tax briefly february 2012.pdf

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Tax Briefly

Stay on Top

February 2012


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Contents

Snapshot 4

Direct & International Tax 5

Transer Pricing 20

International Tax Developments 21

Indirect Tax 24

Glossary o terms 39


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Direct & International Tax

Prots under PMS construed as business income and

not capital gains

Interest on unds or acquisition o subsidiary held to

be expenditure or business purposes

Guarantee commission paid to CMD or personal

guarantee given to bankers was mode to divert

money and not deductible

Concessional rate o 20% not applicable to gains on

depreciable asset held or more than 36 months

Sale o shares out o India by a non-resident to

another non-resident is not liable to tax in India

and accordingly the buyer is not subject to Indian

withholding tax obligations

Carry orward o losses permitted where change

in shareholding does not result in change in

beneciaries

Payment or shrink-wrapped sotware constitutes

royalty payment

Income arising rom sale o sotware regarded as

business prot and in absence o PE in India thesame is not taxable in India

Oshore supply o equipment and supply o sotware

orming integral part o equipment not taxable in

India

Article 7 o the DTAA gives primacy to the provisions

stipulated in the domestic tax legislation or

computation o the taxable income

Leasing o assets in India by non-resident does not

result in PE or business connection in India

TPO not bound to disclose the entire process

ollowed or collection o inormation u/s 133(6)

Indirect Tax

Exemption rom service tax on services provided in

relation to transport o goods by rail extended

Constitutional validity o the explanation inserted

to the taxable services o Commercial or Industrial

Construction Services and Construction o

Residential Complex Service and levy o service tax

on services in relation to provision o preerential

location upheld.

Changes in Excise tari, HSN classication and RSP

valuation eective rom 1 Jan 2012

Changes in Customs tari and HSN classication

eective rom 1 Jan 2012

Goods cleared by debit o duty against SFIS scrip

amounts to discharge o duty liability

Bill o Entry (Electronic Declaration) Regulations,

2011 and Shipping Bill (Electronic Declaration)

Regulations, 2011 notied

Amendments to All India Duty Drawback Rates

explained

Export duty is not applicable on the sales made roma DTA to SEZ

Export benets available in case o sales rom DTA

to SEZ

SIM Cards and other services by telecom companies

cannot be subjected to VAT

Mere back to back arrangement cannot qualiy or

exemption as sale in course o import

Sale rom State o Maharashtra to Mumbai High not

a sale in the course o export

4

Snapshot


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Business income

Profts under PMS construed as business income and

not capital gains

The taxpayer invested surplus unds generated rom

business activities through PMS which was refected as

investments in the balance sheet. The taxpayer claimed

exemption under section 10(38) or long term capital

gain and applied concessional tax rate under section

111A o the Act or short term capital gains arising rom

the sale o shares through PMS. The AO considered the

gains as business prots, on the ground that the shares

were purchased with prot motive.

The Tribunal held that the portolio manager undertook

trading in shares to maximize the prots on behal o

the taxpayer and the intention o the taxpayer was to

maximize prot out o the investments. Accordingly, the

prot arising was taxable as business income.

ACIT v. Radials International ITA No. 1368 o 2010

(Delhi - Trib)

Commencement o business

Participation in tender process construed as business

was set up and had commenced

The taxpayer was in the business o real estate

development and participated in a tender or sale o

land. The taxpayer raised interest bearing loans rom its

holding company and deposited it as earnest money.

As the bid did not materialize the taxpayer remitted

the money to the holding company with interest. The

taxpayer claimed the net interest paid ater adjusting

with interest received as carry orward business loss.

The AO was o the view that the taxpayer had not

commenced its business and hence disallowed the

interest paid and urther treated the interest received as

income rom other sources.

The Tribunal held that the taxpayer being in the

development o real estate, the participation in the

tender would the commencement o one activity which

would enable the taxpayer to acquire the land or

development. The actual development o land would

be immaterial or construing that the business o the

taxpayer was set up and accordingly the net interest

expenses has to be assessed as business loss.

Dhoomketu Builders & Development (P) Ltd v. Addl.CIT

[(2012) 17 taxmann.com 36 (Delhi Trib]

Granting o requisite approvals relevant to

determine commencement o business

The taxpayer obtained approvals rom FIPB or

prospecting and mining o diamonds and other minerals

in India and rom the State Government or mining o

diamond. The taxpayer capitalized prospecting expenses

but did not claim the deduction as per the provisions o

section 35E as actual mining activity did not commence

in the relevant year. However, the taxpayer claimed

deduction or the non-prospecting expenditure like

salaries and other expenses. The AO considered that the

business had not commenced and hence disallowed the

non-prospecting expenditure.

The Tribunal held that the taxpayers business has

been already commenced once the required approval

Direct & International Tax


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has been obtained and hence the non-prospecting

expenditure is allowable as revenue expenditure even

though no income was earned rom that activity.

De Beers India Prospecting (P) Ltd v. ITO ITA No. 40/

Mum/2006 (Mum -Trib )

Business Expenditure

Interest on unds or acquisition o subsidiary held

to be expenditure or business purposes

The taxpayer had borrowed certain unds which were

utilized to subscribe to the equity capital o its subsidiary

company. Subsidiary company used the said unds or

acquiring a hotel. The interest expenditure incurred

by the taxpayer was claimed as a deduction. The HC

observed that the taxpayer is in the business o owning,

running and managing hotels and or the eective

control o new hotel acquired by taxpayer under

its management, it had invested in a wholly owned

subsidiary. Thus, it held that the taxpayer was entitled to

the deduction o interest on the borrowed unds.CIT v. Tulip Star Hotels Ltd. [2011] 338 ITR 74 (Delhi HC)

Interest on Deep Discount Bonds is accrued liability

and hence deductible

The taxpayer company had issued Deep Discount Bonds

and had made provision or the interest (discount)

payable on the Bonds on annual basis though the same

was payable only on redemption. The HC held that once

the liability to pay interest accrues every year and the

money is utilized by the taxpayer or its business, he is

entitled in law to spread over the said liability during

the period o the lie o those bonds. It urther observed

that the liability to pay interest is certain, though the

payment is postponed it accrues every year and cannot

be regarded as a contingent liability.

CIT v. Insotex India Ltd [2011-TIOL-879-HC-KAR-IT]

Guarantee commission paid to CMD or personal

guarantee given to bankers was mode to divert

money and not deductible

The taxpayer claimed deduction in respect o guarantee

commission paid to its Chairman and MD in relation to

personal guarantees given by him to various bankers

or loans availed by the taxpayer. The AO observed

that the loans given by bank were primarily secured

against the taxpayers assets and that the assets o the

guarantor were very negligible when compared to the

amount borrowed on the basis o such guarantee. The

AO held that there was no scientic basis or these bank

guarantees and it was only an innovative method o

diverting income rom companies under his management.

The HC held that the banks had lent money on the

basis o security o the assets o the company, and not

on the basis o personal guarantee given and hence

the guarantee commission was paid primarily to divert

income o the companies under the management o

the Chairman & MD. The HC urther observed that

merely because the banks insist on guarantee and such

guarantee was given against the payment o commission,

it would not make the guarantee commission as a lawul

expenditure to be allowed as a deduction.

CIT v. United Breweries Ltd. [(2012) 17 taxmann.com

6 (Kar)]

Non-compete ee paid or restrictive covenant or

fve years is to be treated as capital expenditure

The taxpayer acquired a business rom KOAL under

business transer agreement. The taxpayer also paid a

non-compete ee o Rs 5.94 crores, in addition to the

consideration or transer o business and claimed the

same as revenue expenditure. The AO disallowed the

deduction stating that non-compete ee was a capital

expenditure.

The HC held that a ve year non-compete period was

sucient to give an enduring benet to the taxpayer

and hence the non-compete expenditure would be

capital in nature. However, the HC did not opine on

the issue whether non-compete ees is eligible or

depreciation under section 32(1)(ii) and sent the case

back to lower authorities to determine.

Pitney Bowes India Pvt Ltd v. CIT [ITA NO. 784 OF 2011]

AO not bound to accept AS not notifed or tax

purposes

The taxpayer was to construct tenements or slum

dwellers ree o cost as per the scheme o slum

rehabilitation. For the purpose o accounting the

taxpayer adopted percentage completion method as


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prescribed by AS-7 relating to construction contracts.

Accordingly, the taxpayer recognized revenue on

the basis o percentage completion method but also

recognized the loss envisaged on the entire project

as provided vide Para-13.1 o the same AS-7. The

AO disallowed the losses on the projects yet to be

completed on the ground that the losses were estimated

and contingent in nature.

The Tribunal observed that any allowances were

to be made on ulllment o conditions prescribed

vide provisions o Chapter-IVD o the Act and mere

treatment in books in line with the AS o ICAI was not

a requisite. Accordingly, any provision made towards

estimated losses o the entire project will not be allowed

as deduction and it is not binding on the AO to accept

the Accounting Standards which are not notied by the

Central Government..

Shivshahi Punarvasan Prakalp Ltd vs. ITO [(2011) 15

taxmann.com 352 (Mumbai - ITAT)]

Capital Gains

Concessional rate o 20% not applicable to gains on

depreciable asset held or more than 36 months

The taxpayer sold a non-residential building held or

more than thirty six months on which depreciation

had been claimed in the previous years. The taxpayer

computed the gains on such asset as as short term

capital gains but applied tax rate o 20%, as applicable

to long term capital gains. Taxpayer contended that

any benet, which was attached to long term capital

asset, would continue to apply or depreciable assets,

even though the gains are to be construed as short

term capital gains. The AO held that the gains should

be taxed at the rate as applicable to short term capital

gains.

The Tribunal observed that section 112(1)(b)(i) and (ii)

reers to long term capital gains as against Sec. 74

and Sec. 54EC which reer to capital gains/loss arising

rom transer o long term capital assets.It urther

stated that section 50 deems the income earned rom

a depreciable asset as short term capital gain and to

be tax accordingly. Accordingly, the Tribunal held that

income earned rom a depreciable asset would be taxed

as short term capital gain which cannot be subject to

the tax rate applicable to long term capital gains.

SKF Bearings India Ltd v. ACIT ITA No. 720/Mum/06

(Mum - ITAT )

Capital gains arising on the sale o shares in an

Indian Company by a Mauritius Company would not

be taxable in India in view o India-Mauritius tax

treaty

The applicant, a Mauritian tax resident, is a wholly

owned subsidiary o Ardex Holdings UK Ltd. It planned

to sell its entire 50% equity shareholding held in an

Indian company, namely, Ardex Endura India Pvt. Ltd.

(Ardex India) to another non-resident group company at

the air market value. The applicant sought an advance

ruling on whether capital gains arising will be subject to

tax in India or whether such gains will be exempt under

Article 13(4) o the India-Mauritius DTAA.

The AAR observed that the existing ownership patternwas not a sudden arrangement, but had been prevailing

or more than 10 years. The AAR held that the

proposed sale cannot be categorized as objectionable

treaty shopping and, at worst, can be construed as

an attempt to take advantage o the India-Mauritius

DTAA. The AAR ruled that capital gains arising were not

subject to income-tax in India in accordance with Article

13(4) o the India-Mauritius DTAA, and the Applicant

could receive the entire sale proceeds without any tax

withholding in India.

Ardex Investments Mauritius Ltd. In re, A.A.R. NO. 866

OF 2010

No exemption rom long term capital gains tax on

listed shares converted into stock in trade despite

payment o STT at the time o sale

The Taxpayer, a non-resident in India had converted

investment in shares (a long term capital asset) into

stock in trade that were sold through a stock exchange

ater payment o STT. The taxpayer claimed the gains

arising on conversion o share investment into stock

in trade as a long term capital gain exempt rom

income-tax as the taxpayer had paid STT on the sale o

the said shares. The AO denied the exemption on the


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ground that capital gain arose at the time o conversion

o investment into stock in trade and in the absence o

payment o STT at that time; the long term capital gain

was subject to tax @ 20%.

The Tribunal armed the tax treatment considered

by the AO. On the question relating to applicability o

concessional tax rate o 10% to the long term capital

gain, it held that a non-resident cannot take recourse o

this benecial provision as it applies only to residents.

Alka Agarwal v. Asst Dir o IT- ITA No. 80/Del/2011 and

Ashok Kumar Agarwal v. Asst Dir o IT- ITA No. 150 /

Del /2011

Book Profts

Deduction under section 80HHE shall be computed

on the basis o adjusted book proft while

computing MAT under section 115JA o the Act.

The taxpayer, in its return o income, claimed deduction

under section 80HHE o the Act against the net protas per prot and loss account to arrive at the book

prot under section 115JA o the Act. As per normal

computation there was no prot ater the set-o o the

brought orward losses o the earlier years. However,

the AO contended that the taxpayer was not entitled to

deduction under section 80HHE.

The SC held that or computing the book prots the

deduction under section 80HHE would have to be

computed on the basis o the adjusted book prots

under section 115JA and not on the basis o prots

computed under normal provisions o the Act.

CIT v. Bhari Inormation Technology Systems Private

Limited,[ (2012) 17 taxmann.com 62 (SC)]

Unabsorbed depreciation adjusted against general

reserves cannot be claimed as deduction while

computing book proft under section 115J

The taxpayer was required to pay MAT under section

115J o the Act on its book prots. In computing the

books prots, unabsorbed depreciation (being the lower

o unabsorbed loss or unabsorbed depreciation) was

deducted as per provisions o section 115J. However, as

per the balance sheet o the taxpayer or the relevant

AY, there was no unabsorbed depreciation as the

same had been adjusted against general reserve. The

A.O. allowed the claim o the taxpayer. However, CIT

invoking provision o section 263 o Act disallowed this

claim.

The HC held that based on actual position, the taxpayer

had no unabsorbed loss or unabsorbed depreciation

to be carried orward in the year under consideration,

and thereore, the CIT had rightly disallowed the claim

o the taxpayer in respect o adjustment pertaining to

unabsorbed depreciation.

CIT v. Madras Fertilisers ltd. (TS-514-HC-2011)

Set-o o Losses

Carried orward business loss cannot be set-o

against long term capital gains

The taxpayer sold the land along with building used or

the business and set-o long term capital gain arising

rom such sale against the brought orward business

loss. The taxpayer contended that the long term capitalgains on transer o business assets had the character

o business income and thereore, business loss brought

orward rom earlier years can be set o against such

income though, it was not computed under the head

prots and gains o business or proession. AO held

that brought orward business loss cannot be set o

against the long term capital gains and the nature o

gains was capital gains only.

The Tribunal observed that the assets transerred were

capital assets and such transer cannot be considered as

the business income or the purpose o setting o the

carried orward business losses.

Nandi Steels Limited vs. ACIT ITA No. 546/Bang/2008

(Bangalore ITAT)

Business deductions

FInitial assessment year under section 80IA(5) to

mean the frst year o claim and not the year o

commencement o business

The taxpayer did not claim deduction under section

80IA in the rst two years o business on account

o unabsorbed depreciation and loss rom windmill

operation which was set o against the prots o its


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other business in the respective years. In the rst year o

deduction (3rd year) the AO notionally carried orward

the unabsorbed depreciation o earlier years and set o

against the prots o the eligible business and reduced

the claim o the taxpayer.

The Tribunal observed that rom the reading o section

80IA(5) it is clear that the eligible business will be

considered as the only source o income during the

previous year relevant to initial assessment year and

every subsequent years. Accordingly the Tribunal held

that the year o commencement need not be the initial

year but depending on the acts the year o claim can

be considered as initial assessment year.

Anil H. Lad v. DCIT ITA No. 1262/Bang/2010

(Bangalore ITAT)

Claim under section 80-IB need not necessarily

be made in original return and can be made

subsequent thereto

The taxpayer led the original return within timeclaiming additional depreciation on new plant and

machinery installed to increase cold storage capacity in

its existing plant. Subsequently taxpayer led a revised

return withdrawing the claim o additional depreciation

instead made deduction under section 80-IB. AO

rejected the claim stating that revised return has not

been led within the time limit prescribed.

The Tribunal held that or claiming deduction u/s 80-IB

the only condition is that the original return should

be led in time, but the claim need not necessarily be

made in the original return, it can be made subsequent

thereto. Accordingly it held that the claim o deduction

under section 80-IB can be made by the taxpayer beore

the appellate authorities.

Parmeshwar Cold Storage (P) Ltd v. ACIT [(2011) 16

taxmann.com.88 (Ahd Trib)].

Individual taxation

Living allowance on deputation is not taxable

The taxpayer was an employee o an Indian company

and was on deputation to USA or rendering services

as an employee o the Indian company. The taxpayer

claimed exemption or living allowance (additional

compensation to meet the daily expenses in the USA on

ood, accommodation, electricity, telephone, laundry

etc) considering it as allowance granted on tour to

meet the ordinary daily charges incurred by him in USA.

The taxpayer also claimed the treaty relie on the tax

paid in USA on such living allowance. The AO denied

the exemption though he allowed the treaty benet or

tax paid in USA.

The Tribunal observed that actors like entitlement

to take the amily during the deputation, duration o

posting and employees consent or deputation cannot

be conclusive in deciding whether a person has been

sent on tour or transer. Having regards to the terms

o deputation agreement and salary structure during

deputation, the Tribunal held that the taxpayer is to be

considered as being on tour. Hence, the taxpayer

being on tour was eligible to claim exemption under

section 10(14)(i) o the Act. The Tribunal urther held

that unless the specic allowance is disproportionatelyhigh compared to the taxpayers salary or unreasonable

with reerence to the nature o duties it would not

be open to the AO to call or the details o expenses

incurred by the taxpayer.

ITO v. Saptarshi Ghosh [(2011)15 taxmann.com 328

(Kol Trib)]

Merger & Acquisitions

Sale o shares out o India by a non-resident to

another non-resident is not liable to tax in India

and accordingly the buyer is not subject to Indian

withholding tax obligations

In February 2007, Hutchison Telecommunications

International Limited, Cayman Islands (HTIL), sold 100%

o its indirect holding in CGP Investments, Cayman

Islands (CGP), to Vodaone International Holdings

BV, Netherlands (Vodaone) or USD 11.2 billion. The

Indian tax authorities contended, inter alia, that the

underlying asset transerred was a controlling stake

in the Indian operating company Hutch Essar Limited

(HEL), which was indirectly held by CGP. Accordingly,

the revenue authorities proceeded to levy tax on the

transaction based on the contention that Vodaone


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was under an obligation to withhold Indian taxes when

making payments to the Hutch Group.

On appeal, the SC held that the Indian revenue

authorities had no jurisdiction to tax the oshore

transaction involving the sale o CGP shares because it

was a capital asset situated outside India. Thus in the

absence o taxability in India, section 195 o the Act

which provides or withholding o tax on payments

made to non-residents would not be applicable to

the acts o the case. Further, section 163 o the Act

(pursuant to which the tax authorities alleged that

Vodaone is a representative assessee o HTIL in India)

would not have application in the acts o the case

there is no transer o capital asset situated in India. In

arriving at the non-taxability o the transaction, the SC

examined various actual and legal aspects surrounding

the transaction as under:

The look-at approach

Therearesoundcommercialreasonsbehindcreationo corporate structures and developing built-in

exit mechanisms when making investments or

undertaking overall restructuring. Moreover, Indias

laws view special purpose vehicles and holding

companies as legitimate entities.

Inascertainingthelegalnatureofatransaction,

the transaction must be looked at in its entirety /

the whole o the structure and transactions must

be looked at (the look at approach) rather than

adopting a dissecting approach. Every strategic

oreign investment into India should be evaluated

in a holistic manner, keeping in perspective actors,

among others, as the duration or which the holding

structure exists, the period o business operations in

India, participation in investment, the timing o exit

and continuity o the business upon exit.

Whether section 9 covers indirect transfers?

Section9(1)(i)cannot,byaprocessofinterpretation,

be extended to cover indirect transers o capital

assets or property situated in India.

Thewordsdirectlyorindirectlyappearinginsection

9(1)(i) qualiy the word income and not transer

o a capital asset i an indirect transer o a capital

asset is read into the section, then capital asset

situated in Ind ia is rendered nugatory. Similarly, there

is no mention o underlying asset.

Consequently,section9(1)(i)isnotalookthrough

provision and only covers income arising rom a

direct transer o a capital asset situated in India.

The effects theory Thetransactionbeingexaminedisasaleofshares

and not an itemized sale o assets because the sale

was o the entire investment made by HTIL through

CGP.

HTIL,asagroupholdingcompany,hadnolegalright

to direct its downstream companies in the matter o

voting, the nomination o directors or management

rights. Applying the test o enorceability, infuence

and persuasion cannot be construed as a right in the

legal sense.

10


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Applyingtheentirety(orlookat)testwithout

invoking the dissecting approach, the transer by

way o extinguishment o HTILs rights over HEL,

i any, was the eect o the transaction and not

the transaction itsel. Any such extinguishment,

thereore, did not qualiy as a transer o a capital

asset situated in India.

Vodaone International v. UOI [2012] 341 ITR

1(SC)

Carry orward o losses permitted where change

in shareholding does not result in change in

benefciaries

S-Net Freight (India) P Ltd, the taxpayer was a joint

venture between two Singaporean companies.

The taxpayer was incorporated through Indian

nominees and the shares were held benecially by the

Singaporean companies through the nominees. As per

FEMA regulation, the approval o FIPB) was required

or investment by oreign companies. Ater obtainingnecessary FIPB approval, the nominees transerred

shares held in the taxpayer to the Singapore companies.

The AO disallowed set o o losses o the taxpayer

invoking provisions o Sec. 79.

The Tribunal observed that in order to carry on

business in India, oreign company need must abide

by the provisions o FEMA. The two subscribers to

Memorandum acted only as a nominee, to enable

smooth passage to the shareholders and benecial

ownership continued with Singaporean companies.

Hence, or the purpose o Sec. 79, such transer

o shares was not to be considered as change in

shareholding.

ITO v. S-Net Freight (India) Pvt. Ltd. (ITA No. 867/

Del/2010)

In purchasing a loss making plant, no value can be

assigned to goodwill or being reduced rom cost o

plant to disallow depreciation

The taxpayer acquired a loss making cement plant rom

another company. The AO noticed that though said

unit was suering losses, the taxpayer had the benet

o using its trade name. On that basis the AO held that

10 per cent o purchase price represented goodwill and

accordingly disallowed depreciation.

The HC held that since the plant purchased was a loss

making unit rom its commencement o business and no

value was assigned in respect o brand name as well as

or goodwill, the AO was not justied in deducting 10

per cent towards estimated value on goodwill rom total

purchase consideration and disallowing proportionate

depreciation.

CIT v. India Cements Ltd - [2011] 15 taxmann.com 46

(Madras HC)

Royalty & FTS

Payment or shrink-wrapped sotware constitutes

royalty payment

Samsung Electronics Co. Ltd, the taxpayer was engaged

in development o computer sotware and exported

such sotware to its head oce in South Korea orwhich the taxpayer imported shrink-wrap sotware

rom USA, France and Sweden and made payments to

the non-residents suppliers without deducting tax at

source on the ground that the same did not constitute a

payment or royalty.

The HC observed that copyright is an umbrella o

many rights and license is granted or making use o

the copyright in respect o shrink wrapped sotware/

o-the-shel sotware under the respective agreement.

The right to make a copy o the sotware and use it or

internal business by making a copy o the same and

storing the same on the hard disk and taking a back-up

would amount to copyright work under the Copyright

Act. Further, as regards the applicability o decision o

SC in the case o Tata Consultancy Services, it held that

the intent o the legislature in imposing sales tax and

income tax are entirely dierent and thereore, mere

nding that the computer sotware would be included

within the term Sales Tax would not preclude rom

holding that the said payments made by the taxpayer to

non-resident would amount to royalty.


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Accordingly, the HC held that the purchase o o-the-

shel sotware/ shrink wrapped sotware amounted to

transer o the copyright or any part thereo and hence

the same was construed as payment or royalty subject

to tax withholding.

CIT (Intl. Tax) v. Samsung Electronics Co Ltd. [(2011) 16

taxmann.com 141 (Kar HC)]

Payment made to a non-resident or obtaining

licence to use database maintained by the non-

resident regarded as royalty

Wipro Ltd, the taxpayer, made certain payment to

Gartner, a US company, or subscription to the database

maintained by it. The taxpayer did not deduct tax

at source while making such payment. The AO held

that the payment was in the nature o royalty as

well as ees or technical / included services as per

provisions o Act and the DTAA between India and

USA respectively and the taxpayer was liable to have

deducted tax at source.

The HC observed that mere act that in the instant case,

the issue did not pertain to shrink wrapped sotware or

o the shel sotware, but the access to the database

maintained by Gartner was granted online, would not

make any dierence in the reasoning that such right

to access would amount to transer o right to use

the copyright held by Gartner and the payment by the

taxpayer is or license to use said database maintained

by Gartner. .Accordingly the HC held that such payment

was to be considered as royalty and the taxpayer was

liable to deduct tax at source.

CIT v. Wipro Ltd. [(2011) 16 taxmann.com 275 ( Kar

HC)]

Income arising rom sale o sotware (without

transer o copyright) regarded as business proft

and in absence o PE in India the same is not taxable

in India

Novel Inc., the taxpayer, a tax resident o USA, was a

provider o inormation solutions. The taxpayer entered

into a joint venture with Novell Sotware (India) Private

Limited (Novell India). Novell India acted as distributor

or the taxpayer and imported certain sotware rom

the taxpayer. Novell India would duplicate and sell or at

times resell the same in the Indian subcontinent.

The taxpayer received royalty as per Distribution

Agreement towards sales made by Novell India,

pursuant to duplicating which was oered by the

taxpayer as royalty income. The taxpayer also received

payment rom Novell India towards sale o sotware

which was subsequently resold by Novell India to its

end customers. The taxpayer claimed such amount as

business income and in the absence o it having PE in

India as per article 5 o India-USA DTAA, the same as

not chargeable to tax in Ind ia. However, the AO held

that the income rom the sale proceeds o resale o

sotware also represented royalty income covered under

article 12(3) o DTAA between India and USA.

The Tribunal observed that the taxpayer had simply

transerred its computer sotware products to Novell

India or consideration or the purposes o resale

without giving any right to duplicate the same in any

manner. The Tribunal held that incorporation o the

words or the use, or the right to use, beore the

words any copyright could be construed as that thepayment would be or the use o any copyright or

it to be considered as royalty and not otherwise. The

requirement is the use o `copyright o work and

not that o the product derived rom such copyright.

Further the denition o royalty in India-USA DTAA

unequivocally co-relates the payment or `use o the

`right to copy the `work as a pre-condition or alling

within the domain o `Royalty and thereore it cannot

be held that the payment or the `use o copyrighted

article nally drawn rom the `work also qualiy as

royalty.

Novell Inc. v. DDIT [(2011) 16 taxmann.com 186 (Mum

Trib)]

Payment made or live broadcast not taxable as

Royalty

Neo Sports Broadcast Private Limited, the taxpayer,

entered into an agreement with Nimbus Sports

International Pte Ltd (Nimbus), a commercial agent o

Bangladesh Cricket Board or receiving and broadcasting

cricket matches to be played in Bangladesh. The signals

to be broadcasted by the taxpayer were or live matches

as well as recorded matches. The taxpayer led an

application beore the tax authorities seeking permission

to make payments without deduction o tax at source

rom the amounts due to Nimbus towards broadcasting

o live matches.


13/4213Tax Briey

The Tribunal reerring to the Copyright Act, on the

ground o construing the payment as royalty, held that

copyright means exclusive right to use the work in

the nature o cinematography. The existence o work

is a pre-condition and must precede the granting o

exclusive right or doing o such work. Unless the work

itsel has been created, there cannot be any question o

granting copyright o such work. The process o doing

or creating the work itsel cannot be simultaneous with

the use o such work. Accordingly, the Tribunal held

that there is no copyright involved in the live events and

depicting the same cannot inringe any copyright and

thereore cannot be considered as royalty.

On the ground o business connection, the Tribunal

observed the relevant criteria is carrying out o

business operations in India by a non-resident and

not the earning o income by any resident rom the

use o any product acquired rom the non-resident.

Where the non-resident only allows some resident to

exploit certain right vested in it on commercial basis,it cannot be said that the non-resident has carried out

any business activity in India. The act o the taxpayer

earning revenues rom India cannot lead to a business

connection o Nimbus in India as the transaction

between the taxpayer and Nimbus was conned to

receiving broadcasting right or a consideration.

ADIT v. Neo Sports Broadcast (P.) Ltd. [(2011) 15

taxmann.com 175 (Mum Trib)]

Amounts received rom provision o operational and

support services to Group companies through cost

allocation taxable as FTS under Article 12 o India-

Netherlands DTAA

The applicant, Peretti Van Melle Hold ing B.V is a tax

resident o Netherlands provides operational and

other support services or the benet o companies o

Peretti group located in various countries, including

India through a services agreement and the amount

is charged to group companies on cost-to-cost basis

without any mark-up. The Peretti Group, through the

applicant and another group company had also entered

into a separate Trademark Technology and Know-how

License Agreement (Technology Agreement) under

which the Indian company had been given a right to

use the proprietary knowledge and processes o the

Peretti Group in the conectionary industry against

a royalty payment. The applicant sought a ruling or

the taxability o the amounts received pursuant to the

services agreement rom the Indian company and also

on the applicability o withholding taxes on the amounts

received.

The AAR observed that the support services are not

intended to be provided on a stand-alone basis without

reerring to the technology agreement and held that the

services agreement has not brought anything specically

which is not covered under the technology agreement.

The AAR held that Services agreement has been entered

into by the Indian Company with the applicant to

enjoy the rights or inormation under the technology

agreement.

Accordingly, the AAR held that both the agreements

are inextricably linked to each other or at least

complimentary to each other. The services renderedunder the services agreement read with technology

agreement are taxable as FTS since such services are

ancillary and subsidiary to the application or enjoyment

o the right, property or inormation or which a

payment described in paragraph 4 o the Article is

received and hence the payments would be subject to

withholding tax under section 195 o the Act.

Peretti Van Melle Holding B.V. AAR 869 o 2010

Oshore supply o equipment and supply o

sotware orming integral part o equipment not

taxable in India

The taxpayer is a company incorporated in Sweden

undertook projects on turnkey basis with cellular

operators in India involving supply o hardware and

sotware, installation and commissioning and ater sales

services. The issues or consideration were whether

the sale o telecommunication equipment to cellular

operators in India constituted a business connection

under the provisions o the Act and whether payments

made or sotware that was sold as part o the

telecommunication equipment was taxable as royalty

under the Act and India-Sweden DTAA.


14/4214

The HC observed that in a transaction or sale o

goods, the determining actor would be as to where

the property in goods passes and that the place o

negotiation o the contract; or place o signing or

ormal acceptance thereo; or overall responsibility o

the taxpayer are not relevant circumstances. Further,

the terms o the contract provide that the acceptance

test was not material even or passing o the title and

the risk, because even i such a test ound out that the

system did not conrm to the contractive parameters,

the operators could call upon the taxpayer to cure the

deect and/or claim damages. However, the operators

did not have a right to reject the equipment on ailure o

the acceptance test. The HC held that since the sale o

telecommunication equipment took place outside India;

and the title in goods also passed outside India, the

taxpayer has not earned any income in India through or

rom a business connection in India.

On the question o royalty on the sotware supply,

the HC observed that where the sotware is parto the hardware supplied and the sotware cannot

be used independently, the sotware would be

considered as merely acilitating the unctioning o the

telecommunication equipment, thereby orming a part

o it. Accordingly the HC held that the consideration

paid by the cellular operators would amount to royalty

only i they had obtained all or any copyright rights in

such sotware that is protected in India as literary work

and a distinction must be made between the acquisition

o a copyright right and a copyrighted article. Thus

the payment or the sotware orming part o the

equipment could not be regarded as royalty.

DIT v. Ericsson A.B. [(2011) 16 taxmann.com 371

(Delhi)]

Payment received by non-resident or rendering

services to Indian companies is not taxable as

royalty where no economic consideration was paid

to use name and logo

Harvard Medical International U.S.A., the taxpayer,

is a non-resident incorporated in U.S.A. The taxpayer

received certain sums rom Max India Ltd. (Max) and

Wockhardt Hospital Ltd. (WHL) or rendering services in

relation to health care.

The AO, ater considering the nature o services

rendered by the taxpayer, was o the view that 90 per

cent o the said payments was in the nature o royalty

taxable under Article 12(3) o Ind ia-US DTAA and

balance 10 per cent was in the nature o FIS taxable

under Article 12(4) o India-US DTAA.

The Tribunal, held that the consideration received was

not a payment or right to use any copyright, trademark

or industrial, commercial or scientic experience and

hence could not be construed as royalty. On the other

hand the payment to the taxpayer was against services

provided to WHL and Max on account o advice and

assistance in relation to development o overall strategy,

quality programs and systems, medical education

and training programs, selection o clinical specialists,

etc; the taxpayer as such did not make available any


15/4215Tax Briey

technical knowledge, experience, skill knowhow or

process and hence the consideration received could

not be considered as FIS. The Tribunal also observed

that no economic consideration or right to use the

name or logo was provided by the taxpayer to WHL and

accordingly held that the payment cannot be split to

treat a part o it as royalty and a part as FIS, i the same

has not been specically agreed.to between the parties.

Thus the entire payment received by the taxpayer rom

WHL and Max was in the nature o business prots and

since the taxpayer did not have a PE in India the same

cannot be brought to tax in India.

JDIT v. Harvard Medical International, USA [(2011) 16

taxmann.com 69 (Mum)]

Permanent Establishment

Article 7 o the DTAA gives primacy to the provisions

stipulated in the domestic tax legislation or

computation o the taxable income

The taxpayer, a non-resident company was engaged by

its Indian AE to provide services towards evaluation o

iron ore quality testing, etc. The taxpayer provided the

services through its division in India, which constituted

a PE in India and accordingly it oered the income to

tax on net basis. However, the AO held that payments

were taxable as FTS on gross basis and no deduction

or expenses was allowed in view o restriction under

section 44D o the Act.

The HC held that where the taxpayer has a PE in India,

ee or technical services is taxable not under Article

12 o the DTAA relating to taxation o royalty or FTS

but under Article 7 o the DTAA relating to taxation o

business income. Article 7(3) o the India-Australia DTAA

provides that in order to determine the prots o a PE,deduction o expenses shall be allowed in accordance

with and subject to limitations in domestic tax law.

Accordingly, it has given primacy to the provisions

stipulated in the domestic tax legislation in computing

the business income o the taxpayer. Thereore, the ee

or technical services is taxable on gross basis under

section 115A o the Act and in view o the provisions

o section 44D o the Act no deduction o expenses is

admissible.

Rio Tinto Technical Services [(2011) 340 ITR 497 (Delhi)]

Where non-resident company had paid commission

to its Indian agent at arms length price, no urther

income o non-resident company in respect o said

transaction would be taxable in India

The taxpayer, a UK based company, appointed its group

company in India (BBC India) as its agent to solicit

orders or sale o advertising airtime on the channel at

the rates and on the terms and conditions provided by

the taxpayer. In consideration or the services provided,

BBC India received 15% o the advertisement revenues

earned by the taxpayer rom Indian advertisers as

marketing commission. The taxpayer did not undertake

Function, Asset and Risk analysis in the initial years;


16/4216

however, BBC India had undertaken the same and the

TPO accepted that commission received was at arms

length price (ALP).

The HC held that once the commission is treated as at

ALP in the hands o recipient (i.e. BBC India), a dierent

view could not be taken in the case o taxpayer who

had paid the same commission to its agent.

BBC Worldwide Ltd [(2011) 203 Taxman 554 (Delhi HC)]

Leasing o assets in India by non-resident does not

result in PE or business connection in India

The taxpayer, an Indian company, entered into an

agreement with a oreign company or hiring certain

machinery. The taxpayer paid hiring charges to the

oreign company without deducting any tax at source.

The AO held that the oreign company had a business

connection with the taxpayer and consequently

disallowed deduction or hiring charges as the taxpayer

had ailed to deduct tax at source.

The Tribunal observed that the oreign company was

sole, lawul and absolute owner o the machinery

and the machinery was delivered outside India. The

agreement with the taxpayer was on principal to

principal basis and that it did not create a partnership

or joint venture between parties. Further there was

no material on record to conclude that the oreign

company had any presence in India. Accordingly, the

Tribunal held that oreign company did not have a

PE or business connection in India; the hiring charges

were not chargeable to tax and hence there was no

obligation on the taxpayer to deduct any tax at source

rom such hiring charges.

Calcutta Test House Pvt. Ltd. [(ITA No. 1782/Del/2011)]

Others

Taxpayer is not required to deduct tax on exchange

rate uctuations at the time o remittance

The taxpayer entered into research and know-how

agreement with a oreign collaborator. It credited

entire sum payable to oreign collaborators account

in its books o account and paid tax on the amount

o such credit. During the relevant year, the taxpayer

claimed deduction o 1/5th o the amount and the

loss on account o the fuctuation in exchange rate at

the time o remittance o money.. The AO held that

the taxpayer deducted tax at source only in respect

o original amount and not on the additional amount

arising because o exchange fuctuation and accordingly

disallowed deduction o oreign exchange fuctuation

loss because o non-deduction o tax at source under

section 40a(ia) o the Act.

The Tribunal observed that under section 195 o the

Act, deduction o tax is to be made at one instance

i.e. either at the time o credit o such income to the

account o the payee or at the time o payment thereo,

whichever is earlier and does not envisage deduction o

tax at both instances. The amount remitted was only a

part o the total obligation and not in addition to the

amount credited. In the year, on account o fuctuation

in oreign exchange rate, only the cost o remitting

the amount to oreign collaborator has increased, but

there was no additional amount o Swiss Kroner thatwas payable to the oreign collaborator other than

the amount credited to its account in the earlier year.

Accordingly the Tribunal held that since the taxpayer

had deducted tax at source at the time o credit, it was

not required to deduct tax again, at the time o payment

o sum during the relevant year under consideration.

and there was no obligation to deduct tax at source on

the oreign exchange loss.

The Tribunal urther observed that even otherwise,

disallowance is applicable to non-deduction o tax and

not to the short deduction o tax. Accordingly, without

prejudice to the rst conclusion, the Tribunal held that

oreign exchange loss could not be disallowed as it was

case o short deduction o tax.

Sandvik Asia Ltd [(2012) 18 Taxmann.com 22

(Pune-Trib.)]

Procedures

AAR cannot admit application or advance ruling

where assessment proceedings are in progress

The applicant led an application beore the AAR on the

issue o taxability o the amounts received/ receivable


17/4217Tax Briey

by it under the oshore supply contract with an Indian

Company. The Revenue authorities raised objection on

entertaining the application on the ground that on the

date o ling the application, ollowing proceedings

were pending beore the income tax authorities:

AY2007-08:Re-assessmentnoticewasissued;

AY2008-09and2009-10:Assessmentnoticeswere

issued;

AY2011-12:Orderundersection197oftheITAwas

subject to revision proceedings.

On maintainability o the application, the AAR reiterated

its position that mere pendency o a proceeding under

section 195 or 197 o the Act or even a nal order

thereon does not stand in the way o an application or

advance ruling being entertained. It urther held that

where during the course o assessment proceedings,

a questionnaire is served on the taxpayer asking some

questions, it does not restrict the scope o the enquiry to

be made under such proceedings. The assessing ocer

has to deal with all the claims o the person urnishingthe return arising out o the return. Accordingly, it held

that pendency o assessment/ reassessment proceedings

beore the tax authorities creates a bar under the Act to

approach the AAR, even i the specic question is not

raised in the assessment/ reassessment proceedings by

the AO as on the date o the application.

SEPCO III Electric Power Construction Corporation

[(2011) 340 ITR 225 (AAR)]

Circulars & Notifcations

Protocol with Swiss Federation or amending the

DTAA notifed

The protocol amending the DTAA between India and

the Swiss Federation, signed on 30 August 2010, has

been notied on 7 October 2011 and shall be eective

in India in respect o income arising in any scal year

beginning on or ater 1 April 2012. However, as regards

Article 26 relating to exchange o inormation, the

Protocol will be applicable or inormation that relates to

any scal year beginning on or ater the 1st day o April

2011. The amendments to the DTAA made vide this

Protocol include:

1) Amendments regarding tax treatment o the income

in respect o business o operation o ships or

aircrat in international trac;

2) The words directly or indirectly have been

deleted rom Para 1 o Article 7 Business Prots

(I the enterprise carries on business as aoresaid,

the prots o the enterprise may be taxed in

the other State but only so much o them as is

directly or indirectly attributable to that permanent

establishment.) Corresponding explanation in the

Protocol to the DTAA regarding what is understood

by directly or indirectly has also been deleted;

3) The existing Article 26 (Exchange o Inormation)

has been replaced by detailed provisions or

exchange o inormation the inormation that can

be exchanged, the rights and obligations o the

requestor and provider o inormation, maintaining

secrecy o the inormation so exchanged etc.;

4) Further, the Protocol to the DTAA has been amended

to provide:

a) Resident to include recognized pension und or

pension schemeb) The existing MFN clause in the Protocol to the

DTAA has been replaced by this Article to now

include:

i. The relevant provisions o the DTAA not

to apply to dividend, interest, royalty, FTS

or other income paid under or as a part o

conduit arrangement.

ii. Rate o taxation o dividends, interest and

royalties & FTS to be limited to the rate

provided in any treaty with an OECD country

entered into ater the signature o the

amending Protocol (30 Aug 2010).

iii. Where the scope in respect o royalties

or FTS is restricted by any treaty with an

OECD country entered into ater the date

o signature o the amending Protocol (30

Aug 2010), India and Switzerland would

enter into negotiations to provide the same

treatment.

Notifcation No. 62/2011[F.No.501/01/1973-FTD-I],

dated 27-12-2011


18/4218

Agreement between India and the Cayman Islands

or the exchange o inormation with respect to

taxes notifed

India had signed an agreement or the exchange o

inormation with respect to taxes with the Cayman

Islands on 21 March 2011. The Agreement has been

notied on 8 November 2011.

Notifcation No.61/2011[F.No.503/03/2009-FTD-I],

dated 27-12-2011

India signs the Convention on Mutual Administrative

Assistance in Tax Matters or promotion o

international co-operation

India on January 26, 2012 has signed the Convention

on Mutual Administrative Assistance in Tax Matters, a

multilateral agreement, which promotes international

co-operation while respecting the rights o taxpayers.

The Convention became open or all countries in June

2011 or developing a broader multilateral approach to

improve the eectiveness o exchange o inormation,

co-operation between the countries in the assessmentand collection o taxes, with a view to combating tax

avoidance and evasion.

So ar, there are 31 signatories to the Convention.

Apart rom India, the other signatories are: Argentina,

Australia, Belgium, Brazil, Canada, Denmark, Finland,

France, Georgia, Germany, Iceland, Indonesia, Ireland,

Italy, Japan, Korea, Mexico, Moldova, Netherlands,

Norway, Poland, Portugal, Russia, Slovenia, South Arica,

Spain, Sweden, Turkey, Ukraine, the United Kingdom,

and the United States. Out o the 31 signatories, 12 o

them have ratied the convention so ar.

Salient eatures o this multilateral convention include:

basedoninternationalstandardoftransparencyand

exchange o inormation;

multilateralandasinglelegalbasisformulti-country

co-operation as against the DTAAs/TIEAs which are

bilateral. It provides or an extensive network and

there will be consistent application o provisions

leaving limited scope or deviation;

extensiveformsofco-operationamongthe

signatories on all taxes;

facilitatestheexchangeofinformationaswellas

provides or assistance in the recovery o taxes;

simultaneoustaxexaminationsandparticipationin

tax examinations in other countries;

allowstaxofcialstoenterintotheterritoryofthe

other country to interview individuals and examine

records;

automaticexchangeofinformationandspontaneous

exchange o inormation;

serviceofdocumentsinothercountry;

exchangeofpastinformationincriminaltaxmatters;

informationreceivedundertheConventioncanalso

be used or other purposes besides those related

to tax co-operation, or example to counter money

laundering with the approval o the supplying state.

PIB release: 27 Jan 2012

DTAA with Georgia notifed

India had signed an agreement or the avoidance o

double taxation and the prevention o scal evasion

with Georgia on 21 August 2011. The DTAA has been

notied on 8 December 2011 and shall be eective in

respect o taxes withheld at source, to income paid or

credited on or ater 1st April 2012 and in respect o

other taxes on income, and taxes on capital, to taxeschargeable or any scal year beginning on or ater 1

April 2012.

Notifcation No.4/2012[F.No.503/05/2006-FTD.I], dated

6-1-2012

Government updates the FAQs on provident und

or International Workers

The Government o Ind ia [GOI] has updated the FAQs

or international workers [IWs] on 20th December, 2011

with the view to address ambiguities related to the

provident und provisions or IWs and provide a status

on Indias Social Security Agreements (SSAs).

The list o in orce SSAs together with their eective

dates is tabulated below:

All the SSAs provide or detachment subject to

conditions. The in orce SSAs, with the exception o

Germany, also provide or exportability o benets.

Totalization does not nd mention in the Germany,

Country Name SSA Eective date Country

Name

SSA Eective

date

Belgium September 1, 2009 Luxembourg June 1, 2011

Germany (Limited) October 1, 2009 France July 1, 2011

Switzerland January 29, 2011 Republic o Korea November 1, 2011

Denmark May 1, 2011 Netherlands December 1, 2011


19/4219Tax Briey

Switzerland and Netherland SSAs. Besides the eight SSAs

indicated above, the GOI has signed agreements with

the Czech Republic, Hungary and Norway, though these

have not yet been made e ective. Further, negotiations

are at various stages or concluding SSAs with Canada,

Sweden, Finland, Austria, Portugal, Japan, Australia and

USA. The GOI is also holding talks with other countries

where sizable number o Indian workers are employed.

Updates to FAQs posted onto the website www.

epfndia.com on 20th December 2011

Verifcation o High Value Transactions

(Investments/Deposits/Expenditure) o persons who

are not assessed to Income Tax

The Central Board o Direct Taxes has directed the

Income Tax department to launch a special drive,

rom 20th January to 20th March, 2012, or veriying

high value transactions(investments/deposits

expenditure) rom persons who are not assessed to

income tax or who have not urnished their PAN while

entering into such transactions. The CBDT has also

issued proorma or query letters and responses to be

issued to the high value investors/depositors/spenders.

Press Release No. 402/92/2006-MC (03 OF 2012), Dated

18-1-2012


20/4220

Controlled transaction acceptable as comparable in

specifc circumstances

The Tribunal laid down the ollowing principles or

determining ALP:

IncasewheretheFARanalysisindicatesdiversionin

two activities, then benchmarking should be done on

separate basis;

Allocationofemployeecostandrentonanadhoc

basis is not acceptable and in the absence o any

other reasonable basis, the biurcation o the said

expenses in the ratio o turnover is appropriate;

Wherethetaxpayerfailstoprovideanycomparable

companies even ater getting the opportunity, the

TPO is justied in undertaking the exercise o identi-

ying comparable cases (even controlled transaction)

on his own or the purpose o making comparison

with taxpayers results; and

Whereitisanadmittedpositionbetweenthe

taxpayer and the TPO that there is no comparable

uncontrolled transaction due to the nature o

transaction being such that it is ordinarily betweenassociated enterprises, in such a case, a transaction

between two associated enterprises at arms length

price, though technically called controlled transac-

tion, would partake o the character o uncon-

trolled transaction or the purposes o determining

the ALP in a later international transaction between

two AEs.

Bayer Material Science Pvt. Ltd. v. Addl. CIT (ITA No.

7977/Mum/2010)

ALP should be determined based on FAR undertaken

while discharging the business

The Tribunal held that ALP should be a refection o the

unctions perormed, assets deployed and risks assumed

by the AEs whilst discharging the business. The Tribunal

rejected the taxpayers method o determining remu-

neration on cost plus mark-up basis noting that the

AE did not have the capacity o executing the sourcing

unctions carried out by the taxpayer in India.

Given the nature o signicant unctions perormed by

the taxpayer, the remuneration should be determined

based on percentage o FOB value o exports and

apportioned the remuneration in the ratio o 80:20

(80% in avour o the assessee & 20% in respect o AE).

The Tribunal also held that amount o transer pricing

adjustments should not exceed the compensation

received by the AE.

Li & Fung (India) Private Limited v. DCIT, Circle 4 (1),

New Delhi

TPO not bound to disclose the entire process

ollowed or collection o inormation u/s 133(6)

The Tribunal held that the TPO is entitled to take into

consideration contemporaneous data that becomes

available ater the specied date and may not inorm the

taxpayer about the process used by him or issuing the

notices u/s 133(6) o the Act. However, i any inorma-

tion collated u/s 133(6) is sought to be used by TPO

against the taxpayer then such inormation is required

to be urnished to the taxpayer and objections o the

taxpayer pertaining to the same to be considered by the

TPO. The taxpayer should also be extended an opportu-nity to cross-examine parties concerned.

Further, the Tribunal also upheld the use o turnover

lter and standard deduction o +/- 5% under the

proviso to section 92C(2) o the Act.

Kodiak Networks (India) Private Limited vs. ACIT,

Bangalore (ITA No.1413/Bang/2010)

Adjustments to be restricted only to international

transactions

The Tribunal held that the adjustments should be

restricted only to the international transactions with

the AEs. The Tribunal upheld the standard deduction

o +/-5% range benet under the proviso to section

92C(2) o the Act. Further, it also held that any transer

pricing adjustment should not automatically lead the

tax authorities to reject the books o accounts unless

specic deects are noted.

Phoenix Mecano (India) Ltd v. DCIT, Mumbai (ITA

No.7646/Mum/2011)

Transfer Pricing


21/4221Tax Briey

International Tax Developments

Netherlands proposes interest limitation on certain

debt-unded acquisitions

The Dutch Chamber o Deputies on 17 November

2011 passed, with two major amendments, a drat

regulation proposed in September by the Ministry o

Finance to impose new limits on interest deductions on

excessively leveraged acquisitions. The Senate (Upper

Chamber) must still pass the regulation, but is not

expected to make major changes.

The new rules would apply to intercompany and

third-party loans (or comparable agreements) and are

designed to prevent the deductibility o excess interest

expenses against the prots o an acquired Dutch Target

by way o a scal unity.

The new regulation will have potential impact on tax

position where an acquisition has been executed but the

acquired company has not yet been included in the scal

unity, as well as or acquisitions under consideration or

set in motion but not yet completed.

Germany amends anti-treaty shopping rule

The German Upper House has adopted the Act or

implementation o EU Directive on the recovery o tax

Claims on November 25, 2011 which amends the

German anti-treaty shopping rule. The act will enter into

eect on 1 January 2012.

Germany levies a 26.375% withholding tax (including

the solidarity surcharge) on dividend distributions

made by a German corporation. A lower rate

requently applies on distributions to oreign corporate

shareholders that hold directly at least 10% o the

capital o the distributing corporation, either because

the rate is reduced under an applicable tax treaty or

because the distribution qualies or the application

o the EU Parent-Subsidiary Directive. The relie rom

the withholding tax, however, is subject to Germanys

anti-treaty/anti-directive shopping rule in section 50d

paragraph 3 o the Income Tax Act. Under the present

regime, the anti-treaty shopping test consists o all o

the ollowing tests:

BusinesspurposetestThereareeconomicorother

relevant (i.e. nontax) reasons or the interposition o

the oreign company;

GrossreceiptstestTheforeigncompanygenerates

more than 10% o its gross receipts rom its genuine

business activities; and

SubstancetestTheforeigncompanyhasadequate

business substance to engage in its trade or

business and engages in general commerce (mere

administrative unctions, outsourced activities or

activities carried out by related parties in the same

jurisdiction are not taken into account in determining

business substance).

Under the revised anti-treaty shopping rule, i the

oreign company is not owned by shareholders that

would have beneted rom the same relie had they

earned the income directly and i the company did not

earn the gross receipts in connection with its genuine

own business activities, the company would be entitled

to withholding tax relie only i both the Business

purpose and Substance test are met.

The revised anti treaty shopping rule is an improvement

or many non-resident taxpayers investing into Germany

as it eliminates the dicult gross receipts test. In all

cases where the dividends (or other income subject towithholding tax) are not deemed to be earned rom a

genuine own business activity, it is unclear how the tax

authorities will handle cases in practice and the level o

scrutiny they will place on the business purpose test.

Russia tax incentives and government support or IT

and high-tech companies

The Russian government has introduced a number o

incentives or IT and high technology companies. The

introduction o a variety o tax and non-tax incentives, a

willingness to reduce administrative burdens, eliminate

barriers and provide nancial support to oreign business

are signicant steps to attracting oreign talent and

investment into Russia.

The main eatures o recent initiatives by the Russian

Government to attract more investment are-

Tax incentives or IT companies

Subject to certain conditions, IT companies doing

business in Russia are eligible or a reduced social

contribution rate o 14% (until 2017) on cumulative

annual salary o their employees up to USD 17,000

(which provides a considerable savings on the

standard tax rate o 30%), plus an additional 10%

on annual earnings above USD 17,000.

Certain IT companies can obtain an immediate tax

write-o or computer hardware.


22/4222

These incentive are available only to Russian entities

(including Russian subsidiaries o oreign companies),

a number o companies currently operating through

a Russian branch or representative oce are

considering restructuring their businesses to obtain

the incentives.

Technology and Innovation SEZs

Russia currently oers our categories o special

economic zones (SEZs), covering the technology

and innovation, industrial, tourist and port and

logistics industries. Companies established within

the boundaries o an SEZ benet rom reduced

bureaucratic regulation and a ree customs zone,

but SEZ-related tax benets have not hitherto

stood out as a compelling incentive to invest in the

zones. Notably, while there has been an exemption

rom the 2.2% property tax and a reduction in

prot tax rom 20% to 15.5% (13.5% regional and

2% ederal), many regional authorities have long

granted similar tax incentives to investors in theirregion outside any zone (subject to meeting various

investment criteria).

As a recent measure, or units located in SEZ rom

year 2012, the regional authority may grants a

reduction in the regional portion (13.5%) o prot

tax down to 0%, leaving only the 2% ederal portion

due by a company located there, with companies

in technology (and tourist) zones urther exempted

rom the 2% ederal portion.

To what extent regional authorities with reduce

prot tax in SEZ below 13.5% and based on what

criteria remains unclear. Nevertheless prospective

investors in Russia should more careully consider

SEZs to determine whether the potential tax

benets render the case or locating within SEZ more

persuasive.

Consolidated group rules introduced/investment

rules eased by Russia

Russia on 16th November 2011 also introduced a

new law providing, subject to specied requirements

or the concept o consolidation or tax purposes.

The consolidation regime represents a step orward

in converging Russian tax and accounting standards.

The ability to consolidate prots and losses will allow

companies to optimize and control tax costs. Although

regime will be available to large Russian businesses, it is

likely that caps established by the law will be lowered.

Hungary Corporate tax changes

The Hungarian Parliament approved a series o tax

law changes on 21 November 2011, several o which

aect multinational companies operating in the

country. Changes have been made to the participation

exemption, the thin capitalization rules, loss carry

orwards and the binding ruling practice, as well as the

Accounting Act. In addition, the VAT rate will increase

rom 25% to 27%. The new rules will apply as rom 1January 2012.

In addition, the previously passed provision that would

have uniormly lowered the corporate income tax rate to

10% irrespective o the tax base as rom 2013 has been

scrapped. As a result, the current corporate income tax

rates will remain in eect: the generally applicable rate

o 19% and the preerential 10% rate applying to up to

HUF 500 million o the tax base.

U.K. issued drat legislation on CFC reorm

The drat legislation on CFC reorms was issued on 6

December 2011 outlining signicant changes to the

U.K.s controlled oreign corporation (CFC) rules. The

proposed regime will only target prots that

have been articially diverted rom U.K. and should take

many groups outside the scope o the CFC rules and

ease the associated compliance burden and will increase

the attractiveness o the U.K. as a holding jurisdiction.


23/4223Tax Briey

The CFC proposals are based on the principle that

overseas activities are not taxed in the U.K. unless

there is an articial reduction o the U.K. tax base.

Additionally, where a CFC charge applies, it will be

proportionate, targeting only prots that have been

articially diverted rom the U.K. This is a welcome move

away rom the current all or nothing approach.

In addition to this more rened targeting o the

legislation, it is recognized that the associated

compliance burden needs to be kept to a minimum.

Groups, thereore, will be able to apply the available

exemptions, including a new gateway test, in any order.

The new CFC regime will apply to both oreign

subsidiaries and exempt oreign branches o U.K.

companies. It is expected that the new rules will have

eect or accounting periods beginning on or ater the

date o Royal Assent to Finance Bill 2012, but this is

subject to urther consultation


24/4224

Indirect Tax

Service Tax

Notifcations / Circulars

Extension o beneft o exemption rom service

tax on services provided in relation to transport o

goods by rail

CBEC has extended the exemption rom levy o service

tax on taxable services provided by Government

Railways to any person in relation to transport o

goods by rail and the abatement provisions in respect

o services o transport o goods by rail rom 1 January

2011 to 1 April 2011.

Notifcation No. 49, 50 and 51/2011-ST dated 30

December 2011

Introduction o simplifed scheme or electronic

reund o service tax paid on the specifed services

used or exported goods

Government has introduced a simplied scheme or

electronic reund o service tax to exporters o goods,

on the lines o duty drawback. According to this newscheme, on input services exporters have two options:

Tooptforrefundwhichisbasedonthescheduleof

rates as specied or goods or their class or;

Tooptforrefundonthebasisofdocumentsin

respect o specied services subject to certain

conditions

In respect o reund procedure based on schedule o

rates:

TheProcedureforclaimingtherefundthrough

the ICES system has been prescribed through a

notication.

Therefundofservicetaxpaidonthespecied

services shall be calculated as a percentage o the

FOB value o the exported goods by applying the

rate specied in the Schedule or the said goods.

TheservicetaxrefundwillbeenabledbytheIndian

Customs EDI System resulting in the amounts getting

directly credited into the exporters bank accounts

within a ew days o conrmation o export without

additional export documentation.

Circular No. 149/18/2011 ST dated 16 December, 2011

& Notifcation No. 52/2011-ST dated 30 December 2011

Service tax return fling date or the period April

2011, to September 2011 urther extended

CBEC has urther extended the due date o lling hal

yearly service tax return or the period April 2011 to

September 2011 to 20 January, 2012.

Order No. 1/2012-ST dated 9 January 2012

CBEC specifes documents required or registration

o Service tax

CBEC has specied that, or a new online service tax

registration, ollowing attested documents are to be

submitted by the applicant along with a printed copy o

the online application signed by the authorised signatoryo the applicant within a period o 15 days rom the

date o ling o application or registration:

PANCard;

Proofofaddress;

Constitutionofapplicantatthetimeoflingan

application or registration;

Powerofattorneyinrespectofauthorizedpersons.

It is also claried that, the time limit o 7 days rom the

date o receipt o application or service tax registration,

within which the service tax registration is to be granted

shall be reckoned rom the date the application or

registration is complete in all respect.

Order No. 2/2011-ST dated 13 December, 2011


25/4225Tax Briey

Clarifcations on levy o Service tax on distributors /

sub-distributors o flms and exhibition o movie

CBEC has claried the taxability o prot/revenue

sharing arrangement in case o distribution o lms and

exhibition o movies in the ollowing manner:

Circular No. 148/17/2011 ST dated 13 December, 2011

Clarifcations on Service tax on IPLC charges

CBEC has claried that the IPLC services rendered by

a person located outside India to a person located

in India, is neither taxable under the category o

Telecommunication Services, nor taxable under the

category o Business Support Services and rescinded

its earlier view o applicability o service tax under

the category o Business Support Services provided

through letter F.No 137/21/2011 ST dated 15 July, 2011.

Letter F.No. 137/21/2011 ST dated 19 December, 2011

Case Laws

Royalty paid or ground handling services at airport

is not subject to service tax

The Kerala High Court has held that the royalty paid by

Air India Ltd. to Cochin International Airport Ltd. out o

the collections made rom various airlines or the ground

handling services rendered on which service tax was

already discharged by Air India Ltd., was not liable to

service tax.

Commissioner o Central Excise v Cochin International

Airport Ltd. [2011 (24) STR 20 (Ker.)]

Distribution o CENVAT credit by an Input Service

Distributor is allowed subject to the limitations in

CENVAT Credit Rules

The Karnataka High Court has held that there are only

two limitations which are imposed on the distribution

o CENVAT credit by an input service distributor. Firstly,

the CENVAT credit cannot exceed the amount o service

tax paid and secondly, the CENVAT credit o service

tax attributable to service used in a unit exclusively

engaged in the manuacture o exempted goods or

providing o exempted services shall not be distributed.

Thereore, once a manuacturer is registered as an input

service distributor, there is no prohibition under law on

payment o service tax on input service at one unit andavailment o CENVAT credit o the same at another unit

o the manuacturer.

Commissioner o Central Excise, Bangalore v ECOF

Industries Pvt. Ltd. [2011-TIOL-770)-HC-Kar-ST]

Demand raised ater retrospective amendment o

provision is not valid

It was held that in case a provision is amended with

retrospective eect, the department can proceed with

the demand only i the matter was kept alive at the time

when original provision was in orce. In other words,

the demand can be raised only i the assessee had

been served with demand notice at the time when the

original provision which is amended retrospectively, was

in orce. Else, no action can be initiated aresh ater the

amendment is introduced validating action taken under

the provisions prior to the retrospective amendment.

Precot Mills Ltd. v Union o India [2011 (24) STR 283

(Ker.)]

Services provided ater the appointed date, which

is the date o amalgamation, to the amalgamated

company does not attract service tax

The CESTAT has held that the services provided by the

Type oArrangement

Movie displayed on whoseaccount

Service Tax Implication

Principal to Principal Basis I the movie is exhibited bytheatre owner or exhibitoron his account by virtue otemporary transer o copyrights

Service tax would be leviedunder copyright service

I the movie is exhibited onbehal o distributor or sub-distributor or area distributor orproducer etc. without transero copyrights

Service tax would belevied under businesssupport service / rentingo immovable propertyservice, as the case maybe, depending upon thearrangement whether thetheatre owner has merelylet out its premises tothe distributor or is alsoinvolved in giving supportservices or the business o

the distributerArrangement underunincorporatedpartnership/ joint/collaboration basis

Service provided by each o the person i.e. the new entity/Theater Owner or Exhibitor / Distributor or Sub-Distributor orArea Distributor or Producer, as the case may be, is liable toservice tax under applicable service head based on the natureo transaction


26/4226

transeror company to the transeree company ater

the appointed date as presented in the scheme o

amalgamation would not be liable to service tax.

Commissioner o Service Tax, Delhi I v ITC Hotels Ltd

[2011-TIOL-1453-CESTAT-Del]

Service provided to Principal situated outside India

to market products in India, whether constitutes

export o service

Some o the points o dierence in views o members

that have been reerred to third member or decision

are:

WhethertheBusinessAuxiliaryServiceofpromotion

o market in India or oreign principal amounts to

export o service.

Whethersuchservicesforpromotionofmarketin

India or oreign principal were delivered outside

India and used there at.

Microsot Corporation (I) (P) Ltd. v Commissioner o

Service Tax, New Delhi [2011-TIOL-1508-CESTAT-Del]

Services provided to Principal situated outside India

to market products in India, whether constitutes

export o service

Some o the points o dierence in views o members

that have been placed beore the President o CESTAT

or appropriate orders are:

AretheprovisionsofExportofServicesRules,2005

and circulars issued by CBEC clariying the scope

o the said Rules in confict with the meaning o

the term export given by Article 286 (1)(b) o the

Constitution o India and the decisions o the Apex

Courts.

AretheprovisionsofExportofServicesRules,2005

and circulars issued by CBEC clariying the scope

o the said Rules in confict with the theory o

equivalence in respect o laws as applicable to taxes

on goods and taxes on services

Whethertheissueastowhatconstitutesexport

o service is to be determined with reerence to

provisions in Export o Services Rules, 2005 only?

Whichistheservicetobeconsideredfordeciding

the actum o export whether that provided to

the principal abroad or that provided to the person

enjoying the service in India who does not pay any

consideration or the services.

Paul Merchants Ltd. v CCE Chandigarh [2011-TIOL-1448-

CESTAT Del]

Charges collected or restructuring and prepayment

o loans are subject to Service tax

It was held that in respect o charges collected or

prepayment o loans and resetting o interest there is

an element o service. Accordingly, it was held that

such charges collected by the Appellant are towards

value added services and hence are subject to service

tax notwithstanding the act that accounting treatment

given to these items as additional interest has been

accepted by the Income tax department.

In so ar as the reliance was placed on the decisions

o European Court o justice holding that cancellation

charges cannot be considered as having any direct

connection with supply o service, the Tribunal held

that without comparing statutory provisions it will not

be appropriate to rely upon the decisions o European

Courts.

Housing & Development Corporation Ltd. (HUDCO) v

CST Ahmedabad [2011-TIOL-1606-CESTAT-AHM]

Reund o service tax paid on the input services prior

to registration

It was held that the reund o service tax paid on input

services used or the provision o output services which

are exported cannot be denied on the ground that there

is delay in obtaining service tax registration and the

input services pertain to pre-registration period.

Wipro BPO Solutions Ltd. v CST, Delhi [2011-TIOL-

1592-CESTAT-Del] and Textech International (P) Ltd. v

Commissioner o Service Tax, Chennai [2011] 33 STT

233 CESTAT

Afliated companies holding separate service tax

registrations to be treated as distinct entities

It was held that show cause notice cannot be issued

to a company or recovery o service tax rom its

aliated company, without liting the corporate veil

to prove that the aliated company is a sham. The

aliated companies who are granted separate service

tax registrations by the department are to be treated as

distinct entities.

Sai Computer Consultancy v Commissioner o Central

Excise [2011 (24) STR 624] [CESTAT]


27/4227Tax Briey

Constitutional validity o the explanation inserted

to the taxable services o Commercial or Industrial

Construction Services and Construction o

Residential Complex Service and levy o service tax

on services in relation to provision o preerential

location upheld.

Writ petition was led in the High Court o Mumbai

challenging the constitutional validity o:

Insertionoftheexplanationtoclauses(zzq)

Commercial or Industrial Construction Services and

(zzzh) Construction o Residential Complex Service

o section 65(105) o the Finance Act, providing

that the construction o a new building and

complex respectively under the taxable categories

which are intended or sale by the builder shall be

deemed to be service provided by the builder to

the buyer except in the cases where no part o the

consideration or sale is received beore the grant o

completion certicate by competent authority.

Levyofservicetaxonservicesinrelationtoprovision

o preerential location by insertion o clause (zzzzu)in section 65(105) o the Finance Act.

The writ petition was dismissed upholding the

constitutional validity o the amendments.

Maharashtra Chamber O Housing Industry and Ot

tax briefly february 2012.pdf

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