FINANCE BILL 2017-DIRECT TAX PROPOSALS AT GLANCE
A. Rates of Taxes:
1. It is proposed to make the following changes in tax rates:
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In case of Resident Individual other than senior citizen |
Taxable Income- Rs.2,50,001 to 5,00,000 Tax- 5% in place of 10%.
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In case of Resident Senior citizen |
Taxable Income- Rs.3,00,001 to 5,00,000 Tax- 5% in place of 10%
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In case of an individual having a Total Income exceeding Rs.50 Lakh but not exceeding Rs.1 Crore
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Surcharge- @10% to be levied |
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In case of Domestic Companies having a Total Turnover/ Gross Receipts, not exceeding Rs.50 crore, in Previous Year 2015-16 |
Tax- @25% shall be charged |
B. Additional Resource Mobilisation:
1. Under existing provisions of Section 115BBDA, income by way of dividend in excess of Rs.10 Lakh is chargeable to tax at the rate of 10% on gross basis in case of Resident Individual, HUF or Firm. Now it has been proposed that said provisions shall be applicable to all resident assesses except domestic company, Trust/Institution u/s 12AA and certain funds u/s 10(23C).
2. Individual or HUF (other than those covered under Section 44AB), responsible for paying rent to a resident exceeding Rs.50,000 pm shall be liable to deduct TDS @ 5% w.e.f. 01/06/2017.
C. Measures for promoting affordable Housing and Real Estate Sector:
1. Period of Holding has been reduced from 36 months to 24 months for calculation of LTCG in case of Immoveable Property being land or building or both.
2. To settle disputes relating to taxability of Capital Gains in case of Joint Development Agreements, Section 45(5A) has been inserted. As per this subsection Capital Gain arising to Individual or HUF under a specified agreement will be tax to income tax in previous year in which the certificate of completion for the whole or part of project is issued by the competent authority.
3. TDS @ 10% is required to be deducted by developer on the amount of money credited or paid by developer to resident in cash or cheque or ECS in lieu of Joint Development Agreement.
4. Scope of exemptions u/s 80IBA has been expanded and now builder can complete project within a period of five years as compared to three years earlier from the date of approval of competent authority. Further word 'built up area' has been replaced with 'Carpet area' to increase the proposed size of the house.
5. Base year for computation of capital gains has been shifted from 1981 to 2001. Now cost of acquisition of an asset acquired before 01.04.2001 shall be allowed to be taken as fair market value as on 1st April 2001.
6. Section 50EC is proposed to be amended to provide that investment in any bond redeemable after three years which has been notified by the Central Government in this behalf shall also be eligible for exemption.
7. Section 23 is proposed to be amended to provide that where the house property is held as stock in trade and is not let out during the previous year, the annual value of such property shall be taken as NIL for the period upto one year from the end of financial year in which the completion certificate is obtained.
D. Measures for stimulating growth:
1. Extension of concessional tax rate to ECB u/s 194LC extended upto 01/07/2020.
2. Scope of Section 194LC also extended to Rupee Denomination Bonds issued to NRI by Indian Companies in INR w.e.f A/Y 2016-2017.
3. In order to facilitate ease of doing business and to promote start up India, it is proposed to amend Section 79 to provide that where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested and being an eligible start-up as referred to in section 80 -IAC of this Act, loss shall be carried forward and set off against the income of the previous year, if all the shareholders of such company which held shares carrying voting power on the last day of the year or years in which the loss was incurred, being the loss incurred during the period of seven years beginning from the year in which such company is incorporated, continue to hold those shares on the last day of such previous year.
4. Section 80IAC is proposed to be amended to provide that deduction of amount equal to 100% of profits and gains derived from eligible business of start-ups for three consecutive assessment years out of seven years beginning from the year in which such eligible start up is incorporated.
5. Section 115JAA(2A) has been proposed to be amended to provide that amount of MAT shall not be allowed to be carried forward to subsequent year to the extent such credit relates to the difference between the amount of Foreign tax credit allowed against MAT and foreign tax credit allowable against the tax as per regular provisions of the Act.
6. AMT can be carried forward upto 15 assessment years now.
7. Section 43D proposed to be amended to provide that the Interest Income in relation to certain categories of bad and doubtful debts received by cooperative banks shall be chargeable to tax in the previous year in which it is credited to its profit and loss account for that year or actually received, whichever is earlier.
8. Section 43B proposed to be amended to provide that interest on any loan or advance from cooperative bank shall be allowed as deduction on payment basis only.
9. Section 36(1)(viia)(a) proposed to be amended to enhance the deduction limit for provision of bad and doubtful debts to 8.5% of amount of total income to scheduled bank or a non-scheduled bank or a cooperative bank.
E. Promoting Digital Economy:
1. Section 80G(5) proposed to be amended to provide that donation of any sum exceeding Rs.2000 made in cash shall not be allowed as deduction. Earlier it was Rs.10,000.
2. Expenditure incurred for acquisition of any asset in respect of which payment made in a day, otherwise than by an account payee cheque or draft or ECS, exceeds Rs.10000, such expenditure shall be ignored for determination of actual cost of such asset .
3. Section 40A is proposed to be amended to provide that any expenditure in respect of which payment or aggregate of payments made to a person in a day exceeds Rs.10,000 shall not be allowed as deduction. Further provided that expenditure exceeding Rs. 10,000 incurred in a particular year but the payment is made in any subsequent year otherwise than by an account payee cheque drawn on a bank or account payee bank draft shall be deemed to be income under profit & gains from business or profession.
4. It is proposed to amend section 44AD of the Act to reduce the existing rate of deemed total income of 8 per cent to 6 per cent in respect of the amount of such total turnover or gross receipts received through banking channels during the previous year or before the due date specified in sub-section (1) of section 139 in respect of .that previous year. Thus, there will be dual rates of 8% in respect of turnover received in cash and rate of 6% in respect of turnover received through banking channels.
5. Section 269ST is proposed to be inserted to provide that no person shall receive an amount of three lakh rupees or more,:-
(a) in aggregate from a person in a day;
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person,
otherwise than through banking channels.
6. Transactions of the nature referred to in section 269SS are proposed to be excluded from the scope of the section 269 ST.
7. Penalty u/s 271DA proposed to the extent of 100% of sum received in contravention of Section 269ST.However penalty shall not be levied if the person proves that there were good and sufficient reasons for such contravention. It is also proposed that any such penalty shall be levied by the Joint Commissioner.
F. Transparency in Electoral funding :
1. It is proposed that political parties would have to fulfill two conditions for claiming exemption u/s 139(1) viz, no donation in cash for amount more than 2000 and filing of return before due date u/s 139(1).
G. Ease of Doing Business:
1. Section 197A is proposed to be amended to provide that Individuals and HUFs in respect of insurance commission received/receivable u/s 194D can now file self-declaration in Form.No.15G/15H for non-deduction of TDS if his total estimated income would be nil.
2. Section 44AA(2) proposed to be amended to increase the threshold limit for income from Business or Profession from Rs.1.2 Lacs to Rs.2.5 Lacs under clause (i). Further as per clause (ii) threshold limit proposed to be increased from Rs.10 Lacs. To Rs.25 Lacs for Total Sales or Turnover or Gross Receipts.
3. Section 194J relating to TDS on Fees for Professional or technical services proposed to be amended to provide the rate of 2% in the case of a payee, engaged only in the business of operation of call Centre.
4. Scope of Section 92BA relating to Specified Domestic Transactions is proposed to be curtailed by providing that expenditure in respect of which payment has been made by the assessee to a person referred to in under section 40A(2)(b) are to be excluded from the scope of section 92BA of the Act.
5. Section 47 proposed to be amended to provide that conversion of preference share of a company into its equity share shall not be regarded as transfer.
6. In order to address the grievance of delay in issuance of refund in genuine cases which are routinely selected for scrutiny assessment, it is proposed that provisions of section 143(1D) shall cease to apply in respect of returns furnished for assessment year 2017-18 and onwards.
7. Section 211 is proposed to be amended to provide that an assessee who declares profits and gains in accordance with the provisions of sub-section (1) of section 44AD & sub-section (1) of section 44ADA shall also be liable to pay Advance Tax in one installment on or before 15th of March.
8. With a view to promote ease of doing business, it has been decided by the Government to merge the Authority for Advance Ruling (AAR) for income-tax, central excise, customs duty and service tax.
9. It is proposed to provide that the orders passed by the prescribed authority under sub-clauses (iv) and (v) of sub-section (23C) of section 10 shall also be appealable before the ITAT.
10. It is proposed to amend sub-section (1) of the Section 153, to provide that for the AY 2018-19, the time limit for making an assessment order under sections 143 or 144 shall be reduced from existing twenty-one months to eighteen months from the end of the assessment year, and for the AY 2019-20 and onwards, the said time limit shall be twelve months from the end of the assessment year in which the income was first assessable. It is further proposed to amend sub-section (2) to provide that the time limit for making an order of assessment, reassessment or re-computation under section 147, in respect of notices served under section 148 on or after the1st April, 2019 shall be twelve months from the end of the financial year in which notice under section 148 is served.
11. It is proposed to amend the provisions of sub-section (5) of section 139 to provide that the time for furnishing of revised return shall be available upto the end of the relevant assessment year or before the completion of assessment, whichever is earlier.
12. Time limits u/s 153B for completion of search assessment also rationalized.
H. Anti-Abuse Measures:
1. It is proposed to amend section 10(38) to provide that exemption under this section for income arising on transfer of equity share acquired or on after 1st day of October, 2004 shall be available only if the acquisition of share is chargeable to Securities Transactions Tax under Chapter VII of the Finance (No 2) Act, 2004.However, to protect the Exemption for genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company acquisition by non-resident in accordance with FDI policy of the Government etc.,it is also proposed to notify transfers for which the condition of chargeability to STT on acquisition shall not be applicable.
2. Section 50CA is proposed to be inserted which provide that where consideration for transfer of share of a company (other than quoted share) is less than the Fair Market Value (FMV) of such share determined in accordance with the prescribed manner, FMV shall be deemed to be the full value of consideration for the purposes of computing income under the head "Capital gains".
3. Clause (x) inserted in Section 56(2) to widen the scope of existing exceptions by including the receipt by certain trusts or institutions and receipt by way of certain transfers not regarded as transfer under section 47.
4. Section 153A relating to search assessments is proposed to be amended to provide that notice under the said section can be issued for an assessment year or years beyond the sixth assessment year already provided up to the tenth assessment year if:
(i) the AO has in his possession books of accounts or other documents or evidence which reveal that the income which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in one year or in aggregate in the relevant four assessment years (falling beyond the sixth year);
(ii) such income escaping assessment is represented in the form of asset;
(iii) the income escaping assessment or part thereof relates to such year or years.
5. Section 58(1A)(ia) is proposed to be inserted to provide that provisions of section 40(a)(ia) shall apply in computing income chargeable under the head "income from other sources" as they apply in computing income chargeable under the head "Profit and gains of business or Profession".
6. It is proposed to insert a new section 94B, in line with the recommendations of OECD BEPS Action Plan 4, to provide that interest expenses claimed by an entity to its associated enterprises shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise, whichever is less.
The provision shall be applicable to an Indian company, or a permanent establishment of a foreign company being the borrower who pays interest in respect of any form of debt issued to a non-resident or to a permanent establishment of a non-resident and who is an 'associated enterprise' of the borrower. Further, the debt shall be deemed to be treated as issued by an associated enterprise where it provides an implicit or explicit guarantee to the lender or deposits a corresponding and matching amount of funds with the lender.
7. It is proposed to insert a new Explanation to section 11 of the Act to provide that any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1) of section 11, being contributions with specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income.
It is also proposed to insert a proviso in clause (23C) of section 10 so as to provide similar restriction as above on the entities exempt under sub-clauses (iv), (v), (vi) or (via) of said clause in respect of any amount credited or paid out of their income.
8. It is proposed to insert a new section 234F in the Act to provide that a fee for delay in furnishing of return shall be levied for assessment year 2018-19 and onwards in a case where the return is not filed
within the due dates specified for filing of return under sub-section (1) of section 139. The proposed fee structure is as follows:-
(i) a fee of five thousand rupees shall be payable, if the return is furnished after the due date but on or before the 31st day of December of the assessment year;
(ii) a fee of ten thousand rupees shall be payable in any other case.
However, in a case where the total income does not exceed five lakh rupees, it is proposed that the fee amount shall not exceed one thousand rupees.
9. Section 271J is proposed to be inserted to provide that if an accountant or a merchant banker or a registered valuer, furnishes incorrect information in a report or certificate under any provisions of the Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) may direct him to pay a sum of 10,000/- for each such report or certificate by way of penalty.
I. Rationalization Measures:
1. It is clarified that the share of company in which public are not substantially interested sold by non-resident shall also be chargeable to tax at the rate of ten per cent for long term capital gain. Earlier, there was an uncertainty as to whether the provision of section 112(1)(c)(iii) is applicable to the transfer of share of a private company.
2. It is proposed to amend section 87A so as to reduce the maximum amount of rebate available under this section from existing Rs. 5000 to Rs.2500. It is also proposed to provide that this rebate shall be available to only resident individuals whose total income does not exceed Rs. 3,50,000.
3. It is proposed to clarify that the amount of deduction referred to in section 10AA shall be allowed from the total income of the assessee computed in accordance with the provisions of the Act before giving effect to the provisions of the section 10AA and the deduction under Section 10AA in no case shall exceed the said total income.
4. Definition of "Person responsible for paying" for Section 204 and 195(6) clarified:
"in the case of furnishing of information relating to payment to a non-resident, not being a company, or to a foreign company, of any sum, whether or not chargeable under the provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the principal officer thereof;"
5. Explanation 4 proposed to be added to Section 90 & 90A to provide that where any 'term' used in an agreement entered into under sub-section (1) of Section 90 and 90A of the Act, is defined under the said agreement, the said term shall be assigned the meaning as provided in the said agreement and where the term is not defined in the agreement, but is defined in the Act, it shall be assigned the meaning as definition in the Act or any explanation issued by the Central Government.
6. It is proposed to amend section 12A so as to provide that where a trust or an institution has been granted registration under section 12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996] and, subsequently, it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, it shall be required to obtain fresh registration by making an application within a period of thirty days from the date of such adoption or modifications of the objects in the prescribed form and manner.
7. It is proposed to further amend section 12A so as to provide for further condition that the person in receipt of the income chargeable to income-tax shall furnish the return of income within the time allowed under section 139 of the Act.
8. Section 206CC proposed to be inserted to provide that in case of non-furnishing of PAN for TCS (in case of Resident only) :-
(i) Higher rate of TCS (twice of the prescribed rates or 5% whichever is more)
(ii) No Credit of TCS as no certificate will be generated.
Section 206CC is not applicable to Non resident having no Permanent Establishment in India.
9. It is proposed to insert sub-section (3A) in the section 71 to provide that set-off of loss under the head "Income from house property" against any other head of income shall be restricted to two lakh rupees for any assessment year. However, the unabsorbed loss shall be allowed to be carried forward for set-off in subsequent years in accordance with the existing provisions of the Act.
10. It is therefore proposed to insert an Explanation to sub-section (1) and to sub-section (1A) of section 132 and to sub-section (1) of section 132A to declare that the 'reason to believe' or 'reason to suspect', as the case may be, shall not be disclosed to any person or any authority or the Appellate Tribunal.
11. Section 132 is proposed to be amended to bring enabling provisions for provisional attachment of any property or valuation thereof by authorized officer during search or within 60 days from the date of last authorization executed by income tax authority with prior approval of Principal Director General or Director General or Principal Director or Director.
12.Section 133 is proposed to be amended to give Powers to Joint Director, the Deputy Director and the Assistant Director to call for the information even when no proceedings are pending before them to any place.
13. Section 133A proposed to be amended to give Powers to survey where any activity for charitable purpose is carried on and further powers also to record statement of trustee, employees, the attending or helping carrying out of charitable activity.
J. Benefit for NPS Subscribers:
1. It is proposed to amend the section 10 so as to provide exemption to partial withdrawal not exceeding 25% of the contribution made by an employee in accordance with the terms and conditions specified under Pension Fund Regulatory and Development Authority Act, 2013 and regulations made there under.
2. It is proposed to amend section 80CCD so as to increase the upper limit of ten per cent of gross total income to twenty per cent in case of individual other than employee.
The Black Money Act,2015 passed by Government of India
1. THE BLACK MONEY (UNDISCLOSED FOREIGN INCOME AND ASSETS) AND IMPOSITION OF TAX ACT, 2015 commonly known as The Black Money Act,2015 has been passed by Parliament of India and received President's assent on 26th May 2015. This Act makes it compulsory of the RESIDENTs of India to disclose all their Foreign Income and Assets. The Act contains provisions to deal with the menace of black money stashed away abroad. It, inter alia, levies tax on undisclosed assets held abroad by a person who is a resident in India at the rate of 30 percent of the value of such assets, provides for a penalty equal to 90 percent of the value of such asset, and also provides for rigorous imprisonment of three to ten years for willful attempt to evade tax in relation to a undisclosed foreign income or asset.
2. Considering the stringent nature of the provisions of the new law, Chapter VI of the Act, comprising sections 59 to 72, provides for a one-time compliance opportunity for a limited period to persons who have any foreign assets which have hitherto not been disclosed for the purposes of Income-tax. This circular explains the substance of the provisions of the compliance window provided for in the said Chapter VI of the Act.
3. A declaration under the aforesaid chapter can be made in respect of undisclosed foreign assets of a person who is a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income-tax Act.
4. A declaration under the aforesaid Chapter may be made in respect of any undisclosed asset located outside India and acquired from income chargeable to tax under the Income-tax Act for any assessment year prior to the assessment year 2016-17 for which he had, either failed to furnish a return under section 139 of the Income-tax Act, or failed to disclose such income in a return furnished before the date of commencement of the Act, or such income had escaped assessment by reason of the omission or failure on the part of such person to make a return under the Income-tax Act or to disclose fully and truly all material facts necessary for the assessment or otherwise.
5. The person making a declaration under the provisions of the chapter would be liable to pay tax at the rate of 30 percent of the value of such undisclosed asset. In addition, he would also be liable to pay penalty at the rate of 100% of such tax (i.e., a further 30% of the value of the asset as on the date of commencement of the Act). Therefore, the declarant would be liable to pay a total of 60 percent of the value of the undisclosed asset declared by him. This special rate of tax and penalty specified in the compliance provisions will override any rate or rates specified under the provisions of the Income-tax Act or the annual Finance Acts.
6. The Central Government has further notified 30th September, 2015 as the last date for making the declaration before the designated Principal Commissioner or Commissioner of Income Tax (PCIT/CIT) and 31st December, 2015 as the last date by which the tax and penalty mentioned in para 5 above shall be paid. Accordingly, a declaration under Chapter VI in Form 6 as prescribed in the Rules may be made at any time before 30.09.2015.
Fees for Technical Services – Another Controversy Unfurled !
INTRODUCTION
The expression 'Fees for Technical Services' has been subject matter of regular judicial reviews in our country. The expression 'fees for technical services' has been defined by Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961. It means any consideration (including any lump sum consideration) for rendering of managerial, technical or consultancy services, including the provision for services of technical or other personnel. For a particular stream of income to be characterized as 'fees for technical services", it is necessary that some sort of "managerial", "technical" or "consultancy" services should have been rendered for a consideration. The terms "managerial", "technical" or "consultancy" do not find definition in the Income Tax Act and it has been held by various courts that they have to be interpreted based on their understanding in common parlance.
Various courts have tried to interpret the meaning of the words "managerial", "technical" or "consultancy" services depending on facts of each case. Delhi High Court in the case of CIT vs Bharti Cellular Ltd.1 held that technical service to be covered in the Explanation 2 to Section 9(1)(vii) must involve human element and does not include any service provided by machines or robots. In another case of Adidas Sourcing Ltd. vs DIT2 it was held by Delhi Tribunal that for services to be covered in the word "Consultancy", it would be necessary that a technical element is involved in such advisory.
Clause (vii) of Section 9(1) specifies circumstances in which fees for technical services are deemed to accrue or arise in India. In cross border provision of services, many type of services are exchanged between non-resident and resident entities. Such transactions may include services like accounting services , information technology related services, testing services and many more. These services may qualify as Fees for Technical Services ("FTS") as per section 9 of Income-tax Act, 1961. However, in many cases, the payment so made may not qualify as FTS within the purview of Double Taxation Avoidance Agreement ("DTAA") between the countries whose payer and payee are residents. Most of the DTAAs contains a restricted definition of FTS. Most of the DTAA's contains separate clause for Professional Services which otherwise may fall within the scope of Section 9(1)(vii). In other words, the definition of FTS as per Income-tax Act is much wider in scope than one given in the respective DTAAs.
When an Indian entity makes the payment for technical services to an entity located outside India, the amount so paid can be deemed to accrue or arise in India. In such a case, the Indian entity is required to deduct tax at source under the provisions of section 195 of the Income-tax Act. However to determine whether said payment is liable to tax in India or not, it is necessary to refer to the Double Tax Avoidance Agreement between the relevant countries otherwise exact taxability cannot be ascertained.
In a very recent case of GVK Industries Limited vs ITO3 before the Hon'ble Supreme Court of India , which involved rendering of professional/consultancy services by a Switzerland based Company for arranging financial assistance for an India Client, the Indian appellant company did not invoke DTAA at any stage of its arguments either before Hon'ble Supreme Court/High Court or before lower authorities. The case has been discussed herein below.
ISSUE INVOLVED :-
- Whether 'success fees' earned through consultancy services ,rendered outside India, by Switzerland based Company to an Indian Company for availing financial assistance would be chargeable to tax under the provisions of Income Tax Act 1961 ?
FACTS OF THE CASE:-
The assessee,an Indian Company, sought services of Non Resident Company located at Zurich, Switzerland, to prepare a scheme for raising the finance and tie up for the loan for its power project. The Swiss Company successfully carried out its obligations and assessee company was able to avail the required loan/financial assistance. After successful rendering of services the Swiss Company sent invoice to the Indian Company for the payment of 'success fees'. The assessee approached the Income Tax Officer for issuing NOC to remit the said fees without deduction of any tax ,pointing out that Swiss Company had no place of business in India and that no part of services were rendered in India. It also contended that the said services were not technical services so as to fall within the scope of Section 9(1)(vii).
The Income Tax officer refused to issue 'No Objection Certificate'. The appellant unsuccessfully preferred revision petition before Commissioner of Income Tax u/s 264 and also failed to get relief from High Court through writ petition. The High Court held that though no business connection is established between the assessee and Swiss company for Section 9(1)(i) to come into operation but payment of 'success fee' would fall within the purview of clause (vii)(b) of Section 9(1) of the Income Tax Act and liable to tax in India as Fees for Technical services.
Being aggrieved, the appellant Indian Company approached the Hon'ble Supreme Court.
REVENUE'S CONTENTIONS :-
(a) That the Swiss Company was very actively associated not only in arranging loan but also in providing various services which fall within the ambit of both managerial as well as consultancy services and hence liable to pay tax as per Section 9(1)(vii)(b) of the Act.
(b) That Section 5(2) read with Section 9(1) will apply to the remittance to be made by the company to the Swiss Company as the income would be deemed to have accrued or arisen in India and hence, the Indian company was liable to deduct tax at the prescribed rate before remitting any money to the Non Resident Company.
(c) That there is a business connection between the Non Resident Company with the company in India and the voluminous correspondence between the two wings discloses the said connection and hence the case falls within the ambit of Section 9(1)(i) also.
(d) It was asserted by the revenue that the services of the Swiss Company, as demonstrable from the material brought on record, was rendered within India and, therefore, the company is obliged in law to deduct income-tax before remitting "success fee" to the Swiss Company. On this premise, the denial of 'No Objection Certificate' (NOC) was sought to be justified.
ASSESSEE'S CONTENTIONS :-
(a) That the Swiss company had no place of business in India and that all the services rendered by it were from outside India; and that no part of success fee could be said to arise or accrue or deemed to arise or accrue in India attracting the liability under the Income-tax Act, 1961.
(b) That the Swiss Company had no business connection in India and hence Section 9(1)(i) is not attracted and further, as the Swiss Company had rendered no technical services, Section 9(1)(vii) is also no attracted.
(c) That the Swiss Company did not render any technical or consultancy service to the company but only rendered advise in connection with payment of loan by it and hence, it would not amount to technical or consultancy service within the meaning of Section 9(1)(vii)(b) of the Act.
It is important to note here that the assessee did not invoke the Double Taxation Avoidance Agreement between India and Switzerland at any stage and this was taken note by the Hon'ble Supreme Court in Para 20 of its order.
HELD:-
The Hon'ble Supreme Court discussed the relevant Sections of the Income Tax Act and observed & held as under:-
(a) That the Swiss Company is a Non-Resident Company and it does not have a place of business in India. The revenue has not advanced a case that the income had actually arisen or received by the Swiss Company in India. The High Court has recorded the payment or receipt paid by the appellant to the Swiss Company as success fee would not be taxable under Section 9(1)(i) of the Act as the transaction/activity did not have any business connection. The conclusion of the High Court in this regard is absolutely defensible in view of the principles stated in CIT v. R.D. Aggarwal & Co.4
(b) That for deciding whether the case would fall within the ambit of Section 9(1)(vii), the expression, managerial, technical or consultancy service, are to be appreciated. The said expressions have not been defined in the Act, and, therefore, it is obligatory on our part to examine how the said expressions are used and understood by the persons engaged in business. The general and common usage of the said words has to be understood at common parlance.
(c) As the factual matrix in the case at hand, would exposit the Swiss Company had acted as a consultant. It had the skill, acumen and knowledge in the specialized field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of activities undertaken by the NRC has earlier been referred to by us. The nature of service referred by the Swiss Copmany, can be said with certainty, would come within the ambit and sweep of the term 'consultancy service' and, therefore, it has been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable under the head 'fee for technical service'. Once the tax is payable paid the grant of 'No Objection Certificate' was not legally permissible. Ergo, the judgment and order passed by the High Court are absolutely impregnable. Hence , the grant of NOC was not legally permissible.
CONCLUSION:-
In this case , surprisingly, DTAA between India and Switzerland was not invoked by the appellant.If the relevant articles of DTAA had been invoked and got analyzed by the appellant , Hon'ble SC might have come out with different decision as DTAA restricts the meaning of Fees for Technical Services giving lesser scope of taxation for Source State. Further there is a separate clause for professional services of these nature in the DTAA.
This decision might cause a major controversy in the coming days as consultancy services of professional nature are generally considered under separate clause of Independent Personnel Services and not under the clause relating to Fees for Technical Services in majority of DTAA's. However by not invoking Indo-Swiss DTAA, the appellant has allowed the Hon'ble Court hold that the fees for rendering such professional services is taxable in India.
Indo Swiss DTAA also has protocol which says that if there is any restrictive covenant in any other DTAA relating to Fees for Technical Services, then that would be made applicable to Indo Swiss DTAA also. Now there is 'Make available' clause in many DTAA's .It has been interpreted to be meant by various courts as the restrictive clause which means that FTS would be taxable in the source state only if the service provider has made available the technical knowledge, experience, skill, know-how, or processes, etc. to the recipient of services and then service receiver can itself use those services in future. 'Make Available' concept has been discussed in many cases such as DeBeers India Minerals (P) Ltd.5
Further professional services like consultancy services are covered under Article 14 of Indo Swiss DTAA which states that source state can tax those services only if Service Provider has fixed base in the source country or he stayed in the source country for at least 183 days. Now if Article 14 is invoked, then also these services cannot be taxed in India as all the services were provided outside India and Swiss company had no fixed base in India.
Hence these services can neither be taxed under Article 14 , there being no fixed base in India and nor under FTS clause as Article 12 read with Protocol restricts applicability of FTS clause and assessee gets benefit of 'make available' clause.
However this ruling by the Hon'ble SC is going to open Pandora's Box of litigation as revenue is going to apply this judgement on every case of consultancy service being treated as FTS ignoring the fact that the Hon'ble SC itself has stated that DTAA has not been invoked by the appellant and hence the same has not been considered.
Reference to Judgements
1. (2008) 175 Taxmann 575 (Delhi HC)
2. (2012) 28 Taxmann.com 267 (Delhi Trib)
3. (2015) 54 Taxmann.com 347 (SC)
4. (1965) 56 ITR 20 (SC)
5. (2012) 208 Taxman 406 (Kar HC)
CA.Arun Gupta
9814104273
Ex-Chairman Ludhiana Branch of NIRC of ICAI
Ex-Secretary Distt Taxation Bar Association,Ludhiana
Foreign Salary Taxability from Resident's Perspective
Introduction
Today India is known in whole of the world for its immense pool of highly talented and well qualified human resource. Big multinationals are not only setting up their shops in India but to manage and run their resources all over the world they are always in look out for Indian talent. Many young Indians go abroad on high profile jobs.Among many other tax issues that arise due to taxability of salary in two countries , one issue that arises is the taxability of the salary in case of a Resident of India earning and receiving salary abroad due to exercise of employment abroad.
Suppose a person ,who is resident of India, goes abroad to a country , with whom India is having a Double Taxation Avoidance Agreement, and exercises employment in that other country. He earns and receives salary abroad and that other country gets right to levy tax on his salary earned there. It is assumed that remuneration is borne by employer resident of the source state. However,the said person stays in India for more than 183 days during the relevant financial year and remains resident of India as per the provisions of the Income Tax Act,1961 and hence also becomes liable to tax in India on his global income.
Another form that question of taxability of such income takes is that whether such income would be taxable in both the countries of residence and source and then eligible for elimination of double taxation by credit system of elimination in the country of residence or that such income would be taxable only in one country and other country loses its right to levy tax as per Double Avoidance Tax Agreements.
Many a times it happens that employment is exercised in a low or no tax jurisdiction and salary packages are finalized taking into account the taxability of the same in the source country. Now if a person becomes liable to tax in his home country also due to retaining of his ordinary resident status in the home country, all his calculations can go bizarre.
Basics of Taxability
The issue that we intend to discuss in this article is about taxability of salary earned and received by a person resident of India while exercising employment abroad. This topic involves discussion on Section 5(1) ,Section 90(2) of the Income Tax Act vis a vis Article on Dependent Personal Services/Income from Employment of UN/OECD Model Tax Convention along with available legal jurisprudence on this issue.
a) Scope of Article 15 (Income from Employment/Dependent Personal Services):-Income from employment is dealt with in Article 15 of OECD/UN Model. Article 15 of UN Model reads as follows:-
1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) The recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned; and
(b) The remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
(c) The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the Contracting State in which the place of effective management of the enterprise is situated.
Paragraph 1 of the Article 15 lays down the basic principle about the taxability of income derived by a person as salary in respect of an employment. It is taxed in the state of residence. Exception to this rule is that it 'may be taxed' in the other state i.e. source state if the employment is exercised in that other state. This is the basic rule.
Paragraph 2 carves out an exception to the basic rule laid down in Paragraph 1 and gives the right of taxation only to the residence state if an employee spends a short period abroad i.e., a period less than 183 days, and remuneration is not paid by an employer who is resident of that other state and is not borne by a permanent establishment which the employer has in the other state.
b) Scope of Section 5(1) of the Income Tax Act,1961 :- Sec 5(1) of the Income Tax Act - Scope of total income - reads as follows:
" Subject to the provisions of this Act, the total income of any previous year of a person
who is a resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such
person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or
(c) accrues or arises to him outside India during such year :
Provided that, in the case of a person not ordinarily resident in India within the meaning
of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession
set up in India."
Section 5(1) of the Income Tax Act enunciates the scope of total income for a person resident in India. Section 5(1)(a) and Section 5(1)(b) lays down that all income ,from whatever source derived, which is received or deemed to received in India or which accrues or arises or is deemed to accrue or arise in India is taxable in India.
Section 5(1)(c ) further enlarges the scope of total income in case of person resident in India by laying down that all income , from whatever source derived, which accrues or arises to him outside India would also be included in the total income of the said resident.
c) Section 90(2) states that 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
Now restricting ourself to the topic of our discussion in this article relating to the taxability of salary earned and received abroad by a person who is resident of India, it is clear from Section 5(1)(c ) that global income of the person resident in India is taxable in India. Hence salary earned and received abroad by a person resident in India would be taxable in India. However , the Government of India provides relief from Double Taxation through Double Taxation Avoidance Agreements entered into with various countries and as per Section 90(2) of the Income Tax Act,1961, 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 the assessee.
Hence, for salary earned and received abroad by a resident, though taxable as per Section 5(1)(c ) of the Income Tax Act, its actual taxability and relief would be determined by the Article relating to Income from Employment/Dependent Personnel Services of the relevant tax treaty.
So to determine the taxability of salary earned abroad by a person resident in India, we would have to analyse the Article 15 of Model Treaty.
Analysis of Article 15 :
We are going to analyse the Article 15 by treating and substituting the residence state with 'India' and other state with the 'source state' where employment has been exercised and salary has been received and earned by the person resident in India. Article 15(1) of UN Model Tax Convention would read as follows:-
(1) Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a India in respect of an employment shall be taxable only in India unless the employment is exercised in the Source State . If the employment is so exercised, such remuneration as is derived there from may be taxed in Source State.
Paragraph 1 of Article 15 establishes that as a general rule income from employment is taxable in the State where employment is actually exercised. It states that salary derived by a resident of India would be taxable in India unless the employment is exercised in the source state and if employment is so exercised, such remuneration 'may be taxed' in source state.
Now in current situation since the employment has been exercised in the source state hence it may be taxed in the source state as per Article 15(1) and the source state acquires right to tax such income. Since the words used in this Article are 'may be taxed' whether India loses its right to tax the said salary income or both the states retains right to tax the said income is the main point of our discussion in this article.
But before we discuss the said situation let us analyse Paragraph 2 of Article 15. Again substituting India for the state of residence , the article would read as follows;-
(2) Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of India in respect of an employment exercised in the Source State shall be taxable only in India if:
(a) The recipient is present in the Source State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned; and
(b) The remuneration is paid by, or on behalf of, an employer who is not a resident of the Source State; and
(c) The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the Source State.
Hence Article 15(2) gives the exclusive right of taxation to India i.e. residence state if the above three conditions are satisfied. It has to be kept in mind that for the remuneration to be exempt in the source state ,all the three conditions must be satisfied. Now applying the provisions to the case in hand , the assessee is present in source state for period less than 183 days, hence first condition is satisfied. The remuneration is borne by the employer who is resident of the source state hence second condition is not satisfied. Now since all the three conditions in the given case are not being satisfied together , India does not get exclusive right to tax the remuneration derived by the person resident in India in respect of employment exercised in source country . Therefore Article 15(2) would not be applicable to the circumstances of the case.
Since Paragraph 2 would not be applicable , hence we return of Article 15(1). Now in present case as per Article 15(1), as we have already discussed, source state may tax the income earned in that state. Now question arises that since the words 'may be taxed' have been used, whether only source country is eligible to tax the salary in the present case or residence country i.e. India also has right to tax the same . This question becomes a lot bigger if source country , like UAE , does not actually exercises its right to tax the salary earned therein. In that case , can India tax the salary on plea that source country has not actually exercised its right to tax the salary.
While analyzing the said situation, we have to understand the scheme of taxation of DTAAs. On an analysis of various articles contained in the Model Tax Convention and various rulings given by Indian Courts, we can see that the scheme of taxation is divided broadly in three categories:
The first category includes Article 7 (Business profits without P.E. in the other State);Article 8 (Air transport and Shipping); Article 13 (capital gains other than mentioned in 13(1),(2),(3),(4)); Article 14 (Independent Personal Service without fixed base in other state) Article 15(2) (Dependent Personal services); Article 19 (Pensions) which provide that income shall be taxed only in the State of residence.
The second category includes Article 6 (Income from immovable property); Article 7 (Business profits where PE is established in other contracting State); Article 15(1)(Income from dependent personal services under certain circumstances); Article 16 (director's fees); Article 17 (income of artists and athletes); Article 18(b) (Government service) which provide that such income may be taxed in the other contracting State, i.e.,State of income source.
The third category includes Article 10 (Dividends); Article 11 (Interest); Article 12 (Royalty and fee for technical services); Article 13 (capital gains on other properties) which provide that such income may be taxed in both the contracting States.
The term 'may be taxed' gives sovereign right of taxation to source country in case of second category as enumerated above. There are some countries ,like UAE, which does not levy any tax on individuals but that does not mean that such country does not have right to tax such person. The fact that they have sovereign right as per treaty to tax such person and whether they actually tax it or not is their own will. But in case they do not actually tax it, other country does not get the right to tax the same. This analysis is substantiated by following judgements.
Legal Jurisprudence
a) In the case of Ms. Pooja Bhatt vs. DCIT1 ,Hon'ble ITAT Mumbai analysed the above scheme of taxation and meaning of the phrase "may be taxed" thread bare. The brief facts of the case is as follows:-
The assessee was a film artiste who had participated in an entertainment show performed in Canada in the year under consideration and had received a sum of US Dollars 6,000. The tax had also been deducted at source in Canada equal to the sum of US Dollars 900. The assessee claimed in the course of assessment proceedings that a sum of Rs. 1,86,000 (US Dollars 6,000) could not be taxed in India in view of Article 18 of the Indo-Canada Treaty. However, her contention was rejected by the Assessing Officer. It was found by the Assessing Officer that the assessee was a resident of India and, consequently, it was held by him that her entire global income was taxable under the provisions of the Income-tax Act.
Held:- The scheme of taxation is contained in Chapter III of the Double Taxation Avoidance Agreement (DTAA)/Indo-Canada Treaty. On an analysis of various articles contained in Chapter III, it is found that the scheme of taxation is divided in three categories. The first category includes Article 7 (Business profits without P.E. in the other State); Article 8 (Air transport); Article 9 (Shipping); Article 1 (capital gains on alienation of ships or aircrafts operated in international traffic); Article 15 (Professional services); Article 19 (Pensions) which provide that income shall be taxed only in the State of residence. The second category includes Article 6 (Income from immovable property); Article 7 (Business profits where PE is established in other contracting State); Article 15 (Income from professional services under certain circumstances); Article 16 (Income from dependent personal services where employment is exercised in other contracting State); Article 17 (director's fees); Article 18 (income of artists and athletes); Article 20 (Government service) which provide that such income may be taxed in the other contracting State, i.e., State of income source. The third category includes article 11 (Dividends); Article 12 (Interest); Article 13 (Royalty and fee for technical services); Article 14 (capital gains on other properties) and Article 22 (other income) which provide that such income may be taxed in both the contracting States. For example, paragraph 1 of Article 11 provides that dividend income may be taxed in other contracting State, while paragraph 2 provides that dividend income may also be taxed in the State of residence. Similarly, Article 14(2) and Article 22 provide that income may be taxed in both the countries. The above analysis clearly shows that intention of parties to the DTAA is very clear.
Wherever the parties intends that income is to be taxed in both the countries, they specifically provides so in clear terms. Consequently, it could not be said that the expression 'may be taxed' used by the contracting parties gave an option to the other contracting States to tax such income. The contextual meaning has to be given to such an expression. If the contention of the revenue was to be accepted then the specific provisions permitting both the contracting States to levy of the tax would become meaningless. The conjoint reading of all the provisions of Articles in Chapter III of the Indo-Canada Treaty, leads to only one conclusion that the expression 'may be taxed in the other State', authorizes only the contracting State of source to tax such an income and by necessary implication the contracting State of residence is precluded from taxing such an income. Wherever the contracting parties intends that income may be taxed in both the countries, they specifically provides so. Hence, the contention of the revenue that the expression 'may be taxed in other State' gave the option to the other State and the State of residence was not precluded from taxing such an income could not be accepted.
The reliance of the revenue on Article 23 was also misplaced. It had been contended that Article 23 gives credit of tax paid in the other State to avoid double taxation in cases like the present one. Such provisions have been made in the treaty to cover the cases falling under the third category mentioned in the preceding paragraph, i.e., the cases where the income may be taxed in both the countries. Hence, the cases falling under the first or second categories would be outside the scope of Article 23 since income is to be taxed only in one State.
In view of the above discussion, it was to be held that the assessee could not be taxed in respect to the sum of Rs. 1,86,000 under the provisions of the Income-tax Act in view of the overriding provisions of the DTAA between India and Canada. The order of the Commissioner (Appeals) sustaining the addition was to be set aside and, consequently, the Assessing Officer was to be directed to exclude the same from the total income of the assessee.
The above ruling further lays down clearly that even when Article 23 of the DTAA provides for elimination of double taxation by way of credit method , this provision would not come in way of providing relief by exemption method as income under first and second category is taxable only in one state.
b) Honourable Supreme Court held in PVAL Kulandagan Chettiar's2 case that once an Indian resident's income is taxed abroad by a treaty country, it cannot be taxed again in India. The view taken above also stands fortified by the decision of Madras High Court in the case of VR. S.R.M Firm3 which has been affirmed by the Apex Court in the case of P.V.A.L Kulandagan Chettiar(supra) and again approved in the recent decision in the case of Torqouise Investment & Finance Ltd4.In the case before the Hon'ble Madras High Court, the assessee was resident of India who had earned profit on sale of immovable property in Malaysia. Article 6 of Indo-Malaysia Treaty provided that such income may be taxed in the State in which such property was situated. The assessee claimed that he was not liable to pay tax on such income in view of Article 6 of the treaty. The revenue took the same stand as taken in the Pooja Bhatt case. The court rejected the same by observing as under :
"The contention on behalf of the Revenue that wherever the enabling words such as "may be taxed" are used there is no prohibition or embargo upon the authorities exercising powers under the Act, from assessing the category or class of income concerned cannot be countenanced as of substance or merit. As rightly pointed out on behalf of the assessees, when referring to an obvious position such enabling form of language has been liberally used and the same cannot be taken advantage of by the Revenue to claim for it a right to bring to assessment the income covered by such clauses in the agreement, and the mandatory form of language has been used only where there is room or scope for doubts or more than one view possible, by identifying and fixing the position and placing it beyond doubt."
Since the above decision has been affirmed by the Apex Court, there is no scope for taking a different view. Although, the Apex Court observed that the decision of the Madras High Court was being affirmed for different reason but the conclusion remains that income cannot be assessed in the State of residence where the agreement provides that income may be taxed in the source country. In this context, it is pertinent to observe that the identical issue arose before the Hon'ble Madhya Pradesh High Court in the case of Torqouise Investment & Finance Co. and the court, following the decision of the Madras High Court in the case of VR.S.R.M. Firm , held that income arising on the sale of immovable property in Malaysia could not be taxed in India. The matter again reached the Supreme Court and the Apex Court has affirmed the view of the Hon'ble Madhya Pradesh High Court following its earlier decision in P.V.A.L. Kulandagan Chettiar(supra).
c) In a recent judgement by ITAT Mumbai Bench in the case of ESSAR oil Limited Vs. Deputy Commissioner of Income Tax5, it was the plea of the assessee that under section 5 of the Income Tax Act, 1961 (the Act) the world income of a resident entity is liable to tax in India. However, as per section 90(2) of the Act, in case where India has entered into a Double Tax Avoidance Agreement (DTAA) with any country, then the provisions of the Treaty would over-ride the provisions of the Act insofar as the Treaty provisions are more beneficial to the assessee. The assessee submitted that since it had a permanent establishment in both the countries and since as per the DTAA, the income earned through such permanent establishment has to be taxed only in the other country. The emphasis by the assessee was on the expression "may be taxed" and according to the assessee it is only the country where the permanent establishment is situated that has the right to tax and not the country in which the assessee is resident. The Tribunal held as follows:
"We are of the view that the reliance placed by the learned D.R. on the aforesaid decision does not help the plea of the revenue before us. The expression "may also be taxed" in Article 7 of the DTAA between India and Qatar is followed by the words "in the state of residence" as is found in Article 11(2) of the DTAA between India and Canada. As laid down in the case of Pooja Bhatt (supra), the intention of countries to the DTAA is to be seen. Article 11 (2) of the DTAA between India and Qatar specifically provides that dividend can also be taxed in the State of which the company paying dividend is a resident. Article 12 of the DTAA between India and Qatar similarly provides right to both the source country as well as the resident country to tax interest income. Wherever the parties intended that income is to be taxed in both the countries, they have specifically provided in clear terms. Consequently, it cannot be said that the expression "may also be taxed" used in the DTAA gave option to the other Contracting States to tax such income. As laid down in the decision in the case of Pooja Bhatt (supra) contextual meaning has to be given to such expression. If the contention of the Revenue is to be accepted then the specific provisions permitting both the Contracting States to levy the tax would become meaningless. In our view, by using the expression "may also be taxed in the other State", the contracting parties permitted only the other State, i.e. State of income source and by implication, the State of residence was precluded from taxing such income. Wherever the contracting parties intended that income may be taxed in both the countries, they have specifically provided. Hence, the contention of the revenue that the expression "may also be taxed in other State" giving the option to the other State and the State of residence is not precluded from taxing such income cannot be accepted."
The consequence of the judgement in Chettiar's case and other above referred cases is that wherever India has signed a Double Tax Avoidance Treaty, when Indian resident earn income from those countries, there will be no tax in India in the case of first and second category of scheme of taxation ,as discussed in Ms Pooja Bhatt case, where phrase 'may be taxed' has been used. And hence in the country of source , if rate of tax is zero or lower then income will be taxed at lower or nil rate. For example in case of UAE ,irrespective of whether or not the UAE actually levies taxes on non-corporate entities, once the right to tax UAE residents in specified circumstances vests only with the Government of UAE, that right, whether exercised or not, continues to remain exclusive right of the Government of UAE. This view is further substantiated by the ruling of Mumbai Tribunal in the case of ITO vs Mahavirchand Mehta6.
As per the analysis of above judgements India cannot even include the said income taking shelter of Section 5(1)(c ) and then give credit of taxes paid, if any, in the foreign country.
On the basis of above legal jurisprudence it is clear that the phrase "may be taxed", as used in Article 15(1), contemplates that if employment is exercised in the source country and remuneration is also received in the source country then such remuneration would be taxable only in the source country and India would be precluded from taxing such income.Moreover, the fact whether tax is actually paid on such remuneration in source country, like UAE, is of no relevance as being 'liable to tax' in the Contracting state does not necessarily imply that the person actually be liable to tax in that contracting state by the virtue of an existing legal provision but would also cover the cases where that other contracting state has the right to tax such persons â€" irrespective of whether or not such a right is exercised by the contracting state.
Government has issued Notification No. 91/2008 dated 28th August, 2008. This notification provide that even if an Indian resident's income is taxed abroad, it shall still be taxable in India. Double Tax will be eliminated as provided in the Double Tax Avoidance Agreement which is mostly credit based method. However,in our view,this notification cannot override the law of the land laid down by Supreme Court. Hence, there is little practical impact of this notification.
Conclusion
In light of the above discussions it is clear that there are some basic concepts on which system of Elimination of Double Taxation is based. Though India, in its Double Taxation Avoidance Agreements has mostly adopted credit system in the Articles relating to Elimination of Double Taxation but that does not mean that "Exemption Method" cannot be used at all where the context requires. As held in the case of Ms Pooja Bhatt (supra), Article 23 relating to credit system of elimination would not be applicable wherein context requires taxability only in one state though the phrase 'may be taxed' has been used.Hence in view of the analysis of various provisions of the Act , Articles of Model Tax Conventions and Legal Jurisprudence , it can be concluded that in case of person resident of India, earning and receiving salary abroad , would be liable to pay tax only in the source country and not in India though the litigation on this point is likely to go on for some more time in view of government notification against the said view.
Reference to Judgements
1.(2008) 26 SOT 574(Mumbai)
2.(2004)137 Taxman 460 (SC)
3.(1994) 208 ITR 400 (Mad)
4.(2008)300 ITR 001
5.(2011) 13 Taxmann.com 151 (Mum-Trib)
6.(2011) 11Taxmann.com 194 (Mum)
CA.ARUN GUPTA
Ex-Chairman Ludhiana Branch of NIRC of ICAI
Ex-Secretary Distt Taxation Bar Association,Ludhiana
09814104273
www.cagds.in
arunaru@yahoo.com
NSEL fiasco and Regulatory framework
Here comes another financial fraud with the traces of criminal conspiracy all around. 24 borrowers dupes 15000 investors of 5400 Crores of rupees and regulatory agencies are still guessing what has happened. National Spot Exchange Limited (NSEL) , a subsidiary of Financial Technologies Ltd. (FT) ,who is promoter of MCX also, flouts all the norms of spot trading due to fragile regulations . NSEL was setup with permission of Ministry of Consumer Affairs , practically without any regulatory agency or framework. It got license from Ministry of Consumer Affairs in 2007 for spot trading in commodities. In absence of any strict regulatory oversight it expanded its operations in latter part of 2010 and included other 'novel products'. Punters joined in steadily to take advantage of the new 'services' NSEL offered, which included paired contracts of T+2/T+25. Despite whispers of unauthorised deals, including those struck for the above paired contracts, punters felt safe to do business because of the lack of regulation.
It was only after February 6, 2012, when the Government notified the Forward Markets Commission(FMC) as the designated agency on behalf of the ministry that things started to move. The FMC found glaring anomalies in NSEL operations. Even the said regulatory agency , FMC, has now come with the statement that NSEL was not regulated entity of FMC and FMC have limited role to play.
It means that an exchange has been operating in India with a very fragile and unclear regulatory set up to oversee it. National Spot Exchange had several contracts where settlement was done beyond eleven days. In fact, some worked to a T+25 and T+35 day settlement cycle. The Forward Market Commission also found that there was short selling in some of these contracts where an individual sold the contract without actually owning the underlying commodity. Settlement beyond 11 days and short trades were both not permitted by regulators on spot market transactions.
Taking advantage of practically zero regulatory restrictions, money was got invested from people all around the country and was accumulated by 24 entities on pretext of having the stock of that much worth. Some of these entities , having borrowing of hundreds of crores from NSEL, have been setup as late as in 2011.
Most of these entities,who have borrowed Rs.5400 crores from NSEL, does not have even 10/20% of the stock declared by them. None of the entity is credit worthy and their statement of accounts speak loudly of their conduct. It means that fake warehouse receipts have been issued, fake stock statements have been prepared,fake VAT documents and insurance documents have been prepared , godowns are vacant and even addresses of godowns given are not correct. In one reported case there is a Mall at the godown address and in other case there is not even 70 lakh of stock in the godown whereas stock of more than 700 crores has been shown in the documents.
Everyone knows that there is no stock and one wonders as to why FMC is still saying that it apprehends that there might not be stock of 6200 crores as claimed by NSEL and it is getting the stocks physically verified from independent auditors.
It is not understandable , when fraud is clearly visible ,as to why so much time is being wasted to catch hold of just 24 borrowers and other related parties. The fraudsters are still moving around in swanky cars and in the mean time money might have travelled out of India and also did most of the family members of defaulters.
Till the time whole thing got busted , money was being collected from innocent investors ,luring them with 15-18% of return. They were issued warehouse receipts with no stock in the warehouses. There is no need of debate on this that people do not understand such markets but are lured by high returns.
It seems that in this election year government is too busy in other things. It is unfortunate that now our authorities are messing it up and trying to make the matter look complicated which otherwise is a clear case of criminal fraud being conducted in absence of any regulations. The inaction and denial on part of government is really astonishing. The matter is being tossed from one ministry to another and in our country running away from taking responsibility is a very common situation.
How come 24 borrowers commit fraud with same modus operandi is anybody's guess. It means that everything was controlled from a centralized platform. If government wants it can immediately tighten the noose around 24 borrowers and officials of NSEL engaged in this fiasco and trace the money trail and recover the money. But it is surprising that authorities are still thinking of conducting investigations instead of taking quick action to recover the money. There are only 24 borrowers and recovering money ,with such powerful government agencies in place, should not be impossible if will power is there. The government showed quick action in case of Satyam and any more delay in this case would help the defaulters swindle away the money and investors lingering on in courts for decades to recover their money.
In case of one of the defaulters there has been an Income Tax raid few months back ,before this fiasco broke out. The Income tax department could not recover any stock from the assessee where as the books were showing stock of more than 700 crores .The stock details released by NSEL is also showing stock of more than 700 crores in so called warehouses. In another case, chairman's son-in-law has been the biggest defaulter and address of one of his godown is showing Mall built up there. Inspite of clear instances of fraud , the authorities are waiting for stock audit reports by independent auditors.
In this country with lax laws and delayed justice , the things are being allowed to be messed up and poorly informed investors are made to run here and there and make futile efforts to recover their savings .Those who can afford the loss, try to forget it as another loss in the financial markets and those who have lost their life long savings are left with only tears in their eyes. In US ,Rajat Gupta , is made to repent for whole of his life for his involvement in a case of insider trading and in our country , handful of high profile persons having top contacts , rob people of their money and government always have other priorities to deal with. Every fiasco is first tried to be buried under the carpet and if that does not happen then it is allowed to become complicated and dragged on in enquires, investigations and courts for decades together. After few decades neither the culprit is alive nor the victim and the mess that could not be buried under the carpet gets buried beneath the ground.
NSEL is a clear case of fraud by a handful of persons and the fact that the same company runs MCX is really alarming . If our government really shows the will and takes quick action , tracing the money trail from defaulters and NSEL officials is not a big deal. Like Satyam scam, it is easy to go after 24 borrowers and recover the money but government is taking too long to interrogate the borrowers and exchange members to find out where the money has gone.
The government can really set an example in this case by seizing the ill gotten money from the defaulters and assets acquired with it and giving them back to the investors. But if authorities delay it more, then it would mess up the things to detriment of innocent investors and shake the confidence of citizens in the regulatory set up of this country.
CA.Arun Gupta
Ex-Chairman Ludhiana Branch of NIRC of ICAI
Ex-Secretary District Taxation Bar Association
(The author is a Chartered Accountant based in Ludhiana.He himself doesnot have any exposure in NSEL or MCX)
WEBSITE-WHETHER CONSTITUTES A PERMANENT ESTABLISHMENT IN THE SOURCE COUNTRY
Introduction
Internet has brought revolution in the world since last few decades. Development of internet and its use by the people in India had been gaining strength since the beginning of last decade of the twentieth century but it really started growing by leaps and bounds by the turn of the 21st Century. Mass increase in use of internet has led to change in the rules of the game as to how business is being run. E-Commerce has become the buzzword. Though the ecommerce bubble burst in the beginning of the 21st Century but that might be mainly due to the reason that people just started using internet and penetration was still low. But last 10 years has seen the tremendous increase in the ecommerce activities and huge revival and success of commercial activities through internet. Introduction of smart phones in last couple of years has again revolutionized the use of internet.
However, if seen from the perspective of taxation, online business activities carries with it a plethora of complications in managing the jurisdictional issues. Some examples of online commercial activities or e commerce activities :-
a) Sale of traditional products like books, garments , equipments etc.
b) Sale of digitized products like software and music.
c) Sale of services .
d) Sale or licensing of online products like games or other commercial software etc.
e) Providing online advertisement opportunities.
Many Multi Nationals engage themselves in variety of business transactions through websites developed by them. Their websites have presence across the globe or some companies are running country specific websites from server located in a single country. To take one such example of a business process , a company selling some products may list its product on its website having global presence. The buyers , say from India, come to the website and register themselves on the website. When they want to purchase a particular product, they click on it and make payment through credit card online. The said product is then delivered to the buyer . If the said product is some software , then same is delivered online. Now in this simple example there might be different types of business processes involved varying from case to case, as follows:-
a) The product being delivered is from country other than where buyer is located i.e stock is being kept in country other than the country where the same has been sold.
b) The stock is being kept in the country where the same has been sold.
c) The website owning company has tie ups with the sellers in the country from where it receives the orders and same is got delivered from them without any stock being kept by the website company itself.
d) The sellers from different countries list their product on some other company's website and buyers come and purchase the product they want from the website.
e) There might be different situations like website company having its physical presence in the other country or they might have subsidiary companies to handle limited activities like marketing or certain preparatory or auxiliary activities.
f) Likewise there might be number of other business models but the main point here is that server is located in a single country ,say US, from where global website of company or country specific websites of similar nature are being hosted and there might be ,or might be not, the physical presence of the website company in the said country of operation . Further even if they have some physical presence in shape of subsidiary or fully controlled group companies , it is only for limited purpose of marketing or does not go beyond certain preparatory or auxiliary activities that enjoy exempt status under the tax treaty.
Apart from traditional business of sale and purchase of goods on e-commerce platform , there are many new revenue streams that are being targeted by the companies world over like revenue generated from the advertisements on the websites or income earned by search engine websites like Google and Yahoo through promotion of sites by 'Key Words'. Payments from source country to these companies also raise question about their taxability in the source country.
Basics of Taxability
Income derived from online business transactions generated by non residents is taxable under the same domestic rules applicable to income derived from other type of activities. However as per Section 9(1) of the Income Tax Act and Article 5 read with Article 7 of tax treaties , a non resident would be taxable in source country only if it has some relationship or minimum presence , in the source state. Even Section 5(2)(b) of Income Tax Act fastens the tax liability in the hands of non-resident only if the income accrues or arises in India or deemed to accrue or arise in India.
A common rule ,as per tax treaties , is that a non resident taxpayer must have a fixed place of business (Permanent Establishment) in the country. Now, to apply this rule, the source state also need to decide whether an electronic presence is sufficient to constitute a fixed place of business under various circumstances or not.
Hence to tax an entity engaged in e-commerce ,it has to be decided in the first place as to whether activities of said entity constitute a PE for DTAA purposes or not. Then the next step is to determine as to whether such activities are within the scope of preparatory or exempted activities that enjoy exemption status.
Issues Involved and Judicial Precedence
The concept of PE is material and it has to be seen whether a non resident entity operating website can be said to have a PE within its primary meaning in India. Two recent cases laws on this issue have been discussed as under.
A) Case of eBay International AG vs ADIT1
In the case of eBay International AG vs ADIT1 the Mumbai Tribunal has held that the revenue earned by the assessee from India specific websites is taxable as per the provisions of Article 7 of the DTA only if it has a PE in India as per Article 5 of the DTA. Since the assessee did not have any PE in India as such no amount was taxable in India.
a) Facts of the Case
In this case the assessee , tax resident of Switzerland, operated India specific websites providing an online platform for facilitating the purchase and sale of goods and services to users based in India. The assessee entered into Marketing Support Agreement with two group companies incorporated and registered in India viz eBay India and eBay Motors in connection with Indian specific sites. The assessee claimed that revenue earned by it from operations of websites in India was not taxable in India as it did not have any PE in India as per Article 5 of the DTA.A.
b) Issues Raised
The department was of view that revenue earned by ebay from India would be taxable as Business Profits as the assessee has dependent agent PE ,as per Article 5(5) and 5(6) of DTA, in India in form of eBay India and EBay Motors, two group companies. That both the group companies were providing the services only to the assessee for facilitating operations of India specific websites. That the Indian companies had no independent existence and the assessee exercised full and direct control over the group companies.
The revenue further took assistance of Article 5(2)(a) of the DTAA to contend that Indian group companies can also be treated as PEs of the assessee in India as its 'Place of management'. That all the costs incurred by eBay India were reimbursed by the assessee with 8% mark-up. Since, the assessee was required to reimburse the entire amount of expenses to eBay India, this, in effect meant that the premises for which rent was paid by eBay India etc., belonged to the assessee and all other expenses, though apparently incurred by eBay India, were, in reality, incurred by the assessee. In the light of the above , it was contended that eBay India and eBay Motors also constitute permanent establishment of the assessee in terms of Article-5(2).
c) Held
The Mumbai Tribunal held that there is no dispute about the fact that eBay India and eBay Motors are providing their exclusive services to the assessee. It has been fairly admitted that these two entities have no other source of income except that from the assessee in lieu of the provision of service as set out in the agreements. In view of the fact that eBay India and eBay Motors are exclusively assisting the assessee in carrying on business in India, they definitely become dependent agents of the assessee. The next question, however, is whether or not these dependent agents constitute permanent establishments of the assessee as per Clause (i),(ii) or (iii) of Article 5 (5), on which the Tribunal observed as under.
i. That clause (ii) of Article 5(5) refers to the dependent agent habitually maintaining a stock of goods or merchandize for or on behalf of the enterprise. This clause has no application in this case because there is no requirement on the part of eBay India or eBay Motors to maintain any stock of goods or merchandize on behalf of the sellers.
ii. Clause (iii) applies where the dependent agent manufactures or processes the goods or merchandize in that State for the enterprise. Obviously, this clause is also not applicable because Indian group companies are not required to manufacture or process the goods or merchandise on behalf of the assessee.
iii.That as per Clause (i), it is to be seen whether the Indian group companies do or habitually exercise 'an authority to negotiate and enter into contracts for or on behalf of the assessee.' By performing the activities as narrated in the agreement, it is seen that Indian Companies have at no stage negotiated or entered into contract for or on behalf of the assessee. Simply by providing marketing services to the assessee or making collection from the customers and forwarding the same to the assessee, it cannot be said that eBay India or eBay Motors entered into contracts on behalf of the assessee. That there is no mention in the assessment order or the contentions of DR that any contract was entered into by Indian companies, during the discharge of their functions or otherwise, for or on behalf of the assessee. Thus the test laid down as per clause (i) of Article 5 (5) also fails in the present case.
iv.Further as regards reliance placed by revenue on Article 5(2)(a) , it was held that Indian Companies were neither taking any managerial decision and nor had any role to play in maintenance or operations of websites. They had no role to play in online business agreements and were required to perform only marketing support services for assessee.Hence , it cannot be said that they form 'place of management' of the assessee's overall business.
v.Held: Though eBay India and eBay Motors are dependent agents of the assessee, but do not constitute 'Dependent agent PEs' of the assessee in terms of Article 5 of the DTAA.
B) Case of ITO vs Rights Florists (P) Ltd.2
The concept of PE in relation to websites has again been discussed in a recent ruling of Kolkata Tribunal in the case of ITO vs Rights Florists (P) Ltd. as under :-
a)Concept of PE evolved because in traditional commerce physical presence was required in the source country if any significant level of business was to be carried on, but, with the development of internet, correlation between the size of business and extent of physical presence in the source country has virtually vanished. The traditional concept of PE , which was conceived at a point of time when internet and ecommerce was not even on radar, does not really fit into the modern day world in which virtual presence through internet, in certain respects , is as effective as physical presence for carrying on business.
b)In order to study the tax impact of ecommerce, CBDT had appointed a High Powered Committee . The Committee also observed that applying the existing principles and rules to ecommerce does not ensure certainty of tax burden and maintenance of the equilibrium in the sharing of tax revenues between the countries of residence and source. "The Committee, therefore, supports the view that the concept of PE should be abandoned and a serious attempt should be made within OECD or the UN to find an alternative to the concept of PE." Clearly , conventional PE test fails in this virtual world even when a reasonable level of commercial activity is crossed by foreign enterprise. The traditional tests for determination of PE fail in virtual world of ecommerce.
c)The Commentary on OECD Model Convention observes on this issue that there has been some discussion as to whether the mere use in electronic commerce operations of computer equipment in a country could constitute a PE. That question raises a number of issues in relation to the provisions of the article. It further observes as under:-
i. Website, per se, which is combination of software and electronic data, does not itself constitute a tangible property. It, therefore, does not have a location that can constitute "place of business" as there is no " facility such as premises or, in certain instances, machinery or equipment" as far as software and data constituting that website is concerned."
ii. The server on which the website is hosted and through which it is accessed is a piece of equipment having a physical location and such location may constitute a "fixed place of business" of the enterprise that operates that server.
iii. However , if the enterprise uses the services of an Internet Service Provider (ISP) for hosting website, then location of such server may not constitute PE for such enterprise, if the ISP is an independent contractor and acting in its independent course of business. In such an event even if the enterprise is able to dictate that its website may be hosted on a particular server at a particular location, it will not be in possession or control of that server and therefore, such server will not result into PE.
iv.However, if the enterprise carrying on business through a website has the server at its own disposal , e.g. it owns or leases and operates the server on which website is stored and used, the place where the server is located could constitute the PE of the enterprise.
d)Though India has expressed its reservations on the OECD Model Commentary and has taken a stand that website may constitute a PE in certain circumstances but High Powered Committee report has clearly laid down the need for present concept of PE to be abandoned and new alternative to be introduced if virtual transactions have to be brought to tax net in source country.
e)Held:- Hence it has been held by the Kolkata Tribunal in this case that receipts in shape of online advertisement charges by non resident search engine websites, Google and Yahoo, from India cannot be brought to tax in India in absence of any PE of said website in India.
In view of aforesaid analysis, it can be concluded that mere presence of website per se does not constitute PE but location of server may be a criteria for determination of PE. This conclusion as per the case of Right Florists (P) Ltd. is in relation to Fixed place PE.
However even if a web site were treated as an office or fixed place of business, it would not form a PE in all cases. The exception for a fixed pace of business engaged merely in preparatory or auxiliary functions would be applicable to virtual office also.
Further whether PE exists in the form of dependent agent or otherwise can been seen in light of discussions made in the case of eBay International AG.
Conclusion and Effect of Non-Constitution of Website as PE in the Source Country
While some countries argue that a website could constitute PE in the source country but OECD argues otherwise. In these type of cases OECD,which mostly favours residence base of taxation, has always contended that web site cannot constitute a PE as there is no physical presence in source state. According to OECD Commentary , a PE requires a "physical presence" in a country and a website is "intangible".However the developing countries have always registered their disagreement. The UN Model Treaty, which favours source based taxation, doesnot clearly deals with these issues relating to e-commerce.
Where companies located abroad, like in the case of ebay, are operating country specific websites and generating revenue clearly attributable to the source country ,law should be made clear as to whether such websites would themselves be treated as PE in the source country. Moreso when companies like eBay India are working to provide all the support services. Otherwise,as we have seen in the case of ebay, companies registered abroad and operating website relating to Source country would move on without being taxed in the Source state on pretext that website is not PE and companies providing support services are also not PE or dependent agent PE.
From a policy perspective, a website should be treated as a PE if it is used to perform the functions of a traditional office.Non taxation of ecommerce in source state is also providing opportunities to the taxpayers to avoid all the taxes by shifting their ecommerce income to a tax heaven. There are many offshore jurisdictions which are currently providing tax free or low tax regime for ecommerce. Some companies may avoid tax by earning profits in subsidiary companies in offshore centers and not remitting them to parent company.
Hence it is imperative that clear law should be laid down for taxability of ecommerce transactions so that neither the source country have to forgo their share of legitimate taxes nor the non-resident companies have to bear the heat of double taxation.
Reference to Judgements
1. (2012) 25 taxmann.com 500 (Mumbai Tribunal)
2. (2013) 32 taxmann.com 99 (Kolkata Tribunal)
CA.Arun Gupta
Partner M/s G D Singla & Co., Chartered Accountants
Ex-Chairman Ludhiana Branch of NIRC of ICAI
9814104273
arunaru@yahoo.com
www.cagds.in
TDS on Reimbursement of salary in case of secondment arrangement of foreign employees
23/05/2013 by Arun GuptaTDS OBLIGATION ON REIMBURSEMENT OF SALARY IN CASE OF SECONDMENT ARRANGEMENT OF FOREIGN EMPLOYEES
1. INTRODUCTION
In this era of rapid globalization, the multinational companies have been establishing their business all over the world. India, being one of the most potential market, has witnessed massive investments from the foreign companies. With increased investment inflows, our country has also seen immense inflow of experts from the various overseas companies . The human resource of any company is its back bone.It is the expertise of their employees which has enabled the overseas companies expand their corporations the world over . The multinational companies are sending their employees, having expertise in the respective fields, to help the subsidiaries set up and run their business more efficiently.
With the taxmen in India becoming more and more aggressive in their approach, the concept of secondment has also brought with itself various tax disputes. Even if the foreign employee has paid his taxes for income earned by way of salary in India , the Indian tax authorities are going one step further in contending that reimbursement of salary of foreign employees by Indian companies is in fact income of foreign company in shape of Fees for Technical services earned from India or that presence of employees of overseas company would constitute Service PE in India.
The secondment of employees , though may seem to be very simple , can lead to serious tax implications both for the Indian Subsidiary Company and the Parent Overseas Company. The tax obligations of the seconded employee working for Indian company would depend upon various factors like the residential status he acquires while working in India, place where services are being rendered , receipt of salary in India or abroad etc. However the tax obligations of the Indian and Foreign employer may not end even if seconded employee has been subject to taxes in India for salary earned as seconded employee.
2. ISSUES INVOLVED AND PREVALENT LAW
In the most common scenario, the Overseas Parent Company second their employees to Indian Subsidiary Company. The overseas employer remains the legal employer of the seconded employees and Indian subsidiary becomes the economic employer of the said employee.
The overseas employer remains the legal employer so that employee does not have to suffer on account of social security schemes or other employment benefits which depend upon the continuity of the employment with said company or in home country. However the Indian company becomes the economic employer which means that employee works under direct control,direction and supervision of the Indian Subsidiary .The overseas company does not become responsible for the work and performance of the employee. The risk and reward of the work done by the seconded employee would go to the Indian Company. The Indian Company has the right to demand the replacement of the employee and parent company also retains the right to replace or terminate the employee.However for administrative convenience the seconded employee remains on the payroll of the overseas company. The parent overseas company pays salary to the seconded employee which is reimbursed on cost to cost basis by the Indian Subsidiary. Certain local benefits such as accommodation, local conveyance etc. is provided locally by the Indian Subsidiary to such seconded employee.
Now in the abovesaid case, even if employee is paying taxes on the Income earned in India by way of salary , the following tax implications may arise:-
2.1 Withholding tax obligations on Indian Subsidiary in case of reimbursement of salary of seconded employee on the contention that reimbursement of salary to Overseas Company is ,in actual, payment for Technical or Consultancy Services.
2.1.1 Revenue has been contending on following lines to establish that reimbursement of salary has to be treated as Fees for Technical Services:-
(i) That reimbursement of salary by the Indian Subsidiary to the parent overseas company is actually payment for technical or managerial or consultancy services provided by the overseas parent company .
(ii) That services performed by the seconded employee are actually performed on behalf of the parent company and not as employee of the Indian Company.
(iii) That the amount received by the parent company is in fact receipt of income and further payment of the salary is only application of the income on which employee is liable to tax as per his nature of income and residential status.
(iv) That Indian subsidiary of the employee is not legal employer and therefore payment by Indian company to overseas company could not be construed to be reimbursement of the salary.
(v) That the parent company has the right of dismissal and further in absence of obligation of Indian company to pay salary to the employee , it cannot be said to be an economic employer.
(vi) That in the secondment arrangement , the right of the seconded employees to seek their salaries is against the parent overseas company and they cannot claim it as right against Indian Company.
2.1.2 Though in few rulings , the above stand of the revenue has found favour with the Courts and AAR (such as Virizon Data Services India(AAR)1 ,AT&S India (P) Ltd.(AAR)2, Target Corporation Indian (P) Ltd.(AAR)3) , however in most of the cases (like Abbey Business Services (India) Pvt. Ltd.(Bang-Trib)4, Tekmark Global Solutions LLC (Mum-Trib)5,IDS Software solutions India(P) Ltd. (Bang Trib)6 ,Cholamandalam (AAR)7), the Courts and AAR have ruled that the said reimbursement of the salary on cost to cost basis is not chargeable to tax in India and cannot be termed as Fees for Technical Services on the following grounds:-
(i) That agreement between the Indian Company and overseas parent company is an agreement for secondment of staff and not agreement for rendering of services by the parent overseas company , hence the reimbursement of salary on costs to cost basis cannot be regarded as Fees for Technical services.
(ii) The Indian Subsidiary company exercising the rights to hire or accept secondees, right to control, supervise, instruct and terminate secondees from secondment along with being liable on its own account for their performance is real and economic employer of the secondees as against the foreign company which is only a legal employer.
(iii) In this context, substance should prevail over the form , i.e. employer should be the person who is having the rights on the work produced and bearing the relative responsibility and the risks.
(iv) That parent company opts to remain legal employer to protect their interest relating to benefit of pension contributions, social security and other benefits under laws of home country.
(v) That overseas parent company does not render any service to Indian enterprise and is only paying salary to the seconded employee for administrative convenience. The amount reimbursed by the Indian company on cost to cost basis would only be reimbursement of salary and therefore no sum is chargeable to tax in India which requires deduction of tax at source.
(vi) Since seconded employee works under direct control, supervision and instructions of the Indian Company and does not render any service on behalf of parent overseas company , the secondment would not tantamount to rendering any technical, professional or consultancy service.
2.1.3 Hence it is clear from the above discussion that if revenue is able to prove that seconded employee, in actual, is working under the direct supervision of the parent overseas company and providing technical or managerial services to the Indian subsidiary and the arrangement has been disguised as secondment arrangement, then it may lead to tax withholding obligations on the Indian Subsidiary. However if it is a genuine case of secondment of employees and intention of the parties is clear from the arrangement then mere reimbursement on cost to cost basis would not tantamount to Fees for technical services as in such a case the Indian Subsidiary becomes the economic employer of the seconded employee though he is drawing salary from parent overseas company for administrative convenience.
2.1.4 As per OECD Model Convention also concept of economic employer has to be taken care of in cross border secondment of employees and substance over form has to be seen to determine as to who is the real employer of the seconded employee.
2.1.5 Concept of 'make available' :- In certain DTAA's there is concept of 'make available' of technical services i.e. obligation to withhold tax under Indian Income Tax Act on recipient of the service would arise only if the receiver of the service is able to use the service itself in future , without the help of service provider, once the services have been rendered by the service provider. It has been held by the Hon'ble Bangalore Tribunal in the case of Abbey Business Services (India) Pvt. Ltd4. that the reimbursement of salary cannot be termed as Fees for Technical services if the same do not pass the test of 'make available' concept. The Hon'ble Tribunal relied upon the judgement of Hon'ble Karnataka High Court in case of De Beers India Mineral Ltd 8. for coming to this conclusion.
2.2 Constitution of Service PE in India due to presence of employees in India:
In the case of ÂÂCentrica India Offshore (P) Ltd. (AAR)9, the revenue has successfully contended that presence of the employees of the foreign company for rendering services for their overseas employer in India by working for specified period would create a Service PE and hence parent overseas company would become liable for taxes in India for amount received as reimbursement of salary under the head business income.
However in this case again the courts have held that in case of secondment agreement the Indian Company is real and economic employer and services are rendered by employee directly to Indian company and not on behalf of foreign company and hence presence of employee in Indian would not lead to Service PE in India.(like in Tekmark Global Solutions LLC (Mum-Trib)5
3. CONCLUSION
Hence it is necessary that intention of the parties involved should be clear while engaging in the secondment agreement as to control, supervision, risk and responsibility , right to termination etc. Only then risks of services being regarded as technical services or Service PE would be mitigated. If the foreign employee severs the relation with parent overseas company and becomes full time employee of Indian Subsidiary then there is no risk of parent company being regarded as Service PE in India or providing technical services through employee to Indian company. However due to protection of interests of employee in home country relating to social security etc. secondment arrangements are entered into. Hence such agreements have to be entered into supported by requisite documentation so that actual purpose is clear and not doubtful.
Case Laws referred:-
1. Virizon Data Services India (2011) 337 ITR 192 (AAR)
2. AT&S India (P) Ltd. (2006) 287 ITR 421(AAR)
3. Target Corporation Indian (P) Ltd. (2012) 348 ITR 61 (AAR)
4. Abbey Business Services (India) Pvt. Ltd.(2012) 23 taxmann.com 346(Bang-Trib)
5. Tekmark Global Solutions LLC(2010) 131 TTJ 173 (Mum-Trib)
6. IDS Software solutions India(P) Ltd.(2009) 122 TTJ 410 (Bang Trib)
7. Cholamandalam MS General Insurance Co. Ltd. (2009) 178 Taxmann 100 (AAR)
8. De Beers India Mineral Ltd. [2012] 21 Taxmann .com 214(Kar.)
9. Centrica India Offshore (P) Ltd.(2012) 206 Taxmann 545 (AAR)
CA.ARUN GUPTA
(M): 09814104273
Email: arunaru@yahoo.com
Force of Attraction rule cannot be imported in Article 7 of Indo-UK DTAA
ADIT vs Clifford Chance (Mumbai Special Bench-IT Appeal. NOs. 5034,5035,7095 (Mum) of 2004 dated 13/05/2013)
ISSUES INVOLVED :-
- Whether amendment by Finance Act,2010 to Section 9(1)(v),(vi),(vii) changes the position of law as far as assessee is concerned ?
- Whether Force of Attraction rule can be imported in Article 7(1) of the India UK DTAA by referring to Articles 7(1)(b) and 7(1)(c) of the UN Model Convention?
DTAA INVOLVED :-
INDIA UK DTAA
FACTS OF THE CASE:-
A) The assessee is a UK based partnership firm of Solicitors engaged in providing international legal services
B) During the years under consideration, it rendered legal consultancy services in connection with different projects in India. Although it did not have an office in India, some part of the work relating to the projects in India was performed in India by its partners and employees during their visits to India.
C) For assessment years 1999-2000, 2000-01, 2001-2002 and 2003-04, the returns of income were filed by the assessee declaring NIL income on the ground that the aggregate period or periods of stay of its partners and employees during the said years did not exceed 90 days and its income, therefore, was not taxable in India in these years placing reliance on Article 15 relating to 'Independent Personal Services' of the India-UK Treaty.
D) AO ,however, rejected assessee's claims for exemption based on Article 15 of Indo-UK DTAA and taxed profits based on Article 7(1) of Indo-UK DTAA to tax them as business profits.
E) CIT(A),however, allowed the claim of the assessee.
REVENUE'S CONTENTIONS :-
a) That Article 15 of the India-UK Treaty is not applicable in the case of the assessee since it did not cover partnership firms within its ambit.
b) That that the case of the assessee ,even otherwise, was covered by Article 7 of the India-UK DTAA read with Article 5 thereof. Reference in this regard was made to the terms of Article 5(2)(k) of the India-UK DTAA which provided that the term 'Permanent Establishment' (PE) shall include, inter alia, the furnishing of services including managerial services other than those taxable under Article 13 (Royalties and fees for technical services) within a Contracting State by an enterprise through employees or other personnel but only if the activities of that nature continued within that state for a period or periods aggregating to more than 90 days within any 12 months period. That the test of 90 days stipulated under Article 5(2)(k) was satisfied in the case of the assessee and the assessee thus had a PE in India in terms of the "duration of stay" test provided in the treaty. That the assessee also was having fixed place PE in India in the years under consideration through which services were rendered by its partners and employees during their stay in India. That the assessee had a PE in India and also a business connection in India, hence, the profit earned by the assessee from the rendering of services in India was in the nature of business profit covered under Article 7 of the India-UK DTAA.
c) That the legal premise, "services, which are the source of income sought to be taxed in India, must be utilized in India and rendered in India", did not hold good any longer in view of amendment made in section 9 by the Finance Act, 2010 w.r.e.f. Ist June, 1976 whereby Explanation to section 9(1) was amended to provide that the income of the non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of section 9(1) and shall be included in his total income, whether or not (a) the non-resident has a residence or place of business or business connection in India or (b) the non-resident has rendered services in India.
d) That since the assessee was carrying on business in India through the said PE, the profits to the extent they are directly or indirectly attributable to PE in India are taxable in India as per Article 7 of the India-UK DTAA. That Article 7(1) of Indo UK DTAA should be interpreted in the light of Article 7(1) of the UN Model Convention relying upon the decision of Division Bench of Mumbai Tribunal in the case of Linklaters LLP .
ASSESSEE'S CONTENTIONS :-
a) That the assessee's case fall under Section 9(1)(i) and not section 9(1)(vii), hence amendments made by Finance Act ,2010 to clauses (v),(vi),(vii) of Section 9(1) does not come into play in the case of the assessee.
b) That Article 15 of the Indo UK treaty is applicable to the assessee and not Article 5 read with Article 7 and since aggregate period of stay of the partners and employees did not exceed 90 days, its income derived from the services rendered in connection with the projects in India was not taxable.
c) That,even otherwise, as per the said Article 7(1), profit attributable directly or indirectly to the PE in India is taxable in India. That ,what is directly and indirectly attributable to the PE in India is defined in Article 7(2) and 7(3) of the Treaty and referring to the UN Model Convention to come to the conclusion that the force of attraction rule is incorporated in Article 7(1) of the India-UK DTAA is not justified and erroneous.
HELD:-
Hon'ble Special Bench of The Mumbai Tribunal discussed the provisions of Income Tax Act,1961 and relevant Articles of Indo-UK DTAA and observed and held as under :-
a) That the case of the assessee is covered by Section 9(1)(i) and not Section 9(1)(vii).
b) That assessee's case is duly covered by Article 15 of the Indo-UK DTAA as contended by the assessee and not Article 5 read with Article 7 of the DTAA.
c) That even otherwise Article 7(1) of India UK DTAA read with Article 7(3) thereof is not similar to provisions of Section 7(1)(b) and Section 7(1)(c) of the UN Model Convention and it would not be correct to say that the connotations of "profits indirectly attributable to permanent establishment" extend to the two categories of income as specified in clause (b) and clause (c) of Article 7(1) of the UN Model Convention and incorporate a force of attraction rule as held by the Division bench of this Tribunal in the case of Linklaters LLP.
d) That when the connotations of "profits indirectly attributable to permanent establishment" are defined specifically in Article 7(3) of the India-UK DTAA which clearly explains the scope and ambit of the profits indirectly attributable to the PE and the provisions of said article being unambiguous and capable of giving a definite meaning, there is really no need to refer to the provisions of Article 7(1) of UN Model Convention which are materially different from the provisions of Article 7(1) of the India-UK DTAA read with Article 7(3) thereof.
Comments :-
The main contention of the assessee in this case was that he is covered by Article 15 of the Indo UK DTAA relating to "Independent Personal Services" and not by Articles 5 read with Article 7 of the said DTAA. Further he contended that Section 9(1)(i) is applicable to him and not Section 9(i)(vii). The Hon'ble tribunal held both the issues in favour of the assessee.
Since the main contentions abovesaid were held in favour of the assesse , the Hon'ble Tribunal itself in the order said that since Article 15 has been held to be applicable in the case of assessee and now issue ,whether 'force of attraction' would apply in case of assessee or not has become infructuous and academic only. But since the said question was specifically referred for consideration of Special Bench, the Hon'ble Bench went on to decide this issue in detail.
'Force of attraction' concept lays down that when an enterprise sets-up a permanent establishment ('PE') in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can tax all profits that the enterprise derives from that country - whether through the Permanent Establishment (PE) or not. Therefore, under the 'force of attraction rule' mere existence of PE in another country leads all profits derived from that another country being treated as taxable in that another country.
UN Model of Convention supports this philosophy clearly in Article 7(1). However OECD Model Convention does not support this philosophy. Though Indian Tax Treaties are largely based on UN Model Convention but each DTAA in itself lays down the intent of both the countries. In respect of Indo UK Treaty also the extent of profits attributable to PE directly or indirectly has been laid down in Article 7(1) read with Article 7(3) . However the Division Bench of the Tribunal in the case of Linklaters LLP held that the provisions of Article 7(1) in the DTAA include the same results as are sought to be achieved by Article 7(1)(c) of the UN Model Convention and relying on the UN Model Convention commentary on the issue, a considered view was taken by the Tribunal that the connotation of 'profits indirectly attributable to permanent establishment' would extend to incorporation of the 'force of attraction' rule being embedded in Article 7(1).
However in this case the Hon'ble Special Bench has overruled the decision of Division Bench and held that when language of the treaty wasn't ambiguous ,there was no need to take meaning of this term from the UN Model convention. This ruling would save the tax payers from force of attraction rule to be applied on them and creating unwarranted tax liabilities on them.
CA.ARUN GUPTA
Ex-Chairman Ludhiana Branch of NIRC of ICAI
Ex-Secretary,District Taxation Bar Association,Ludhiana
arunaru@yahoo.com
arun@cagds.in
09814104273