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90A. (1) Any specified association in India may enter into an agreement with any specified
association in the specified territory outside India and the Central Government may, by
notification in the Official Gazette, make such provisions as may be necessary for adopting
and implementing such agreement—
(a) for the granting of relief in respect of—
(i) income on which have been paid both income-tax under this Act and
income-tax in any specified territory outside India; or
(ii) income-tax chargeable under this Act and under the corres-ponding law in
force in that specified territory outside India to promote mutual economic relations, trade
and investment, or
(b) for the avoidance of double taxation of income under this Act and under the
corresponding law in force in that specified territory outside India, or
(c) for exchange of information for the prevention of evasion or avoidance of
income-tax chargeable under this Act or under the corres-ponding law in force in that
specified territory outside India, or investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corres-ponding law in
force in that specified territory outside India.
(2) Where a specified association in India has entered into an agreement with a specified
association of any specified territory outside India under sub-section (1) and such
agreement has been notified under that sub-section, for granting relief of tax, or as the
case may be, avoidance of double taxation, then, in relation to the assessee to whom such
agreement applies, the provisions of this Act shall apply to the extent they are more
beneficial to that assessee.
(3) Any term used but not defined in this Act or in the agreement referred to in sub-
section (1) shall, unless the context otherwise requires, and is not inconsistent with the
provisions of this Act or the agreement, have the same meaning as assigned to it in the
notification issued by the Central Government in the Official Gazette55 in this behalf.
Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in
respect of a company incorporated in the specified territory outside India at a rate higher
than the rate at which a domestic company is chargeable, shall not be regarded as less
favourable charge or levy of tax in respect of such company.
Explanation 2.—For the purposes of this section, the expressions—
(a) “specified association” means any institution, association or body, whether
incorporated or not, functioning under any law for the time being in force in India or the
laws of the specified territory outside India and which may be notified as such by the
Central Government for the purposes of this section;
(b) “specified territory” means any area outside India which may be notified as such
by the Central Government for the purposes of this section.]
Generally the treaty obligations, which a country enters with another country have
sometimes become law of the land without the formality of law enacted by the
legislature. It is because Government of the day may have been given power to
negotiate and arrive at such treaty . It is note that all treaties become part of the
domestic law( as in the case of US). It is in this context that it had to be
incorporated in the Indian constitution with the result that the Government of the
day is authorized to enter into international agreements but in most matters, such
agreements may have to be followed up by local legislation as was found in
respect of arbitrations, patents etc. The Tax payer may opt to be governed by the
Act of the tax treaty, whichever is more beneficial but cannot pick & choose the
provisions.
- Circular No. 333 of 1982
- Azadi Bachao Andolan 263 ITR 706 (SC)
- Vishakapatnan Port Trust 144 ITR 146 (AP)
DTAA MODELS:
There are Two major types of DTAA Model
· OECD MODEL
· UN MODEL
OECD Models are generally adopted by developed nations and their emphasis is
on the residency based taxation.
UN Model emphasis is on the source based taxation and generally adopted by the
developing nations.
There are also US model Convention & Indian Model Convention too.
In this Treaties Importance has been given to Residence than citizenship. The Tax
Treaties follow a fairly well established procedure which is given below:
(1) Negotiation
(2) Initialing
(3) Signature
(4) Ratification
(5) Entry into force
(6) Effective Date
Now let us analyze some of the Judicial decisions which comes in last one year .
Atlanta
Australia
Austria
Belgium
Canada
DENMARK
France
ITAT Mumbai in the case of CMA CGM SA France 24 DTR 37 decided that
Income earned by the assessee on account of transportation by ships
operated by other enterprises under slot chartering arrangement is
covered by art. 9 and is taxable only in the State of residence and
accordingly, such income will be exempt from the Income-tax under the
Income-tax Act.
In the case of Maruti Udyog Limited, it was decided that Expression „fees
for technical services‟ as appearing in provision of article 13(4) of DTAA
between India and France as well as in Explanation 2 to s. 9(1)(vii)
means payment made to any person in consideration of managerial,
technical or
consultancy services. Since test reports had been used by assessee in
India in manufacturing of cars payment made to “U” company of France
were
chargeable to tax in India.
Germany
Interest in income Tax refund is includible under article 11 & not article
8-3 of DTAA (Hapag Lloyd Container Linie Gmbh v ACIT 9 Taxmann.com
126).
Royalty income earned by a resident of Germany from India has to be
assessed to tax at the rate of 10% as provided in Article 12 of DTAA
(ADIT v Chiron Behring Gmbh & Co KG).
Ireland
Italy
Korea
MAURITIUS
In the case of JRAY McDermott Eastern Hemisphere Ltd. vs. Jt. CIT 38
DTR 161 (Mum.) (Trib.) it had been decided that For the purpose of
determining the applicability of the threshold time-limit under Art.
5(2)(i), of the Indo-Mauritius DTAA, what is to be taken in to account is
the duration of the activities of the foreign enterprise on a particular site
or a particular project or supervisory activity connected therewith, on a
standalone basis and not all the activities in a tax jurisdiction as a
whole.
In the case of Velankani Mauritius vs. DDIT it had been decided that
Profits from supply of „shrink-wrapped‟ software is not „royalty‟.
Applicant is not liable to pay capital gain tax in India in respect of the
transfer of shares held in the Indian Company to HSBC, having regard to
provisions of the India-Mauritius DTAA. (E. Trade Mauritius Ltd., in Re.
(2010) 324 ITR 1 / 190 Taxman 232 (AAR)
Shares held by the applicant as investment in the books of accounts are
treated as capital asset. Applicant is not liable to be taxed in India on
the proposed transfer of said shares to its wholly –owned subsidiary
company in India in view of section 47 (iv) or under art 13 of India
Mauritius treaties. (Praxair Pacific Ltd In RE 42 DTR (AAR) 177.).
A Mauritian company is not liable to pay capital gains in India qua
transfer of shares held in an Indian company to another Mauritian
company. (D B Zwrin Mauritius Trading 10 Taxmann.com 158).
Cessation of PE is relevant only for taxability of business profits and
even after cessation of PE in India, A non resident assessee can still be
liable to Its Taxability‟s under other heads including under capital gains
in India (Cartier Shipping Co Limited v DDIT (IT) 6 taxmamm.com 16 -
Mumbai - 2010.)
Netherland
NewZeaLand
Payment made to New Zealand company for rendering liasion & co-
ordinate services qua DNA testing at USA does not fall within ambit of
royalty & FTS (DCIT v MRO (India) P Limited 10 Taxmann.com 123).
Others
In the case of ACIT vs. Federal Express Corporation (2010) 35 DTR 425
(Mum.)(Trib.) it had been decided that Transportation of mail or cargo
etc by the assessee in the international traffic by the aircrafts as
owner / charter / lessee fell within the scope of Art. 8 and therefore,
profits attributable to the same cannot be taxed in India. Benefit of Art.
8 cannot be denied to the assessee merely on the ground that the
assessee was collecting cargo from its customer‟s place and transporting
the same to airport for the purpose of further transportation in the
international traffic and vice versa.
No income arises to the foreign company in India in the course of
deputing personnel to an Indian company, who work under the control
and supervision of the Indian company and thus become employee of
the Indian company. Amount of salary of deputed employees
reimbursed to the foreign company is not taxable in India. This
had been decided in the case of DDIT vs. Tekmark Global Soutions LLC
(ITAT Mumbai, ITA No. 671/2007, decided on 23-2-2010, (BCAJ 42-A,
May 2010 pg. 171)
Mumbai ITAT in the case of Airlines Rotables vs. JDIT decided that No
PE under DTAA if three criteria are not fulfilled
In the case of Cartier Shipping vs. DDIT, Mumbai ITAT declared that
Despite cessation of PE, gains on transfer of PE asset taxable under Act
and DTAA
Delhi tribunal in the case of Paradigm Geophysical Pty Ltd. 122 ITD 155
declared that Where non-resident is taxable under domestic law but
there is a provision in treaty between India and country in which
nonresident is incorporated to exempt transaction or reduce rigour of
taxation to benefit of non –resident, provisions of treaty override
provisions of domestic law.
The above again had been confirmed by Mumbai Tribunal in the case of
Chiron Behring GmbH & Co. where it was held that Assessee being a
person to whom DTAA applied had option being subjected to tax as per
DTAA or Act, which was more beneficial to it, hence, it had rightly
subjected it self to tax at reduced rate of 10 percent as per DTAA.
In the case of Swedish Telecoms International AB 224 CTR 418 it was
held that Management charges, whether relating to business
management or technical management would be outside the scope of
exemption under art, of DTAA. Management charges are not to be
treated as commercial profits
Work of to be undertaken by assessee included data collection
measurement of dynamic properties of machines, providing training to
engineers nominated by “T” Ltd. etc, it could be concluded that assessee
did “make available’ technical knowledge, experience, skill and know-
how processes to „T” Ltd. within the meaning of paragraphs (4) of article
13 of DTAA and therefore assessment passed by the authorities were
confirmed. As regards the second project was concerned, since the role
assessee was confined to merely providing independent evaluation of
motorcycles prior to their launch and there was no provision for making
available any technical knowledge, experience and skill etc. to „T‟ Ltd.,
no addition can be made. This was confirmed in the case of TVS Motor
Co Limited 35 SOT 230.
In the case of Airports Authority of India, In Re (2010) 190 Taxman 209
(AAR) (New Delhi), it had been decided that Except in regard to the
payment made to Raytheon for hardware and COTS software that go
with hardware, which are not liable to be taxed in India, the payments
for other items fall with in the scope of Article 12 and therefore, can be
taxed in India, irrespective of the fact that Raytheon has no PE in India.
The applicant is liable to deduct tax at source on the payment made to
Raytheon other than for hardware the rate of withholding tax is
governed by section 115A(1)(b)(BB) which is more beneficial to the tax
payer when compared to the rate prescribed in Article 12 of the treaty.
It was held, income from receipt of royalties as set out in s. 9(1)(vi) are
taxable in India whether or not the non-resident has a place of
residence, or place of business or business connection in India.
However, the correct interpretation of the Double Taxation Avoidance
Agreement would be to include the royalties from patents, copyrights or
trade marks and the like within the expression “industrial” or
“commercial” profits. This income would not be royalties within the
meaning of the Double Taxation Avoidance Agreement but would fall
under the expression “commercial or industrial profits.” In the absence
of a permanent establishment, such income would not be taxable in
India. (Siemens Aktiongesellschaft 310 ITR 320).
(i) To constitute “royalty”, it is not necessary that the process should be a “secret
process”, nor that that the instruments through which the “process” is carried on should be
in the control or possession of the payer. The context and factual situation has to be kept in
mind to determine that whether the process was “used” by the payer. The fact that the
telecasting companies are enabled to telecast their programmers by up linking and down
linking the same with the help of that process shows that they have “use” of the same. Time
of telecast and the
nature of programme, all depends upon the telecasting companies and, thus, they are using
that process;
(ii)
(ii) The consideration paid by telecasting companies to satellite companies is for the
purpose of providing “use of the process” and consequently
assessable as “royalty” under the Act and the DTAA.
Sale of raw materials /CKD units to DCIL. DCIL carried out further
activity of assembling the same and selling the finished cars. There were
no further activities carried out by the assessee in India in this
connection. Mere sale of raw materials/components would not result in
business connection and even if it did as per the terms and conditions of
the contract between the assessee and DCIL no income occurred to the
assessee on the basis of any activities carried out on behalf of the
assessee in India. Mere existence of subsidiary does not by itself
constitute the subsidiary company as a PE of the parent. The DCIL was
merely rendering a very insignificant auxiliary/preparatory service in the
sale of CBU cars by assessee to the Indian Clients. Therefore DCIL did
not constitute a dependent agent of the assessee. (DY DIT v Daimler
Chrysler A.G. 39 SOT 418 (Mum.)
Payment made for grant of license in respect of Copy right by end user
is taxable as royalty as per s.9(1)(vi),domestic tax legislation to
override treaty provisions in case of irreconcilable conflict. (Microsoft
Corporation vs. ITAT).
when assessee receives only net proceeds as per export invoice, there is
nothing further left over to be treated as income received or to be
received or accrued or deemed to be accrued or arising in India or
outside India (ITO v Vishal Janakkumar Agarwal).
In the case of CIT v Maggronic Devices (P) Limited, it was decided that
Purchase of drawings and data documents and delivered abroad . No
income accrue to India.
Purchase of technical know- how by foreign company, was business
receipt. As there was no permanent establishment in India, the same
was not liable to be taxed in India, though the same was treated as
„royalty‟. (Vesil SPA Italy vs. Jt. CIT)
Singapore
South Africa
In the case of Cia de Navegacao Norsul 12I ITD 113 it was held that
Where assessee was neither owner nor lessee nor character of feeder
vessels carrying cargo from Mumbai port to destination in Durban,
profits attributable to such voyage would be outside scope of article 8
of DTAA.
In the case of Spahi Projects (P) Ltd. Commission being payable to
South African Company for services rendered abroad and it having no
fixed place or agent in India, no income could be taxed in India.
Switetzerland
United Kingdom
In the case of Real Resourcing Ltd, In Re. 36 DTR 132 it had been
decided that Referral fee received by the applicant, a UK company
from India based recruitment agency for referring potential Indian
Clients and candidates to the latter even if it is in the nature of
consultancy services, cannot be considered to be ancillary and
subsidiary to the enjoyment / application of the right or information
referred in para. 3(a) of Art. 13 of the Indo–UK DTAA, nor the activity of
providing information would fall within the ambit of making available
the technical knowledge and experience of the service provider, in
the absence of PE, the receipts in the nature of referral fee are not
taxable even as business profits.
ITAT Mumbai in the case of Linklaters LLP vs. ITO confirmed that
Professional Firms can have a ‘service PE’. The words “indirectly
attributable to the PE” encompass the “force of attraction” principle and
even services rendered offshore for Indian projects are assessable in
India.
Dividend received by a Resident Indian from an English company is to
be increased by 1/9th of the same and on increased amount which is a
gross dividend same is to be considered as dividend received by
assessee for the purpose of IT Act. (ACIT v Homy N J Dady 2010 6
taxman.com 126 Mum).
Compensation awarded under Arbitration awarded to a Non Resident
Company having no PE in India, is not taxable in India (Goldcrest
Exports v ITO 7 taxmann.com 74 Mum ITAT).
Payment made by applicant to the UK company for providing
international leg of the service in transmitting voice/data to places
outside India
using its international infrastructure and equipments is neither royalty
nor fees for technical services: payment is in the nature of business
profits and in the absence of PE of UK company in India, same is not
taxable in India. (Cable & Wireless Networks India (P) Ltd 25 DTR 49).
In view of article 9(1) of DTAA between India and UK, freight income
earned by non–resident assessee on account of transportation of cargo
in international traffic by ships operated by other enterprises under slot
chartering, arrangement would be taxable only in State of residence and
consequently, such income would be exempt from taxation under Indian
Income tax law. (Balaji Shipping (UK) Ltd. (2009) 121 ITD 61)
In the case of BBC worldwide, it was decided that Foreign Co not liable
to tax in India if Indian agent is paid on arms‟ length basis
Remittance for acquisation of TALO process by an assessee on a non
exclusive basis from UK cant be constructed as royalties (CIT v DCM
Limited)
In the case of Asst. DIT vs. Delata Airlines Inc 124 ITD 114 it had been
decided that charter of aircraft would alone fall within the ambit of para.
2(b) of Article 8 of Indo-US Treaty. Deposit of amount in FDR could not
be said to be connected with operation of aircrafts para. 5 of Article 8
would not apply.
Installation or structure used for exploration or exploitation of natural
resources may constitute a PE provided it is used for either of activities
for a period of more than 120 days for any 12 M period. (R&B Falcon
Offshore Limited v Addl CIT 7 Taxmann.com 76)
In the case of EFunds Corporation vs. Asst. DIT 45 DTR 345, it had been
decided that Assessee a US company, providing IT enabled services to
its clients by assigning or sub contracting execution of the contracts to
its wholly owned Indian subsidiary EFI and supplying the relevant
software and database to the latter free of charge has business
connection in India within the meaning of section 9(1)(i) as well as a PE
in the form of EFI as per Art. 5 of the Indo-US DTAA, profits attributable
to the PE are to be worked out by applying the proportion of Indian
assets, including EFI‟s assets, to the aggregate of global profits and
reducing resultant figure by the assessed profits of EFI.
Payment made by assessee for purchase of a software program from A
non resident, having no PE in India, cannot be considered as a royalty
either under income tax act or under DTAA (DDIT v Reliance Industries
Limited 8 taxmann.com 182).
In the case of Tata Sons the court decided that an assessee is entitled to
benefit of section 91 even though he is covered by scope of India -US &
India -Canada DTAA.
In the case of Whirlpool India Holdings Limited v DDIT, the court says
that “Before bringing a forign company to tax in India on ITS business
profits, it is for the revenue to establish that it has PE in India”.
In the case of Louis Berger International Inc., it was decided that
reimbursement of Expenditure cannot form part of fees payable for
technical service
In the case of Factset Research Systems Inc 25 DTR 146 Subscription
fee received by applicant from the licensee (customer) for providing
database
containing financial and economic information of companies worldwide
was not royalty within the meaning of s. 9(1)(vi), Expln. 2 or art 12 of
DTAA between India and USA as no exclusive right or copyright was
made over to customer and it did not amount imparting of information
concerning the applicant‟s own knowledge, experience or skill in
commercial and financial matters.
Payments made to non-residents on account of rentals for hosting of
websites on servers are not in nature of interest of royalties or fee for
technical
services or other sum chargeable to tax in India. Provisions of Article
26(3) DTAA between India and USA neutralizes rigor of provisions of s.
40(a)(i). (Millennium Infocom Tech Ltd. 309 ITR 18)
The ITAT Bangalore, in the case of Nike decided that Assessee, having
its main office in USA having opened a liaison office in India solely for
the
purpose of helping its affiliates located at different parts of the world to
buy goods etc. for trading operations, acting through liaison office as
purchasing agent, placing orders with local manufacturers specifying the
quantity, price, the
affiliate with address on whom the bill is to be raised and the destination
and not in any way communicating with the manufacturers other than
supervising the manufacturing operations to ensure quality as per
approved samples and specifications, the same amounts to purchase in
the course of
export and Expln. 1(b) to s. 9(1)(i) is attracted, hence no income is
deemed to accrue or arise to assessee in India.
It is not necessary that unless a person be taxed in the UAE that person
cannot claim the benefits of Indo- UAE tax treaty in India, what is really
relevant to see is whether or not the recipient was resident of the UAE.
(Hindustan Petroleum Corporation Ltd. vs. ADIT 2010) 130 TTJ 518
(Mum.)
Mere presence of vessel of Non resident ship in territorial water of India
does not constitute PE (Swabird Exploration FZ, LLC , In re 6
taxmann.com 57 (AAR - New Delhi)
Expression liable to tax in contracting state as used in Article 4(1) of
Indo UAE DTAA does not necessarily imply that person should actually
be liable to tax in that contracting state (ADIT v resource Connection
(FZE).