Habibullah & Co. Newsflash
Contributed by Habibullah & Co
07 October, 2019
ITAT Vizag in the case of 3F Industries Ltd. vs. ACIT
Ref: Article 7, India-Malaysia DTAA; Article 7, India-UK DTAA
Facts: Compensation paid for contractual default, being business profit, was not taxable in India if recipient had no PE in India and Rebate given for quality issues effectively being discount in sale price, was not taxable; even otherwise, rebate being business profit, was not taxable in India if recipient had no PE in India
Compensation for contractual default
The transaction of export was a business transaction. Compensation was paid because of failure of the assessee to supply the products. Thus, the payment was to compensate the Malay Co for the loss suffered by it because of non-fulfilment of contract by the assessee. Therefore, the receipt was business income in the hands of the Malay Co. Further, the Malay Co did not have a PE in India. In terms of Article 7 of the India-Malaysia DTAA, business income of the Malay Co would be taxable only in Malaysia unless it had a PE in India. But since it did not have a PE in India, the business income was not chargeable to tax in India. Therefore, the question of disallowance u/s 40(a)(i) of the Act did not arise.
Quality rebate was given because of certain quality issues. The perusal of the documents showed that the quality rebate was, effectively, a discount in sale price. Hence, there was no question of TDS. Even otherwise, quality rebate was in the nature of business profit for the UK Co. In terms of Article 7 of the India-UK DTAA, the business income of the UK Co would be taxable only in the UK unless it had a PE in India. But since it did not have a PE in India, the business income was not chargeable to tax in India. Therefore, the question of disallowance u/s 40(a)(i) of the Act did not arise.
ITAT Mumbai in the case of Knight Frank (India) (P) Ltd. vs. ACIT
Ref: Sections 5, 9, 40(a)(i) and 195 of the Act; Article 7 of India-USA DTAA
Facts: As services were rendered outside India and payment was also made outside India, receipts of the foreign company were not within the scope of 'total income' in section 5(2) - Fee received for merely referring and introducing clients is business income which, in absence of PE in India, would not be chargeable in India - Besides, the services were not in the nature of managerial, technical or consultancy services
Under section 5(2), income taxable in India of a nonresident includes income received or deemed to be received in India and income which has accrued or arisen, or is deemed to accrue or arise in India. Since the referral fee was paid outside India, it was not received or deemed to be received in India. As regards accrual, place of accrual would be relevant. Since the US Co had rendered the services outside India, referral fee did not accrue or arise in India. Since the US Co had rendered all its services outside India, no part of referral fee could be attributed to any operation in India. Hence, there was no income deemed to accrue or arise in India. And, since the CIT(A) had based his conclusion on Explanation to section 9(2), which mentions clauses (v), (vi) and (vii), their applicability should be examined. As clause (v) is in respect of 'interest', it is not relevant. Similarly, clause (vi) deals with 'royalty', which is also not the case. Hence, what needs to be examined is whether, in terms of clause (vii), the services rendered were in the nature of managerial services, technical services or consultancy services.
The US Co was referring or introducing clients to the assessee. It did not provide any managerial advice or services. Therefore, referral fee cannot be said to have been received for managerial services.
The US Co had not performed any services which required special skills or knowledge relating to a technical field. Therefore, referral fee cannot be said to have been received for technical services.
The US Company was using its skill and knowledge for its own benefit and merely referring or introducing clients to the assessee. It had not provided any consultation or advice to the assessee. Therefore, referral fee cannot be said to have been received for consultancy services.
The service of referring or introducing a client did not 'make available' any technical knowledge, experience, skill, knowhow or processes to the assessee. Therefore, the receipt was not 'Fees for included services' in terms of Article 12 of the IndiaUSA DTAA.
Disallowance under section 40(a)(i)
As referral fee was business income of the US Co, it was covered under Article 7 of the India-USA DTAA. And since the US Co did not have a PE in India, referral fee was not chargeable to tax in India. Hence, the assessee was not obligated to deduct tax at source u/s 195 from the referral fee. Consequently, no disallowance u/s 40(a)(i) could be made.
ITAT Delhi in the case of Adidas India Marketing vs. IT Officer (P) Ltd.
Ref: Sections 5 and 9 of the Income Tax Act
Facts: As insurance compensation received by foreign parent company from foreign insurer was for protection of its financial interest in Indian subsidiary, it was not taxable in hands of the Indian subsidiary, although compensation was paid pursuant to fire damage to assets and stock of the Indian subsidiary.
Insurance policy between the asssesse and the Indian insurer was to secure stock-in-trade, which is a tangible asset. However, GIP between Foreign Company (FC) and foreign insurer was for securing investment made, or financial interest, in subsidiaries which is an intangible asset. Thus, the interest insured by the asesseee and that by Foreign Company were two different interests.
The insurance contracts entered by the asesseee and Foreign Company were separate and independent since: (i) there were two different claimants; (ii) claimants had separately paid the premium; (iii) no part of the premium on GIP was allocated to the asssesse; and (iv) the privity of contract was with different parties.
As the assessee did not have any right or obligation in the GIP and it was not a party to it, the assessee did not have any right to receive the claim of insurance. The same was also not vested in the assessee to be regarded as having accrued in the hands of the assessee. Reliance was placed on the Supreme Court's decision in the case of ED Sassoon [26 ITR 27 (SC)].
The claim under GIP was in respect of insured financial interest of FC in its worldwide subsidiaries. The foreign insurer had paid compensation for diminution in financial interest. Merely because the computation of the claim was with reference to loss by fire of the stock, or profit that could have been earned if such stock was sold, cannot be construed to mean that the claim was in respect of loss of tangible property in the form of stock of the assessee. The claim was in respect of the intangible asset in the form of financial interest of FC. Hence, the claim cannot be said to have any 'business connection' in India.
The insured interest of FC cannot be said to be through or from any property in India or through or from any asset or source of income in India. FC had entered into a contract in Germany for insuring the intangible assets in the form of financial interest in its subsidiaries. This was quite distinct from the physical stock-in-trade of the assessee that was lost in fire. Thus, the claim received by FC could not be treated as income deemed to accrue or arise in the hands of the assessee in India. Further, the email correspondence was merely to explore the modes of transfer of money from FC to the assessee for restoring the financial interest of FC in the assessee. The same cannot determine the tax liability. Such correspondence was related to application of money but did not indicate in whose hands the money was taxable.
The GIP was taken to cover the contingent losses that may or may not arise in future. Further, as FC had actually paid premium in respect of GIP from time to time and also paid tax in Germany in relation to the insurance claim, there was no colorable device adopted by the assessee for evading taxes in India.
ITAT in case of Kingfisher Airlines Ltd. vs. DDIT
Ref: Article 12 of India-UAE DTAA; Article 12 of India-Germany DTAA; Article 12 of IndiaSingapore DTAA; sections 9 and 195 of the Act
Facts: Since hiring of simulator by itself has no purpose, fee paid for simulator is not royalty -
Payment to foreign companies for flight simulation training was in the nature of FTS - In absence of FTS article in India-UAE DTAA, it was to be treated as business income which, in absence of PE of foreign company in India, was not taxable - TDS obligation cannot be fastened on the assessee because of retrospective amendment if such obligation was not there at the time of payment.
Payment for simulator
Flight simulator is an essential part of training. Merely because charges for simulator are separately quantified on an hourly basis did not mean that the assessee had hired the same or made payment for a right to use the same. Without imparting training by the instructors, hiring of the simulator on its own is of no purpose. Hence, the charges paid by the assessee for use of simulator were 'royalty'.
Payment to UAE Co.
In the case of the UAE Co, the question of payment being FTS did not arise since the India-UAE DTAA does not have an article relating to FTS. It is settled position of law that in the absence of an article in a DTAA regarding a particular item of income, the same should not be regarded as residuary income but income from business. In the absence of the PE of a non-resident in India, business income cannot be taxed in India.
The CIT(A) had upheld the order of the AO only on the ground of retrospective amendment to section 9 in 2010 and to section 195 in 2012.
The law is well settled that TDS obligation cannot be fastened on a person on the basis of a retrospective amendment to the law, which was not in force at the time when the payments were made. Since at the time when the assessee made payments to the nonresident there was no TDS obligation on him, it was not possible for him to foresee that by a retrospective amendment to the law a TDS obligation would be fastened on him.
- ITO: Income Tax Officer
- ITAT: Income Tax Appellate Tribunal
- DTAA: Double Taxation Avoidance Agreement
- DCIT: Deputy Commissioner of Income
- ACIT: Assistant Commissioner of Income
- CIT(A): Commissioner of Income Tax (Appeals)
- PR: Permanent Establishment
- FTS: Foreign Technical Services
- IPR: Intellectual Property Rights
- TRC: Tax Residency Certificate
- Act: Refers to the Indian Income Act 1961
- Bombay Chartered Accountants Society
- The Institute of Chartered Accountants of India
- Bombay Stock Exchange
- National Stock Exchange
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