Cummins Ltd., In re A.A.R NO. 1152 OF 2011 (dated 12.01.2016) Background: Cummins Limited, UK is a company incorporated in the UK. Cummins Technologies India Limited (CTIL) is a company incorporated in India. CTIL is engaged in the business of manufacture and sale of turbochargers. CTIL purchases turbocharger components directly from third party in UK and US and in relation to such purchases, Cummins Limited provides supply management services vide Material Suppliers Management Service Agreement. As per the agreement CTIL pays supply management service fees calculated at 5% of the base prices from the suppliers As per the agreement, Cummins Ltd, UK is responsible for following activities: – Finalization of supplier prices from UK and US suppliers and ensuring market- competitive pricing from suppliers; – Ensuring that the approved suppliers have the necessary manufacturing capacities and infrastructure to provide for the raw material requirements; – Assisting in ensuring on-time delivery of components by the suppliers to Cummins India as well as resolution of delivery performance issues with suppliers, if any – Ensuring that suppliers maintain strict compliance with the standards, procedures and processes and support in obtaining response from supplier to any quality control violation issue; and – Performance review of the supplier Cummins Ltd does not have a permanent establishment (PE) in India in respect of the supply management services as per the provisions of the India-UK Treaty.
International Taxation
DCIT v M/s Carl Zeiss India (P) Ltd (ITA No 1251(B)/2014, 1258(B)/2014 dated 24 July 2015) Mumbai ITAT Background: During the course of assessment proceedings, the AO noted that the assessee has claimed Rs.1,12,51,602 under the head cost of senior management pertaining to activities of Carl Zeiss India Branch. On query, by the AO, the assessee submitted that during the financial year amount has been reimbursed to Carl Zeiss, Singapore Pte Ltd. being the cost allocated based on the proportion of work performed. Thus, it was submitted that the cost reimbursed by the assessee is in the nature of reimbursement on actual basis without any mark-up. The assessee has also pointed out that the payment was made and the amount was remitted only after obtaining a certificate from the AO u/s 195(2). The AO did not accept the contention of the assessee and was of the view that the services provided by the head office through 3 senior managerial personnel fall under the category of fee for technical services (FTS). Thus, the AO held that the remittance in truth and reality is consideration for technical services disguised as reimbursement of expenses. Since the assessee did not deduct tax at source, the said payment of Rs.1,12,51,602 was disallowed and added to the total income. The CIT(A) gave partial relief by accepting contentions of the assessee with respect to 1 managerial personnel and dismissed the ground regarding other 2 personnel and upheld the order of the AO that the services were indeed FTS.
Once certificate u/s 195(2) is obtained for NIL deduction, AO cannot disallow the expense u/s ...
CIT v GRUP ISM P. LTD. (ITA 325/2014 dated 29.05.2015) Delhi High Court Background: The assessee Company made payment of Rs 56,54,963/- to M/s. CGS International, UAE (“CGS International”) and Rs 37,76,863/- to M/s. Marble Arts & Crafts LLC, UAE (“Marble Arts & Crafts”) (aggregating to Rs 94,31,826/-). The AO noted that no TDS had been deducted by the assessee while making the payment to the said two foreign concerns and asked the assessee to justify the same. The assessee stated that the payments were made towards commission and that neither of these concerns had any business in India and therefore, it was not required to deduct TDS. However, the AO disallowed the amounts stating that the payment made was towards consultancy services and therefore, liable to TDS. On appeal before the CIT(A), the CIT(A) held that the payment made by the assessee to the two UAE entities would not come within the purview of “technical services‟, as defined in Explanation 2 to Section 9(1)(vii) of the Act and consequently, the provisions of Section 9(1)(vii) were not attracted in the assessee’s case. The CIT(A) also held that Article 14 of the DTAA with UAE is applicable in the facts of the case and that the AO could not have denied the applicability of the said Article on the sole premise that the two UAE entities are companies. Accordingly, since the remittances to such non-resident entities are liable to be taxed in the UAE, no TDS was required to be deducted. The ITAT dismissed Revenue’s appeal and confirmed CIT(A)’s order.
Liaisoning, inspection, solicitation, procedural services do not constitute ‘FTS’ – Del HC
DDIT v Serum Institute of India Limited ITA No.792/PN/2013 dated 30.03.2015) – Pune ITAT Background: Assessee during the financial year 2010- 11 made payments to non-residents on account of interest, royalty and fee for technical services. The assessee deducted tax at source on such payment in accordance with the tax rates provided in the Double Taxation Avoidance Agreements (DTAAs) with the respective countries. The tax rate so provided in the DTAAs was lower than the rate provided under the Income-tax Act, 1961. In case of some of the non-residents, the recipients did not have Permanent Account Numbers (PANs). The AO treated such payments, as cases of ‘short deduction’ of tax in terms of the provisions of section 206AA of the Act. Section 206AA prescribes that if the recipient of any sum or income fails to furnish his PAN to the person responsible for deduction tax at source, the tax shall be deductible at the rate specified in the relevant provisions of the Act or at the rates in force or at the rate of 20%. The AO treated it as short deduction being difference between 20% and the actual tax rate on which tax was deducted in terms of the relevant DTAAs. As a consequence, demands were raised on the assessee for the short deduction of tax and also for interest u/s 201(1A) of the Act. CIT(A) granted relief holding that where the DTAAs provide for a tax rate lower than that prescribed in 206AA of the Act, the provisions of the DTAAs shall prevail and the provisions of section 206AA of the Act would not be applicable.
Section 206AA does not apply to beneficial rates provided in tax treaty – Pune ITAT
GVK Industries Ltd vs. ITO (Supreme Court) The assessee paid fees to a non-resident (NRC). The obligation of the NRC was to: (i) Develop comprehensive financial model to tie-up the rupee and foreign currency loan requirements of the project.(ii) Assist expert credit agencies world-wide and obtain commercial bank support on the most competitive terms. (iii) Assist the appellant company in loan negotiations and documentation with the lenders. The assessee claimed that as the fees were paid for services rendered outside India, the same were not chargeable to tax in India and that the assessee was under no obligation to deduct TDS u/s 195. However, the AO and CIT rejected the claim of the assessee. The High Court (228 ITR 564) held that the said payment was not assessable u/s 9(1)(i) but that it was assessable u/s 9(1)(vii). The assessee claimed that s. 9(1)(vii) was constitutionally invalid as it taxed extra-territorial transactions. However, this claim was rejected by the Constitution Bench of the Supreme Court in 332 ITR 130. On merits, the matter was remanded to the Division Bench of the Supreme Court. HELD by the Division Bench dismissing the appeal:
Expression “fees for technical services” in s. 9(1)(vii) explained with reference to “consultancy” services – ...
OXFORD UNIVERSITY PRESS (AAR No.1110 of 2011) Background The assessee (applicant) is engaged in publishing, printing and reprinting of educational books for schools, Universities, Professional and other educational institutions or scholarly books. The applicant has appointed Ms Geetha Kumararaja, a resident of Colombo, Sri Lanka as a marketing executive that involves promotion of sale of books published by the applicant. The question before the AAR was whether the remuneration received by Ms Geetha was chargeable to tax in India and consequently, whether the payment should be subjected to tax deduction under the income tax Act.
Sales promotion and marketing activity cannot be construed as ‘fees for technical service’ – AAR
HUAWEI TECHNOLOGIES CO LTD, China v ADIT (ITA Nos.5253/Del/2011, 5254/Del/2011, 5255/Del/2011 & 5256/Del/2011 dated 21/03/2014) – Del ITAT Background: The assessee, which is a company incorporated in China, is engaged in the business of supplying non-terminal products, i.e., telecommunications network equipment. The assessee had not filed any return of income. During the course of survey undertaken at the office premises of Huawei India, several documents were found and statements of various senior executives were recorded. On the basis of the said documents and statements, the Assessing Officer arrived at the conclusion that the assessee was having Permanent Establishment (PE) in India and the income that has accrued to the assessee from the supply of telecommunications network equipment during the previous year is taxable in India. In view of the above, the AO issued notice under Section 148 of the Income-tax Act, 1961. In response to the notice under Section 148, the assessee filed the return of income on 30th July, 2009 disclosing total income of Rs 82,69,535.
Delhi ITAT ruling on factors considered for determining PE and taxability of software embedded in ...
eBay International AG v DDIT [IT APPEAL NO. 8907 (MUM.) OF 2010 dated 11.09.13] Mumbai ITAT Background: The Assessee is a company incorporated under law of Switzerland and is a tax resident of Switzerland. The assessee operated India specific websites (www.ebay.in and www.b2motors.ebay.in) that provides an online platform for facilitating the purchase and sale of goods and services to users based in India. The assessee has entered into marketing support agreements with eBay India and eBay Motors which are eBay group companies, for availing certain support services in connection with its Indian specific websites. Assessee earned revenues amounting to Rs. 12,00,39,045/- from the operations of these websites during the year. The assessee contended that these revenues are taxable as business profits in India as per the provisions of Article 7 of the Treaty only if the assessee has a permanent establishment (‘PE’) in India as per provisions of Article 5 of the Treaty i.e. DTAA. The assessee contended that did not have any PE in India and as such no amount would be taxable in respect of the consideration received from the operations of the above mentioned websites.
Distinction between ‘Dependant Agents’ & ‘Dependant Agent PEs’ brought out in eBay case – Mum ...
DIT vs. Infrasoft Ltd (Delhi High Court) Background: The assessee, a USA company, set up a branch office in India for the supply of software called “MX”. The software was customized for the requirements of the customer (not “shrink wrap”). The Indian branch imported the software package in the form of floppy disks or CDs and delivered it to the customer. It also installed the software and trained the customers. The AO & CIT(A) held that the software was a “copyright” and the income from its license was assessable as “royalty” under Article 12 of the India-USA DTAA. On appeal by the assessee, the Tribunal held, following Motorola 270 ITR (AT) (SB) 62, that the income from license of software was not taxable as “royalty”. Before the High Court, the Department argued that in view of CIT vs. Samsung Electronics345 ITR 494 (Kar), the right to make a copy of the software and storing it amounted to copyright work u/s 14(1) of the Copyright Act and payment made for the grant of a license for the said purpose would constitute royalty.