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Foreign Remittance TDS u/s 195 Case Law Analysis 2015 Series 1

Income Tax - Direct Tax Code - DTC - By: - CA Rohit Gupta - Dated:- 26-3-2015 Last Replied Date:- 30-12-1899 - International Tax Update: Some of the important case laws published during 2015 pertaining to TDS u/s 195 and/or taxability of foreign companies/non-resident entities in respect of source of income in India. Discussion and analysis (given in italics) pertain to relevance of judgement in future proceedings, subsequent developments, other relevant case laws on the same aspect, judicial de .....

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a)(i) did not arise. 1.1. Comments: However, the above judgement shall not hold good in respect of interest payments w.e.f. 1.4.2015 by Indian branch to foreign head office due to amendment in Finance Bill 2015 whereby interest paid by Indian branch to foreign head office has specifically been made chargeable to income tax in India. Concept of Non-taxability of Income on grounds of mutuality/payment to self no longer holds validity after 1.4.2015 in respect of interest payment by Indian branch t .....

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igh Court in case of DIT v. Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT, payment received by assessee from sale of software and provisions of maintenance and other supports services to customers in India were not taxable as 'royalty', in terms of article 12 of India US Double Taxation Avoidance Agreement. 2.1) Comments: There were two issues involved -taxability of sale of software and taxability of support services 2.1.1) Sale of Software: The tribunal rightly concluded that sa .....

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erned. It overruled the earlier Karnataka HC decision of Samsung Electronics on the ground that The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose . Though there was another decision of Delhi High Court (subsequent to Samsung Decision) in the case of DIT v. Nokia Networks OY 2012 (9) .....

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(which held software as copyright and hence taxable as royalty and were relied upon by revenue) which are no longer relevant after Infrasoft decision of Delhi high court include: CIT v. Sunray Computers (P.) Ltd. 2011 (10) TMI 239 - Karnataka High court; Citrix Systems Asia Pacific Pty. Limited, 2012 (2) TMI 258 - AUTHORITY FOR ADVANCE RULINGS; CIT v. Samsung Electronics Co. Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT 2.1.2) Software Support/Maintenance Services: Maintenance / other software s .....

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pts would assume the same character as that of software receipts and the same were liable to be taxed accordingly . However, there is no High Court or Supreme Court judgement on the matter. It may be regarded as fees for technical services or royalty depending on the facts of the case. The issue needs further clarification as regards taxability of charges for software updates/support services/maintenance charges. 3. Royalty-Subscription Charges: CIT vs. Infosys Technologies Ltd. 2015 (3) TMI 850 .....

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td had not given any detailed reasoning as to why subscription charges would amount to royalty and how online access to database is different from subscription made to a journal or magazine. It relied on the reasoning given in its earlier decision as regards taxability of shrink-wrapped software in CIT v. Samsung Electronics Co. Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT which has since been distinguished by the subsequent decision of DIT v. Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COUR .....

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nd skill. The judgements include: Cargo Community Network (P.) Ltd., In re 2007 (1) TMI 108 - AUTHORITY FOR ADVANCE RULINGS, ONGC Videsh Ltd. v. ITO 2013 (9) TMI 793 - ITAT DELHI, ThoughtBuzz (P.) Ltd. 2012 (5) TMI 104 - AUTHORITY FOR ADVANCE RULINGS. 4. Movie/Film Satellite rights as royalty: S. P. Alaguvel vs. DCIT 2014 (10) TMI 183 - MADRAS HIGH COURT Transfer of Movie/Film satellite rights to assessee under an agreement for a period of 99 years is a sale and, therefore, excluded from definit .....

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of assessee is a sale and, therefore, excluded from definition of royalty under section 9(1)(vi). Explanation 2. 5. Fees for Technical Services for Business Outside India: DCIT vs. Hofincons Infotech and Industrial Services (P.) Ltd. 2015 (3) TMI 876 - ITAT CHENNAI Assessee, providing consultancy services, made payment pertaining to some support services rendered by non-resident in Qatar qua its Nigerian projects. HELD, since fees was paid to non-resident abroad for services utilized in business .....

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to its agent located abroad for mobilising its sales in foreign countries, since said services were not in nature of managerial services, payment in question was not taxable in India as 'fee for technical services' under section 9(1)(vii)(b) ACIT vs. Lohia Starlinger Ltd. 2014 (10) TMI 700 - ITAT LUCKNOW 5.1.b) Testing services for export- Taxable: Assessee-company was engaged in manufacture of switch gears, energy meters, cables and wires, electrical fans, compact florescent lamp and re .....

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in section 9(1)(vii)(b), source of income and not source of receipt, should be situated outside India. Since, in instant case export activity having taken place or having been fulfilled in India, source of income was located in India and not outside and mere fact that export proceeds emanated from persons situated outside India did not constitute them as source of income. Therefore, fees for technical services was taxable in hands of US company in India and assessee was liable to deduct tax at .....

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made outside India, or (iii) activity yielding income takes place outside India. In this case, Assessee, a domestic company, had acquired four Boeing Cargo Aircrafts from a foreign company and obtained license from licensing authority to operate those aircrafts on international routes only. Assessee periodically made payments to a non-resident company on account of overhaul, repairs of its aircrafts, engines sub-assemblies and rotables (components) in workshops abroad. HELD, even assuming that p .....

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an company to advice and assist in acquisition of sugar mills and distilleries in Brazil and paid them fees for technical services - Whether since assessee was contemplating to create a source for earning income outside India, though source of income had not yet come into existence, assessee would still get benefit of exceptional clause (b) of section 9(1)(vii) as there is nothing in section 9(1)(vii), clause (b) to show that source of income should have come into existence so as to except payme .....

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ts (P.) Ltd. 2012 (6) TMI 404 - ITAT CHENNAI Exclusion clause under section 9(1)(vii)(b) is the most underutilised clause for arguing non-taxability of income of non-residents for the purpose of business outside India. It offers a great tax planning opportunity for reducing tax liability on foreign remittance. 6. Capital gains/Resident: DIT vs. ICICI Bank Ltd. 2014 (9) TMI 95 - BOMBAY HIGH COURT Where capital gain accrued to residents of UAE from sale of Government securities in India carried ou .....

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o the judgement of Asstt. DIT v. Green Emirate Shipping and Travels 2005 (11) TMI 239 - ITAT MUMBAI clearly laid out that taxability in one country is not a sine qua non for availing relief under treaty from taxability in other country and being liable to tax in Contracting State does not necessarily imply that person should actually be liable to tax in that State by virtue of an existing legal provision but would also cover cases where other Contracting State has right to tax such persons irres .....

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rlying immovable property of the company is situated in India. Also, the definition of resident of UAE has been revised to in the case of the United Arab Emirates: an individual who is present in the UAE for a period or periods totalling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE. Hence dispute as regards concept of liable to tax for determining residential status and hence ap .....

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n System (CRS) appointed Indian distributor which only negotiated and entered into contracts with various travel agents who wished to be connected to assessee's CRS - Major functioning of collecting data bases with various airlines, hotels, etc. and their analysis and development took place and all data were stored in huge capacity computers in Denver, USA. Indian agent merely provided connectivity to agents enabling them for booking function. HELD, the 15 per cent formula, which was applied .....

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d be ideally based upon number of bookings originating from India in comparison with the bookings in a particular year and on consideration of global accounts. However, HC did not agree with the submission as the Assessing Officer had mentioned in the assessment orders that the facts and circumstances of the case remain the same and no such Foundation and basis had been first made in the assessment order. Also, the HC relied on FAR analysis to determine the 15% rate of attribution of profits to .....

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ertaken in India viz., the functions and assets outside India, 15 per cent was attributed to India. However, the concept of customers as asset was not brought up during the proceedings. If revenue generating assets viz. Customers are more in India, more profits be ideally allocated to India. 8. Usance Charges as Interest: ACIT vs. Bhavani Enterprises 2015 (3) TMI 545 - ITAT PANAJI : Usance charges paid to non-resident on import purchase by assessee would be considered as 'interest' incom .....

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held that unpaid purchase price cannot be regarded as loan since non-resident company could not be said to have lent amount of unpaid purchase price to assessee-company either in cash or in kind, there was no question of interest payable assessee-company to non-resident company being deemed to be income accruing or arising from any money lent at interest and brought into India in kind. 9. Telecom Services as Fees for Technical Services: ITO vs. Clear Water Technology Services (P.) Ltd. 2014 (12) .....

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the latest decision of Karnataka High Court in the case of CIT vs. Infosys Technologies Ltd. 2015 (3) TMI 850 - KARNATAKA HIGH COURT wherein it was held that Down linking charges paid to foreign party could not be treated as royalty. Also, with regard to telecom services, The Madras High Court in the case of Sky Cell Communication Services Ltd. v. DCIT 2001 (2) TMI 57 - MADRAS High Court has held that payment for use of mobile phone services would not constitute royalties or fees for technical s .....

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see, a French resident, from sale of shares of Indian companies, could not be taxed under head 'capital gain' due to benefit conferred in terms of article 14(6) of India-France DTAA. Where assessee, a non-resident, received certain amount of compensation from his power of attorney holder towards damages for breach of trust in respect of sale of shares of Indian companies, said amount being in nature of capital receipt, could not be brought to tax. 10.1) Comments: The DTAA with France pro .....

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hares if period of holding is more than 1 year only. Also, for unlisted shares maximum rate is 20% if period of holding is more than 1 year. Hence, the provision of taxability of capital gain from sale of shares in Indian company by French resident in state of residence i.e. France is more of a disadvantage and should be planned properly. Further decision points out that damage for breach of trust as capital receipt and not taxable in India. There are other recent judicial precedents pertaining .....

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ior to payment to beneficiaries. In this case, HC did not outrighly held the compensation as capital receipt rather remanded the matter back to AAR to determine whether the settlement amount is capital receipt or revenue receipt. 10.1.b) Spaco Carburetors (I) (P.) Ltd. V. ACIT : 2009 (3) TMI 213 - ITAT BOMBAY-E Assessee was a manufacturer of different types of carburetors required for automobile and two wheeler industries - It entered into a technical collaboration agreement (TCA) with a Japanes .....

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