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"We meditate on that most adored Supreme Lord, the creator, whose effulgence illumines all realms. May this divine light illumine our intellect.” -Gayatri Mantra
Case 1: Income from Shipping and Air Transport – Article 8
In a case where exemption under Art 8 of Indo-China DTAA was denied because of alleged non-establishment of link between the Mother Vessel and Feeder Vessels used for transporting materials from hub port to Indian port and vice versa, the Mumbai Tribunal in China Oceanic Shipping (Group) Co. v. Assistant Director of Income-tax (International Taxation), Mumbai [2017] 80 taxmann.com 318 (Mumbai - Trib.) held in favour of the assessee based on cargo tracking report, document of ownership of the Vessels, Bill of lading etc which clearly established the linkage between the Mother
Vessel and the Feeder Vessels, as well as eligibility to claim the benefit of Art 8. The Tribunal also gave weightage to the stand taken in previous years where this matter was decided in favour of the Assessee even during the Assessment Stage;
Case 2: Reimbursements and Fee for Independent Personal Services
The Kolkatta Tribunal in Ershisanye Construction Group P. Ltd v. DCIT [2017] 84 Taxmann.com 108 clarified that amounts paid by the assessee to its Parent in China as reimbursement of amounts incurred in China by the Parent for training and legal services rendered by third parties do not partake the character of reimbursement simplicitor but shall take the character from services rendered by such third parties. In coming to this conclusion, the Tribunal relied on C.U. Inspections (I) (P.) Ltd. v. Dy. CIT [2013] 34 taxmann.com 75/142 ITD 761 (Mum. - Trib.) and held that withholding taxes
have to be examined based on the nature of actual services rendered by the third parties to the assessee. Analysing the taxability of payments made towards training of personnel, the Tribunal held that it would not constitute Fee for Technical Services (FTS) as the services were not technical in nature, relying on the decision of the Madras Tribunal in Cosmic Global Ltd. v. Asstt. CIT [2014] 48 taxmann.com 365/66 SOT 13 (Chennai - Trib.) and Mumbai Tribunal in the case of Lloyds Register Industrial Services (India) (P.) Ltd. v. Asstt. CIT [2010] 36 SOT 293. In respect of legal services, the Tribunal clarified that between Article 12 - FTS and Article 14 - Fee for Independent Services, the latter Article being more specific would prevail and in so deciding relied on Maharashtra State Electricity Board v. Dy. CIT [2004] 90 ITD 793, and Mumbai Tribunal in the case of Dy. CIT v. Chadbourne & Parke LLP [2005] 2 SOT 434. As to taxability under Art 14, the Tribunal found that the Chinese law firm neither stayed in India for more than 183 days nor had a fixed base, and hence did not attract tax in the State of source. Accordingly, it was held that payment towards legal fee was not taxable in India.
Case 3: Fee for Technical Services – Article 12
In Guangzhou Usha International Ltd [2015]
62 taxmann.com 96 (AAR - New Delhi), the AAR had occasion to decide on the taxability of amounts received by the Applicant towards market research, procurement, new supplier development, New Product development and a host of services from its Indian parent. Taking into account the nature of services rendered which included managerial and consulting services and not merely procurement, the AAR held that the payments were towards FTS.
Also rejecting the theory that the payment was not taxable as the services were done wholly outside India - and hence not arising in India - the Authority relied on Art 12(6) of the Indo-DTAA Treaty to hold that the amounts were deemed at arise in India and hence subject to tax in India. This ruling shows that wherever only services of procurement simplicitor is envisaged, Agreement should be specific to cover only such services and importantly not include other services that may involve skill, acumen and knowledge lest it should be inferred as payment for consultancy services as in GVK Industries Ltd. v. ITO [2015] 371 ITR 453/231 Taxman 18/54 taxmann.com 347.
Case 4: Whether payment for software portion incorporated in Mobile Handsets constituted Royalty
In CIT v. ZTE Corporation [2017] 77 taxmann.com 304 (Delhi), the question before the Delhi High Court was whether the value of software included in the mobile handsets supplied by the Chinese company represented payment for royalty and hence taxable in India. Affirming the findings of the Tribunal and following its own judgements in CIT v. Alcatel Lucent Canada [2015] 372 ITR 476/231 Taxman 87/56 taxmann.com 413 (Delhi), DIT v. Nokia Networks OY [2013] 212 Taxman 68/25 taxmann.com 225 (Delhi) and DIT v. Erricsson A.B. [2012] 343 ITR 470/204 Taxman 192/[2011] 16
taxmann.com 371 (Delhi), the High Court held that the software embedded in the mobile sets did not represent transfer of copyright but was only a copyrighted article similar to a music CD or a Book. Acknowledging that the buyer had no right to deal with the software in a manner that a transfer of copyright would enable, the High Court relied on the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh 271 ITR 401 for the proposition that software incorporated in a media is ‘goods’. The fact that the value of software and hardware were separately mentioned in the Invoice did not detract the Court from drawing its conclusions as the software and the hardware could not exist independent of each other as held in Andhra Pradesh in CIT v. Sundwiger EMFG Co.,[2003] 262 ITR 110, and that separate values were necessary only because of difference in customs duty.
Case 5: Permanent Establishment, Royalty
In Huawai Technologies Co. Ltd v ADIT [2014] 44 taxmann.com 296 (Delhi - Trib.), the Appellant, a Chinese company supplied telecommunication equipment bundled with software to customers in India. It was not controverted that the Appellant used the services of the employees of its subsidiary in India in bidding, negotiation, conclusion and signing of its contracts with customers and they virtually formed the sales team of the Appellant. The factual finding that the subsidiary was ‘dependent’ on the Appellant to do its business in India and that it was economically, technically
and financially so, was also not controverted. That the employees of the Appellant regularly worked out of the premises of the subsidiary also remained uncontroverted. It was also noted that the employees had stayed in India for more than 180 days for installation purposes while they also stayed for more than 183 days to render technical services. On the totality of such facts being uncontroverted, the Tribunal had no difficulty in affirming the findings of the DRP that the Appellant had a Fixed Place, Installation and Service PE besides, the subsidiary constituting a Dependent Agency PE under Article 5 of the Indo-China DTAA.
The Tribunal however ruled in favour of the Appellant that the value of software embedded in the telecommunication equipment, though separately priced, did not constitute Royalty as it only represented transfer of a non-exclusive, non-transferable, non-sub-licensable license to use the software and did not constitute transfer of any copyright. The Tribunal relied on the jurisdictional Court judgements in Ericsson A.B., (supra) and also in DIT v. Infrasoft Ltd., [2014] 220 Taxman 273/[2013] 39 taxmann.com 88 (Delhi) where the factual matrix was identical. Reference is also invited to CIT v. ZTE Corporation [2017] 77 taxmann.com 304 (Delhi) covered elsewhere in CHINA DESK.
Case 6: Residence
In CIT v. Bank of China [1985] 23 Taxman 46 (Cal.), the Calcutta High Court affirmed the findings of the Tribunal that a foreign company under liquidation and managed by the Official Liquidator shall be construed as having the seat of control and management wholly in India and hence a resident of India under Sec 6(3)(ii). The Court took note of the provisions of the Companies Act and Rules thereof that upon the appointment of the Liquidator, the Board of Directors cease to exist and all the powers becomes vested with the Official Liquidator. In determining the place of
residence as the seat of defacto control and management and not necessarily the place of registered office, the Court also relied on De Beer Consolidated Gold Mines v. Howe 5 TC 198.
Case 7: Fee for Technical Services
The Mumbai Bench of the ITAT in Ashapura Minichem Ltd. v. Assistant Director of Income tax [ 2010] 40 SOT 220 (MUM.) held that payment by an Indian company to a Chinese Resident for testing services rendered in China, but utilised in India as one for Fee for Technical Services both under Sec 9(1)(vii) of the Domestic law as well as under Art 12 of the Indo-China Treaty. The Tribunal agreed with the lower authorities that the decision of Ishikawajima Harima Heavt IndustriesLtd and Clifford Chance were no longer good law after the restrospective amendment to Sec 9(1)(ii) bringing
even services rendered outside India but utilised in India as income deemed to accrue or arise in India. On the Indo-China Treaty, the Tribunal rejected the reliance of the Appellant on para 4 of Art 12 which admittedly covered only services rendered by a resident of a contracting state in the other contracting State while relying instead on the ‘catch-all’ deeming provision in para 6 that construe all payments for technical services to arise in India if paid for by a resident of India.
Case 8: Resident – No Estoppel as to Law
The Delhi Tribunal in Assistant Commissioner of Income-tax, Circle -48 (1), New Delhi v. Raj Jain [2013] 38 taxmann.com 133 (Delhi - Trib.) reiterated the established law that a stay for more than 182 days in India was required to characterise a person as a Resident of India and that the same would apply also to a Citizen of India who had come to India on a visit during the year, in terms of Expl to Sec 6(1). Based on the uncontroverted facts that the assessee had stayed in India for less than 182 days, the Tribunal held the assessee to be a non resident and hence no part of the salary earned and
received in China was deemed to accrue or arise in India, and hence not taxable in India. The fact that the Indian subsidiary of the Chinese Parent had issued Form 16 did not detract the findings, reiterating that there was no estoppel as to law.
Case 9: Independent Personal Services
The question of whether audit services performed by KPMG, China but utilised in India by KPMG, India was taxable was resolved in favour of the assessee relying on Art 14 of the Indo-China Treaty on Independent Personal Services (IDPS) in preference to Art 12 on Fee for Technical Services (FTS). It is interesting to note that the Tribunal also included professional services rendered by limited companies under Art 14 and in so far as the assessee could show that the payee neither had a fixed base in India nor had stayed in India for more than 183 days, the Tribunal denied India the
right to tax the income. It was so held in KPMG v ACIT [2017] 83 taxmann.com 323 (Mumbai - Trib.) following a catena of cases. Reliance was placed on Maharashtra State Electricity Board v. Dy. CIT [2004] 90 ITD 793 (Mum.) in preferring the specific article 14 to the more general article 12. The case involved a batch of cases including services rendered by KPMG US, UK and France and in those cases, the Tribunal had no difficulty either under the Article on FTS or IDPS, to rule in favour of the assessee.
Case 10: Permanent Establishment, FTS, FIS and Royalty
The assessee was engaged in Port development activities under BOOT and placed an order on a Chinese company for design, engineering, manufacture, supply, installation and commissioning of certain specialised cranes. Specific Purchase Contracts (SPC) was entered into for the supply portion and separate service contracts towards installation/commissioning portion. The assessee also engaged the services of a US entity to audit the design and construction in China in order to monitor compliance with predetermined set standards. The question before the
Tribunal in Gujarat Pipavav Port Ltd v ITO (Intl Taxation) [2016] 67 taxmann.com 370 (Mumbai - Trib.) were multiple (1) whether the sums paid by the assessee to the Chinese company towards certain services embedded in the supply cost as per SPC constitutes FTS under the Indo-China DTAA and subject to withholding tax; (2) whether the presence of personnel from the Chinese supplier to oversee the assembling in India exceeded the threshold under Art 5 and thereby constituted an Installation PE and alternatively whether the Indian subcontractor engaged to perform the installation and commissioning activity constituted an Agency PE; (3) whether the sums paid to the US entity for work done outside India amounts to Royalty / FTS, chargeable to tax under the Indo-USA DTAA;
On the aspect of PE for the Chinese Supplier, the Tribunal excluded the number of days relating to after-sales service ( not an actual period of stay but a commitment to support for 6 months from commissioning) and confined the computation only to the installation and commissioning period to find that the number of days fell short of 182 days required to constitute an Installation PE under Article 5(2). On the question of whether the service element included in the SPC cost was FTS, the Tribunal reiterated the proposition that it was not permissible to apply Art 12 when Article 5(2) on Installation PE was available in the Treaty relying on Birla Corporation Ltd. v. Asstt. CIT [2015] 153 ITD 679/53 taxmann.com 1 (Jabalpur) to make good the point. The Tribunal further found that the service element embedded in the supply cost as per SPC which was sought to be taxed as FTS, was intrinsically connected to the sale of goods and cannot therefore constitute FTS, but would only be part of Business profits relying on Andrew Yule & Co. Ltd. v. CIT [1994] 207 ITR 899 (Cal.) and the special bench of the Madras Tribunal in ITO v. Prasad Production Ltd. [2010] 125 ITD 263. The tribunal also made a finding of fact that the subcontractor was not authorised to conclude contracts on behalf of the Chinese supplier, nor was he substantially depended on the latter so that even Agency PE was jettisoned.
In respect of the services rendered by the US company, on facts, the Tribunal held that the US company never transferred any skill, knowledge, technical plan, design or process to the Indian company, but was merely a commercial service involving review of designs during the process of manufacture so that it did not constitute FIS under Art 12(4)(b) or 12(7) fo the Indo-US treaty. The tribunal also held that no transfer of right to use anything, nor any industrial, commercial or scientific experience to the assessee has taken place to bring the transaction within the definition of Royalty. Relying on Diamond Services International (P.) Ltd. v. Union of India [2008] 304 ITR 201/169 Taxman 201 (Bang.), the Tribunal rejected claims of FIS or Royalty and finding that the US company did not have a PE in India, held that no part of the sum paid was taxable in India.
Case 11: Liaison Office constituting PE:
In Jebon Corporation India v CIT (Intl Taxation) [2012] 19 taxmann.com 119 (Karnataka), the Karnataka High Court agreed with the Tribunal that the activities of the liaison office encompassing procuring purchase orders, identifying the buyers, negotiating with the buyers, agreeing to the price, requesting them to place a purchase order, forwarding the PO to the Head Office, subsequently follow up regarding the payments from the customers and also offer after sales support are commercial activities and per se constitute a Permanent Establishment of the foreign entity in terms of Article 5 of the Treaty.
