residential statute in local law with greater stress on nexus between source & income, definition of certain categories’ like technical services etc.
6) Permanent Establishment and its parameters –
(a) PE means a fixed place from where the business of the enterprise is carried on.
(b) PE includes place of management, branch, office, factory, workshop, mine , quarry, an oil or gas well, a construction site for long duration, a service location for a long duration and a dependent agency with power to conclude contracts.
7) The definition of concepts like immovable property, dividend, business profits, royalty, technical fees, salaries etc.
8) Different ways of tax-sharing depending upon the residential statute, permanent establishment, fixed base or tax sharing with both countries giving agreed part of relief.
9) Stipulation as to the method of relief either by way of exempting income or where it is taxable, taxing it at stipulated rate, which may be lower than the domestic rate, or by unilaterally giving credit for tax paid in the other country.
10) Exchange of information with special reference to the concept of associated enterprises primarily to tackle diversion of income to avail treaty benefit or evasion of tax in one or the other country.
11) Provision for elimination of double taxation.
12) Provision for non- discrimination etc.
13) Other clauses to suit the requirement of the participating countries.
Concept of Active & Passive Income and others in DTAA
- Passive Income refers to income derived from investment in tangible / intangible assets.
|Article No.||Nature of Income||Taxing right of source of state||Taxing Right of state of residence||Remarks|
|6||Income from Immovable Property||Has the first right to tax||Reserve the right to tax|
|10||Dividend Income||Has the right to tax provided rate does not exceeds the agreed rate of tax as per DTAA||Dividend is not taxable in India, DDT is levied upon the company declaring dividends|
|12||Royalties & Fees for Technical Service|
|13||Capital Gain||Has the first right to tax|
|18||Pensions||Cannot Tax pension||Can tax pension|
- Active income is the income derived from carrying on active cross border business operations or by personal effort and exertion in case of employment.
|Article No.||Nature of Income||Taxing right of source of state||Taxing Right of state of residence||Remarks|
|7||Business Profits||Yes, if PE exists in source state, otherwise not||Income attributable to PE alone can be taxed in source state|
|8||Shipping & Air Transport||Cannot tax the income|
|14||Independent Personal Service||Yes, if the person has a fixed base or his stay extends beyond 90 days|
Now let us analyze some of the Judicial decisions which comes in last one year .
- In the case of Dy. Director of IT vs. Scientific Atlanta, INC 37 DTR 98 it was held that Consideration received for factory acceptance test and project management and engineering support services were not liable to tax in India, because such services were rendered overseas and non-resident did not make available technical services to Indian party.
- In the case of Joint Accreditation Systems of Australia and New Zealand it had been decided that There is not Transfer of any skills or Technical Knowledge or experience or process or know how to CABs on Account of Grant of Accreditation by application to those entities for providing third party certification and or inspection service.
- The ITAT Delhi in the case of Rio Tinto Technical Services vs. DCIT decided that The assessee, an Australian company, set up a permanent establishment (PE) in India to render technical services for evaluation of coal deposits and conducting feasibility studies for transportation of iron ore. The AO accepted that the income was business profits under Article 7 of the DTAA but held that as no rate of tax was prescribed in the DTAA and the nature of the income was “fees for technical services”, the income was assessable u/ss 115A & 44D. This was upheld by the CIT (A). On appeal by the assessee, HELD allowing the appeal:(i) The assessee was not rendering simple technical or consultancy services but was rendering specific activities through the PE. Accordingly, Article 12 of the DTAA was not applicable. Income attributable to a PE is assessable under Article 7 of the DTAA. Under Article 7(2), the PE is deemed to be a wholly independent enterprise and under Article 7(3) deduction in accordance with the subject to the law relating to the tax in India is allowable. Since Article 7 of the DTAA comes into play, s. 9(1)(vii) is not applicable. Since Article 7 (2) of the DTAA specifies that the PE in India is to be treated as a wholly independent enterprise in India, ss. 44D and 115A will not apply in so far as they relate to foreign companies.
- Payment made by the assessee to an Austrian company by way of fees for technical services was not taxable in India as per art 7 of the old DTAA of 1065 as applicable to the relevant assessment year 2002- 03, in view of the fact that no portion of the activities were performed by the Austrian enterprise in India , and therefore ,provisions of section 195 were not applicable to the payment made by the assessee to the said enterprise and as such fees for technical services is not hit by the provisions of section 40(a) (ia). (VA Tech Wabag Ltd v Asst CIT 44DTR (Chennai) (Trib) 1.).
- Amount paid by a non resident assessee towards interest on borrowings from shareholders or joint venture partners for purpose of business is deductible in computation of its profits which are eligible to tax in India. (Besix Kier Dabhol , SA v DDIT 8 taxmann.com 27).
- Income of Indian cine artiste from entertainment show in Canada is taxable in Canada only in terms of Art. 18 of the DTAA between India and Canada. It had been decided in the case of Pooja Bhatt 123 TTJ 404.
- In the case of DIT vs. SNC Lalvalin International, Inc 332 ITR 314, it was decided that The assessee was a non resident company engaged in the business of providing Consultancy for infrastructure projects. It had entered into an agreement with the National High way Authority of India and under the agreement the assessee was to provide technical drawings and reports to NHAI to enable it to use the technology for its infrastructure projects which was founded by the World Bank. The contention of the assessee was that the fee received from NHAI was to be treated as “fees for included services” as prescribed in article 12(4) of the Double Taxation Avoidance Agreement between India and Canada. In terms of this article, the tax chargeable is at 15%. However the Assessing Officer was of the opinion that fee charged for the aforesaid project did not include “fee for included services”. He accordingly is of the opinion that the income was derived as fee for technical services was chargeable to tax under the provisions of section 9(1)(viii) read with section 115A of the Act. According to this section the tax is chargeable was at 20 percent. The Tribunal accepted the contention of assessee. In appeal the High Court affirmed the view of the Tribunal. The amount received by the assessee was taxable under Article 12 of the Indo-Canadian treaty. The assessee was not liable to pay advance tax and therefore, interest under section 234B was not chargeable.
- Use of Sophisticated equipments in providing a particular facility by itself will not be sufficient to hold that technical services are rendered because ultimately machine only performs and so no human element is involved (Dampskibsselskabet of 1912 v ADIT 9 Taxmann.com 165 Mum ITAT).
- ITAT Mumbai in the case of CMA CGM SA France 24 DTR 37 decided that Income earned by the assessee on account of transportation by ships operated by other enterprises under slot chartering arrangement is covered by art. 9 and is taxable only in the State of residence and accordingly, such income will be exempt from the Income-tax under the Income-tax Act.
- In the case of Maruti Udyog Limited, it was decided that Expression ‘fees for technical services’ as appearing in provision of article 13(4) of DTAA between India and France as well as in Explanation 2 to s. 9(1)(vii) means payment made to any person in consideration of managerial, technical or
consultancy services. Since test reports had been used by assessee in India in manufacturing of cars payment made to “U” company of France were
chargeable to tax in India.
- Interest in income Tax refund is includible under article 11 & not article 8-3 of DTAA (Hapag Lloyd Container Linie Gmbh v ACIT 9 Taxmann.com 126).
- Royalty income earned by a resident of Germany from India has to be assessed to tax at the rate of 10% as provided in Article 12 of DTAA (ADIT v Chiron Behring Gmbh & Co KG).
- Subscription income received by an Irish company from Indian clients towards its research products is not in nature of royalty taxable in India (Gartner Ireland Limited v DDIT 6 taxman.com 124)
- Payments made by assessee to an Irish Company towards activation charges of converged communication solution were not in nature of ” Fees for Technical Service” and assessee was not liable to deduct TDS. (DDIT v Avaya Global Connect Limited 9 Taxmann.com 119).
- Wherever there is a sale transaction by a foreign company on outright basis, receipt there from shall be treated as business profit of that foreign company. (Vesil SPA Italy v JCIT 8 taxmann.com 201.)
- Payment made by assessee to an Italian Company (GTA) for Deputing Certain Technicians to India for Supervising erection of Machinery would not be chargeable to tax in India because person who rendered services were not present in India for required number of days as envisaged by article 5(j) of DTAA (Aditya Birla Nuvo Limited v ADIT 9 Taxmann.com 183)
- Offshore supplies are not taxable even in case of a Turnkey Contracts as long as title passed outside country and payments are made in Forex. (DIT v LG Cable Limited 9 Taxmann.com 51).
- Liaison office of the South Korean company being engaged in procuring purchase orders in India for the latter after negotiating the deal, there exist a business connection in India. Liaison office is also a PE, with in meaning of art 5 of the DTAA between India and South Korea as it is having
freedom to fix the sale price and conclude the contract and therefore, its activities could not be of preparatory or auxiliary nature. Income attributable to the Liaison office is taxable under art 7 of the DTAA. (Jebon Corporation India Liaison Office (2010) 127 TTJ 98 (Bang)
- In the case of JRAY McDermott Eastern Hemisphere Ltd. vs. Jt. CIT 38 DTR 161 (Mum.) (Trib.) it had been decided that For the purpose of determining the applicability of the threshold time-limit under Art. 5(2)(i), of the Indo-Mauritius DTAA, what is to be taken in to account is the duration of the activities of the foreign enterprise on a particular site or a particular project or supervisory activity connected therewith, on a standalone basis and not all the activities in a tax jurisdiction as a whole.
- In the case of Velankani Mauritius vs. DDIT it had been decided that Profits from supply of ‘shrink-wrapped’ software is not ‘royalty’.
- Applicant is not liable to pay capital gain tax in India in respect of the transfer of shares held in the Indian Company to HSBC, having regard to provisions of the India-Mauritius DTAA. (E. Trade Mauritius Ltd., in Re. (2010) 324 ITR 1 / 190 Taxman 232 (AAR)
- Shares held by the applicant as investment in the books of accounts are treated as capital asset. Applicant is not liable to be taxed in India on the proposed transfer of said shares to its wholly –owned subsidiary company in India in view of section 47 (iv) or under art 13 of India Mauritius treaties. (Praxair Pacific Ltd In RE 42 DTR (AAR) 177.).
- A Mauritian company is not liable to pay capital gains in India qua transfer of shares held in an Indian company to another Mauritian company. (D B Zwrin Mauritius Trading 10 Taxmann.com 158).
- Cessation of PE is relevant only for taxability of business profits and even after cessation of PE in India, A non resident assessee can still be liable to Its Taxability’s under other heads including under capital gains in India (Cartier Shipping Co Limited v DDIT (IT) 6 taxmamm.com 16 – Mumbai – 2010.)
- Amount payable by ONGC under SLC contract to applicant for supplying special purpose computer software to be used in Exploration and Production of Minerals oils does not amount to royalty within meaning of Article 12.4 of DTAA between India and Netherlands Nor can it be treated as Fees for Technical Service. (GeoQuest Systems B.V In re 6 taxmann.com 95 AAR New Delhi).
- In the case of Dy. DIT vs. Dharti Dredging & Infrastructural Ltd 46 DTR 1, it had been decided by Hyderabad ITAT that Assessee hired a dipper dredger under an agreement from a Dutch company and executed a dredging contract on its own utilizing the said dipper dredger, the payment made by the assessee to the Dutch company was nothing but hire charges, and the dipper dredger which was leased to the assessee to be used under its direction, control and supervision can not be construed as PE of the Dutch company and therefore, payment of hire charges made by the assessee to the foreign company is not liable to be taxed in India and assessee was not required to deduct tax at source under section 195.
- Tax residence certificate issued by Tax Authority of the contracting state is a sufficient evidence of the beneficial ownership of royalties or FTS for purpose of considering concessional rate of Tax applicable to Royalty income received by a Netherlands company from India (ADIT v Universal International Music BV 10 Taxmann.com 29).
- In the case of VNU International B V it had been decided that Capital gains earned by a Dutch company on transfer of shares held in an Indian company to a foreign company is taxable only in Netherlands.
- Mere provisions of a Dredger dry lease for carrying out dredging activity in India dose not result in assessee having PE. (DDIT v Nederlansche Overzee baggermaatschappiji bv 2010 5 taxmaan.com 120 Mum – ITAT.)
- Payment made to New Zealand company for rendering liasion & co-ordinate services qua DNA testing at USA does not fall within ambit of royalty & FTS (DCIT v MRO (India) P Limited 10 Taxmann.com 123).
- In the case of ACIT vs. Federal Express Corporation (2010) 35 DTR 425 (Mum.)(Trib.) it had been decided that Transportation of mail or cargo etc by the assessee in the international traffic by the aircrafts as owner / charter / lessee fell within the scope of Art. 8 and therefore, profits attributable to the same cannot be taxed in India. Benefit of Art. 8 cannot be denied to the assessee merely on the ground that the assessee was collecting cargo from its customer’s place and transporting the same to airport for the purpose of further transportation in the international traffic and vice versa.
- No income arises to the foreign company in India in the course of deputing personnel to an Indian company, who work under the control and supervision of the Indian company and thus become employee of the Indian company. Amount of salary of deputed employees reimbursed to the foreign company is not taxable in India. This had been decided in the case of DDIT vs. Tekmark Global Soutions LLC (ITAT Mumbai, ITA No. 671/2007, decided on 23-2-2010, (BCAJ 42-A, May 2010 pg. 171)
- Mumbai ITAT in the case of Airlines Rotables vs. JDIT decided that No PE under DTAA if three criteria are not fulfilled
- In the case of Cartier Shipping vs. DDIT, Mumbai ITAT declared that Despite cessation of PE, gains on transfer of PE asset taxable under Act and DTAA
- Delhi tribunal in the case of Paradigm Geophysical Pty Ltd. 122 ITD 155 declared that Where non-resident is taxable under domestic law but there is a provision in treaty between India and country in which nonresident is incorporated to exempt transaction or reduce rigour of taxation to benefit of non –resident, provisions of treaty override provisions of domestic law.
- The above again had been confirmed by Mumbai Tribunal in the case of Chiron Behring GmbH & Co. where it was held that Assessee being a person to whom DTAA applied had option being subjected to tax as per DTAA or Act, which was more beneficial to it, hence, it had rightly subjected it self to tax at reduced rate of 10 percent as per DTAA.
- In the case of Swedish Telecoms International AB 224 CTR 418 it was held that Management charges, whether relating to business management or technical management would be outside the scope of exemption under art, of DTAA. Management charges are not to be treated as commercial profits
- Work of to be undertaken by assessee included data collection measurement of dynamic properties of machines, providing training to engineers nominated by “T” Ltd. etc, it could be concluded that assessee did “make available’ technical knowledge, experience, skill and know-how processes to ‘T” Ltd. within the meaning of paragraphs (4) of article 13 of DTAA and therefore assessment passed by the authorities were confirmed. As regards the second project was concerned, since the role assessee was confined to merely providing independent evaluation of motorcycles prior to their launch and there was no provision for making available any technical knowledge, experience and skill etc. to ‘T’ Ltd., no addition can be made. This was confirmed in the case of TVS Motor Co Limited 35 SOT 230.
- In the case of Airports Authority of India, In Re (2010) 190 Taxman 209 (AAR) (New Delhi), it had been decided that Except in regard to the payment made to Raytheon for hardware and COTS software that go with hardware, which are not liable to be taxed in India, the payments for other items fall with in the scope of Article 12 and therefore, can be taxed in India, irrespective of the fact that Raytheon has no PE in India. The applicant is liable to deduct tax at source on the payment made to Raytheon other than for hardware the rate of withholding tax is governed by section 115A(1)(b)(BB) which is more beneficial to the tax payer when compared to the rate prescribed in Article 12 of the treaty.
- It was held, income from receipt of royalties as set out in s. 9(1)(vi) are taxable in India whether or not the non-resident has a place of residence, or place of business or business connection in India. However, the correct interpretation of the Double Taxation Avoidance Agreement would be to include the royalties from patents, copyrights or trade marks and the like within the expression “industrial” or “commercial” profits. This income would not be royalties within the meaning of the Double Taxation Avoidance Agreement but would fall under the expression “commercial or industrial profits.” In the absence of a permanent establishment, such income would not be taxable in India. (Siemens Aktiongesellschaft 310 ITR 320).
- Except in regard to the payment made to Raytheon for hardware and COTS software that go with hardware, which are not liable to be taxed in India, the payments for other items fall with in the scope of Article 12 and therefore, can be taxed in India, irrespective of the fact that Raytheon has no PE in India. The applicant is liable to deduct tax at source on the payment made to Raytheon other than for hardware, the rate of withholding tax is governed by section 115A(1)(b)(BB) which is more beneficial to the tax payer when compared to the rate prescribed in Article 12 of the treaty. (Airports Authority of India, In Re. 190 Taxman 209).
- Price paid to Non resident foreign company for performance of a works contract of producing power cannot be taken to be fees for technical service (Rolls Royce Industrial Power Limited v ACIT 7 taxmann.com 120).
- Issue of PE is required to be examined once it is held that income from consultancy services is not taxable as ” FEES for Included Services” as in that case taxability as business profit under article 7 is required to be seen for which PE is relevant. (DDIT v Mckinsey & co. 9 Taxmann.com 298).
- In the case of Mahindra & Mahindra Limited 313 ITR 263, it was decided that Underwriting commission paid to lead managers to issue of global depository receipts by Indian party, are business profits which are not taxable in
absence of permanent establishment in India. Reimbursement of expenses no element of income hence not taxable
- Offshore supply of equipment is not liable to tax in India though it is a part of composite contract involving onshore service component. (Xelo Pty Ltd. ITA Nos. 4107 & 4108/Mum/2002, A.Y. 1995-96 & 1997–98, Dt. 22-6-2009 BCAJ pg. 35, Vol. 41A, Part 5, August 2009
- In the case of New Skies Satellites N it was decided that
(i) To constitute “royalty”, it is not necessary that the process should be a “secret process”, nor that that the instruments through which the “process” is carried on should be in the control or possession of the payer. The context and factual situation has to be kept in mind to determine that whether the process was “used” by the payer. The fact that the telecasting companies are enabled to telecast their programmers by up linking and down linking the same with the help of that process shows that they have “use” of the same. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process;
(ii) The consideration paid by telecasting companies to satellite companies is for the purpose of providing “use of the process” and consequently
assessable as “royalty” under the Act and the DTAA.
- In the case of Intrasoft Limited, it was decided that amount received under license agreement for allowing use of software, not royalty but business profits. Receipts on account of maintenance charges and training fees incidental to software receipts is of same character.
- In the case of TISCO 42 DTR 204 it was decided that Services rendered by non resident lead managers to the assessee company for bringing out GDR issue , though in the nature of technical or managerial services , were not “made available ” to the assessee and therefore cannot be taxed in India. Underwriting commission was neither fees for technical services under section 9 (1) (vi) nor chargeable to tax as “business profits’ under art 7 of the DTAA in the absence of any PE of the non resident in India, payment towards reimbursement of expenses not being in the nature of income was not taxable.
- Sale of raw materials /CKD units to DCIL. DCIL carried out further activity of assembling the same and selling the finished cars. There were no further activities carried out by the assessee in India in this connection. Mere sale of raw materials/components would not result in business connection and even if it did as per the terms and conditions of the contract between the assessee and DCIL no income occurred to the assessee on the basis of any activities carried out on behalf of the assessee in India. Mere existence of subsidiary does not by itself constitute the subsidiary company as a PE of the parent. The DCIL was merely rendering a very insignificant auxiliary/preparatory service in the sale of CBU cars by assessee to the Indian Clients. Therefore DCIL did not constitute a dependent agent of the assessee. (DY DIT v Daimler Chrysler A.G. 39 SOT 418 (Mum.)
- Payment made for grant of license in respect of Copy right by end user is taxable as royalty as per s.9(1)(vi),domestic tax legislation to override treaty provisions in case of irreconcilable conflict. (Microsoft Corporation vs. ITAT).
- when assessee receives only net proceeds as per export invoice, there is nothing further left over to be treated as income received or to be received or accrued or deemed to be accrued or arising in India or outside India (ITO v Vishal Janakkumar Agarwal).
- In the case of CIT v Maggronic Devices (P) Limited, it was decided that Purchase of drawings and data documents and delivered abroad . No income accrue to India.
- Purchase of technical know- how by foreign company, was business receipt. As there was no permanent establishment in India, the same was not liable to be taxed in India, though the same was treated as ‘royalty’. (Vesil SPA Italy vs. Jt. CIT)
- Income deemed ro accrue or arise in India – Scope of section 9(1)(vii) – Technical Know – How – Design drawings & data delivered to person outside India – consideration received by NR not assessable in India (Grasim Industries v S M Mishra CIT 332 ITR 276).
- In case real & substantive business operations of a non-resident are carried out by its Indian office, income from such operations would accrue or arise in India (Linmark International (Hong Kong) Limited v DDIT)
- In the case of Singate Singapore Head Quarters (P) Ltd., In re 2010) 230 CTR 110 (AAR) it was decided that Applicant a Singapore company having entered in to agreement with independent service providers (ISPs), in India who are obliged to make adequate space available to store applicant’s products provide other facilities apart from storage, handling, repacking, etc, and deliver the goods to the customers on behalf of the applicant, the demarcated space in the warehouse of ISP constitutes the fixed place of business and the applicant has a PE in India within the meaning of Art. 5.1 of the Indo-Singapore DTAA.
- In the case of J. M. Baxi & Co. vs. Dy. Director of IT 39 DTR 1 (Mum.) (Trib.) it had been decided that Income of assessee, a tax resident of Singapore having been taxed in India, denying the benefits of Art. 8,without examining the issue whether the assessee had a PE in India within the meaning of Art. 7, matter remanded for examining the issue of PE and assessment accordingly.
- ITAT Mumbai in the case of DDIT vs. SET Satellite (Singapore) decided that Royalty paid by non-resident does not “arise” in India if there is no “economic link” between the PE and the royalty.
- Payment for use of Satelelite Signal or Transponder not a royalty and also not PE (Asia Satelletite Telecommunications CO Limited v DIT 332 ITR 340).
- Since the agent is only performing the functions of soliciting orders for sale of assessee’s products and promoting the sales, while all other main or core activities regarding arrangement or acquisition of products are performed in Singapore at least 10 percent of the profit earned from the activities of sale of spares by the assessee company to Indian customers can be said to be attributable to PE in India. (Rolls Royce Singapore (P) Ltd. vs. Addl Director of IT 2010) 40 DTR 289 (Del.) (Trib.)
- Services provided by a Singaporean company to the applicant , an Indian insurance company , such as business support , market information ,technology support services and strategy support ,etc do not fulfill the requirements of the definition of fees for technical services in the Indo –Singapore DTAA and therefore ,the fee paid to that company by the applicant does not amount to fee for technical services within the meaning of the DTAA .Payments made for providing access to software applications and to server hardware system hosted in Singapore for internal purposes and for availing of related support services under the terms of the service agreement cannot be brought within the scope of the definition of “royalty” in art 12.3. (Bharati Axa General Insurance Co Ltd .IN. RE 234 CTR (AAR) 62.).
- When a computer software put into a media and sold, it becomes goods like any other audio cassette or painting and amount paid by assessee towards purchase of such computer software from a Singapore company cannot be treated as payment of royalty taxable in India under Article 12 of DTAA between India & Singapore (Kansai Nerolac Paints Limited v ADIT 6 taxmann.com 7 Mum ITAT)
- In the case of Teletate, it had been decided that A Singapore resident company had PE in India, which provided information available in public domain to subscribers. The AO held that the income was fees for technical services (FTS) under the Income Tax Act and taxable on gross basis and not on net basis as claimed by the Tax payer under DTAA. The Tribunal held that the assessee can choose between DTAA and the Income Tax Act and tax authorities cannot
thrust provisions of the Income Tax Act unless they are more beneficial
- Payment made by Indian customers to Singapore company for use of telecom network infrastructure is royalty for the use of process (Verizon Communication Singapore Pte Limited v ITO (IT)
- In the case of Cia de Navegacao Norsul 12I ITD 113 it was held that Where assessee was neither owner nor lessee nor character of feeder vessels carrying cargo from Mumbai port to destination in Durban, profits attributable to such voyage would be outside scope of article 8 of DTAA.
- In the case of Spahi Projects (P) Ltd. Commission being payable to South African Company for services rendered abroad and it having no fixed place or agent in India, no income could be taxed in India.
- Payments made by Applicant – ABB India to ABB Zurich for funding of corporate R&D under cost contribution agreement cannot be treated as Payments in Nature of Royalties Liable to be taxed in India (ABB Ltd In re AAR No. 834 of 2009 dated 15-3-2010.)
- In the case of Real Resourcing Ltd, In Re. 36 DTR 132 it had been decided that Referral fee received by the applicant, a UK company from India based recruitment agency for referring potential Indian Clients and candidates to the latter even if it is in the nature of consultancy services, cannot be considered to be ancillary and subsidiary to the enjoyment / application of the right or information referred in para. 3(a) of Art. 13 of the Indo–UK DTAA, nor the activity of providing information would fall within the ambit of making available the technical knowledge and experience of the service provider, in the absence of PE, the receipts in the nature of referral fee are not taxable even as business profits.
- ITAT Mumbai in the case of Linklaters LLP vs. ITO confirmed that Professional Firms can have a ‘service PE’. The words “indirectly attributable to the PE” encompass the “force of attraction” principle and even services rendered offshore for Indian projects are assessable in India.
- Dividend received by a Resident Indian from an English company is to be increased by 1/9th of the same and on increased amount which is a gross dividend same is to be considered as dividend received by assessee for the purpose of IT Act. (ACIT v Homy N J Dady 2010 6 taxman.com 126 Mum).
- Compensation awarded under Arbitration awarded to a Non Resident Company having no PE in India, is not taxable in India (Goldcrest Exports v ITO 7 taxmann.com 74 Mum ITAT).
- Payment made by applicant to the UK company for providing international leg of the service in transmitting voice/data to places outside India
using its international infrastructure and equipments is neither royalty nor fees for technical services: payment is in the nature of business profits and in the absence of PE of UK company in India, same is not taxable in India. (Cable & Wireless Networks India (P) Ltd 25 DTR 49).
- In view of article 9(1) of DTAA between India and UK, freight income earned by non–resident assessee on account of transportation of cargo in international traffic by ships operated by other enterprises under slot chartering, arrangement would be taxable only in State of residence and consequently, such income would be exempt from taxation under Indian Income tax law. (Balaji Shipping (UK) Ltd. (2009) 121 ITD 61)
- In the case of BBC worldwide, it was decided that Foreign Co not liable to tax in India if Indian agent is paid on arms’ length basis
- Remittance for acquisation of TALO process by an assessee on a non exclusive basis from UK cant be constructed as royalties (CIT v DCM Limited)
United State of America
- In the case of Asst. DIT vs. Delata Airlines Inc 124 ITD 114 it had been decided that charter of aircraft would alone fall within the ambit of para. 2(b) of Article 8 of Indo-US Treaty. Deposit of amount in FDR could not be said to be connected with operation of aircrafts para. 5 of Article 8 would not apply.
- Installation or structure used for exploration or exploitation of natural resources may constitute a PE provided it is used for either of activities for a period of more than 120 days for any 12 M period. (R&B Falcon Offshore Limited v Addl CIT 7 Taxmann.com 76)
- In the case of EFunds Corporation vs. Asst. DIT 45 DTR 345, it had been decided that Assessee a US company, providing IT enabled services to its clients by assigning or sub contracting execution of the contracts to its wholly owned Indian subsidiary EFI and supplying the relevant software and database to the latter free of charge has business connection in India within the meaning of section 9(1)(i) as well as a PE in the form of EFI as per Art. 5 of the Indo-US DTAA, profits attributable to the PE are to be worked out by applying the proportion of Indian assets, including EFI’s assets, to the aggregate of global profits and reducing resultant figure by the assessed profits of EFI.
- Payment made by assessee for purchase of a software program from A non resident, having no PE in India, cannot be considered as a royalty either under income tax act or under DTAA (DDIT v Reliance Industries Limited 8 taxmann.com 182).
- In the case of Tata Sons the court decided that an assessee is entitled to benefit of section 91 even though he is covered by scope of India -US & India -Canada DTAA.
- In the case of Whirlpool India Holdings Limited v DDIT, the court says that “Before bringing a forign company to tax in India on ITS business profits, it is for the revenue to establish that it has PE in India”.
- In the case of Louis Berger International Inc., it was decided that reimbursement of Expenditure cannot form part of fees payable for technical service
- In the case of Factset Research Systems Inc 25 DTR 146 Subscription fee received by applicant from the licensee (customer) for providing database
containing financial and economic information of companies worldwide was not royalty within the meaning of s. 9(1)(vi), Expln. 2 or art 12 of DTAA between India and USA as no exclusive right or copyright was made over to customer and it did not amount imparting of information concerning the applicant’s own knowledge, experience or skill in commercial and financial matters.
- Payments made to non-residents on account of rentals for hosting of websites on servers are not in nature of interest of royalties or fee for technical
services or other sum chargeable to tax in India. Provisions of Article 26(3) DTAA between India and USA neutralizes rigor of provisions of s. 40(a)(i). (Millennium Infocom Tech Ltd. 309 ITR 18)
- The ITAT Bangalore, in the case of Nike decided that Assessee, having its main office in USA having opened a liaison office in India solely for the purpose of helping its affiliates located at different parts of the world to buy goods etc. for trading operations, acting through liaison office as purchasing agent, placing orders with local manufacturers specifying the quantity, price, the affiliate with address on whom the bill is to be raised and the destination and not in any way communicating with the manufacturers other than supervising the manufacturing operations to ensure quality as per approved samples and specifications, the same amounts to purchase in the course of export and Expln. 1(b) to s. 9(1)(i) is attracted, hence no income is deemed to accrue or arise to assessee in India.
- Payments received by Microsoft corporation from sale of its products to Indian distributors is taxable (Gracemac Corporation v ACIT).
United State of Amirates
- It is not necessary that unless a person be taxed in the UAE that person cannot claim the benefits of Indo- UAE tax treaty in India, what is really relevant to see is whether or not the recipient was resident of the UAE. (Hindustan Petroleum Corporation Ltd. vs. ADIT 2010) 130 TTJ 518 (Mum.)
- Mere presence of vessel of Non resident ship in territorial water of India does not constitute PE (Swabird Exploration FZ, LLC , In re 6 taxmann.com 57 (AAR – New Delhi)
- Expression liable to tax in contracting state as used in Article 4(1) of Indo UAE DTAA does not necessarily imply that person should actually be liable to tax in that contracting state (ADIT v resource Connection (FZE)
Hope the above will help in updating your knowledge in respect of Double tax avoidance agreement. I welcome your feedback. Please feel free to contact me at [email protected] for any further clarification.