International Taxation

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January 2016

CA. Hinesh Doshi & CA. Ronak Soni

Director, Income Tax vs. R & B Falcon Offshore Ltd. Co. [2015] 63 taxmann.com dated 14th September, 2015

Facts of the case:

R & B Falcon Offshore Ltd. Co. has bought a rig to India from USA and it was ready for use at that time. The rig underwent temporary repairs work & certain preparatory activity was conducted before it was given for exploration of natural resources to M/s Petrom SA.

The lower authorities considered that the assessee had a “permanent establishment in India” under Article 5(2)(j) of the Double Taxation Avoidance Treaty between India and the USA since the same was used in India for more than 120 days considering the days of repairs done to rig.

CIT (Appeals) also was of the same view & dismissed the appeal of the assessee.

Issue:

Whether assessee operating rig had PE in India and the income of an assessee in India, be treated as taxable in India if PE of an assessee exists in terms of Article 5(2)(a)(b)(c) beside 5(2)(j) of DTAA with USA?

Held:

The HC considered Tribunal view that the installation or structure used for the exploration or exploitation of natural resources may constitute the PE. The attendant condition is that it must have been so used for a period of 120 days in any twelve-month period. The words “so used” clearly show that the installation or the structure should have been used for exploration or exploitation of natural resources for it to constitute a PE provided that it is used for either of activities for a period of more than 120 days for any twelve-month period.

The rig was not used for exploration or exploitation of the mineral oil when it was under repairs or being moved to the appointed place for exploitation of mineral oil. That activity was a preparatory activity so as to make the rig to be fit for exploitation of natural resources as per the requirement of Saipem SA. It was used for exploitation of mineral oil when it was positioned at the appointed place for exploitation of mineral oil. It is the admitted position that if the time is reckoned from its positioning at the appropriate place, the period is less than 120 days. Therefore, it is held that the assessee did not have the PE in terms of Article 5(2)(j).

Hence the result was in favour of assessee.

Income Tax Officer International Taxation-II vs. B A Research India Pvt. Ltd. [TS-683-ITAT-2015(Ahd) dated 30th November, 2015]

Facts of the Case:

he assessee is an Indian company manufacturing drugs in India & subsequently selling the drugs.

The assessee made payments to concerns in USA & Canada for providing analytical services and testing charges without deducting tax. The non-resident companies had no PE in India. These services were provided outside India, but were utilised for earning income from source in India.

The Assessing Officer did not accept the contention of the assessee and proceeded to hold the assessee in default for non-deduction of tax on the basis that the services provided are fees for included services & it is made available as per the Article 12(4)(b) of DTAA.

In an appeal CIT(A) held that the services provided to the assessee by the non-resident parties of USA and Canada did not fall within the purview of ‘included services’ under Article 12(4)(b) and, hence, there was no liability on the assessee to deduct TDS u/s.195 of the Act.

Aggrieved by the order of the CIT(A), the Revenue preferred an appeal before Ahmedabad Tribunal.

Issue:

Whether a service, technical in nature, can be said to be “fees for included services” only when it has “made available” technical knowledge or skills to the recipient of services and such recipient can apply the same on his own?

Held:

ITAT referred the appellant’s contention that Article 12(4)(b) of the DTAA between India and USA/Canada is not applicable since the non-resident parties did not ‘make available’ any technical knowledge, experience, skill, know-how or processes. In this case the concerns in USA and Canada were conducting tests on the drugs which were already researched and after analysing the drugs on the required parameters final reports were submitted to the assessee.

In the present case the samples were sent to the experts outside India and there is nothing on record suggesting that the services rendered to the assessee were made available to the assessee and also the assessee was able to apply the same of his own. In the absence of the same, such service would not fall within the ambit of the included service under
Article 12(4)(b) hence there was no liability on the appellant to deduct TDS u/s. 195
ITAT thus held that the service which is technical in nature can be said to be “fees for included services” only when it has “made available” technical knowledge or skills to the recipient of services, i.e. recipient of services can apply the same on his own.

In the result, appeal of the Revenue is dismissed.

Asst Commissioner Income Tax vs. Ms Meera & Ceiko Pumps Pvt. Ltd. [2015-TII-196-ITAT-HYD-INTL dated 30th November, 2015]

Facts of the Case:

The assessee company was engaged in the business of manufacture of hand pumps and its spares and execution of works contracts.

A payment was made to non-residents as Agency Commission for participating and obtaining export orders for supply of hand pumps spares and tools manufactured by the assessee without deducting tax on it.

AO claimed that since the amount paid by the assessee falls within the ambit of income deemed to accrue or arise in India, the assessee is bound to deduct tax as per the provisions of section 195 and as such no application as required u/s. 195(2) for Nil deduction or deduction rate was made to the AO. Therefore due to failure to comply with provisions of TDS the AO disallowed the amount of Agency Commission paid.

In an appeal the CIT(A) referring to the earlier similar cases held that the assessee is not under obligation to deduct tax on agency commission payment made to foreign agents and accordingly the disallowance made by AO u/s. 40(a)(ia) was deleted by CIT(A).

Aggrieved by the order of CIT(a), revenue preferred an appeal before Hyderabad Tribunal.

Issue:

Whether when the assessee paid to a foreign national in respect of work carried out outside India, payment also made outside India, such payment would be taxable in India or would fall under the exception of section 9(1) (vii)(b)?

Held:

ITAT held that the issue in dispute is squarely covered by the decision of the ITAT in assessee’s own case. The agreement entered into between the assessee and Non-resident agents clearly shows that the assessee has to dispatch hand pumps, spares etc. and agents has to clear the hand pumps, spares and other material dispatched by the assessee from the port situated outside the country. The agent has to make arrangements for transporting, storing, distribution, installation and commission of hand pumps. This clearly shows that agents rendered their services only outside Indian territory.

It held that when the assessee paid to a foreign national in respect of work carried out outside India, and the payment was also made outside India, such a payment would fall within the exception provided’ in section 9(1)(vii)(b) of the Income-tax Act. Therefore, the payment made by the assessee is not subject to any tax in India. Accordingly, there is no need for deduction of tax by the assessee.

Hence the result was in favour of Assessee.

Dy. Director of Income Tax vs. The BOC Group Ltd. [TII-195-2015 –ITAT-Kolkata-Tribunal] dated 30th November, 2015

Facts of the Case:

The assessee, a tax resident of United Kingdom, declared taxable income from business or profession and subjected the same to tax at the rate of 15% as per the DTAA, as against the regular tax rate applicable to a foreign company at the rate of 40%. The assessee did not calculate surcharge and education cess on the tax rate of 15% as per DTAA.

The assessee submitted that since the Article 2 which defines “tax” states income tax including surcharge and felt that separately surcharge and education cess was not to be applied on the tax rate of 15% which was inclusive of all applicable taxes and was of the opinion that no other tax other than 15% was payable.

The AO determined the tax to be payable at the rate of 40% being the rate applicable to foreign company and surcharge and education cess was also applied on the said rate.

On appeal, the CIT(A) held that the assessee had received the income in the nature of fees for technical services and in terms of Articles 13(2) (a) and 13(4) (c) and the tax rate applicable would be 15%. Also, that the surcharge and education cess was not to be levied on the tax rate prescribed under DTAA at 15% on fees for technical services.

Aggrieved by this revenue preferred an appeal before Kolkata Tribunal.

Issue:

Whether the surcharge and education cess is leviable when the tax rate is prescribed under DTAA?

Held:

It is well settled that the education cess is nothing but an additional surcharge. Article 2 states that surcharge is included in income tax and hence the tax rate of 15% for fee for technical services which is prescribed in Article 13 shall have to be deemed to include surcharge.
Since education cess is nothing but an additional surcharge, the tax prescribed under DTAA @ 15%, in the instant case, shall be deemed to include surcharge and education cess. When a tax rate is determined under DTAA, then the tax rate prescribed thereon shall have to be followed strictly, without any additional taxes thereon in the form of surcharge or education cess.

DTAA benefit under Article 13 could not be denied to the assessee.

ITAT, thus, ruled in favour of assessee.

CIT vs. Taurus Shipping Services [2015–TII–77–HC – Ahmedabad – INTL] dated 1st December, 2015

Facts of the Case:

The assessee during the concerned year had acted as an agent of three vessels which had transported goods from Kandla Port to Vizag. The vessels had undertaken this freight transportation during the journey from Singapore to Dubai.

During assessment, the AO concluded that such transportation between Kandla to Vizag could not be considered as international traffic as defined in DTAA between India and Singapore.

On appeal, the Tribunal, however, ultimately held in favour of the assessee.

Aggrieved by this revenue preferred an appeal before Ahmedabad High Court.

Issue:

Whether the exclusion clause of the definition of term ‘international traffic’ would apply to a case, where the transportation between two Indian ports was undertaken during a larger journey of vessels from Singapore to Dubai?

Whether the assessee is entitled to claim the benefit of Article 8 of the Indo-Singapore DTAA on transportation of vessel from Singapore to Dubai, by treating the said transaction as “international traffic?

Held:

The term ‘International Traffic’, as noted, is defined to mean any transport by a ship or aircraft operated by an enterprise by a contracting state. This definition, however, has an exception clause which excludes the transport when the ship or aircraft is operated “solely” between the places in the other contracting state.

Thus, any transaction by a ship or aircraft operated by enterprise or contracting state would be an international traffic. However, this would be not so if a ship or the aircraft is operated “solely” between the places in the other contracting state.

The case here was not that the journey being undertaken by such vessels in question were confined between the two ports in India either routinely or even in individual isolated case. Fact was that such transportation between 2 India ports was undertaking during a larger journey of the vessels from Singapore to Dubai. Being so, the requirement of such journey being “solely” between places in the other contracting state is not satisfied.

The exclusion clause of the definition of term ‘international traffic’, in this case therefore, would not apply.

In terms of Article 8 of the DTAA, profits derived by an enterprise of a contracting state from the operation of ships or aircraft in international traffic would be taxable only in that state. Hence the transport by the ships in question from Kandla to Vizag falls within the definition of the term ‘international traffic’, in terms of Article 8, the assessee would be entitled to the benefit of the DTAA.
Thus, Revenue\'s appeal dismissed.