INTERNATIONAL TAXATION Case Law Update

Transcription

1 CA Tarunkumar Singhal & CA Sunil Lala INTERNATIONAL TAXATION Case Law Update A] AUTHORITY FOR ADVANCE RULINGS I. India Mauritius DTAA Capital Gains Whether if the Mauritian entity is holding a valid tax residency certificate, the capital gain arising to such entity from sale of investment in India shall not be taxed in India in view of the judgment of the Hon ble Supreme Court in Azadi Bachao Andolan? Held : Yes Whether Chapter X-A introduced into the Act by the Finance Act, 2012 which come into force only on , section 90(2A) and section 90(4) of the Act has no relevance at this stage? Held : Yes Dynamic India Fund I, In re [2012] 23 taxmann. com 266 (AAR) Facts 1 The applicant, Dynamic India Fund I ( DIF-I ), a company incorporated in Mauritius and a 100 % subsidiary of Dynamic India Fund II ( DIF-II ), a Mauritian based company was registered as a Foreign Venture Capital Investor obtained on , a licence from the Securities Exchange Board of India ( SEBI ). 2 The applicant was set up to invest in growing sectors in India. The funds required for investments in India were pooled from various individual and institutional investors from different parts of the world by DIF-II and invested as capital into DIF-I, the applicant. The said funds were invested in India by the applicant. 3 It had a Tax Residency Certificate from Mauritius valid up to , the validity of which was further extended till The applicant had made investments in India in units and shares of Indian companies in the years 2007 and The shares were held with the intention of generating long-term capital appreciation. 5 The applicant proposed to sell the shares of some companies which would generate capital gains. It thus sought an advance ruling on the taxability in India arising out of the sale of shares it held in Ranbaxy Fine Chemicals Limited. 6 The applicant submitted that being a tax-resident of Mauritius, it was entitled to Taxation Avoidance Agreement ( the DTAA ) and accordingly the capital gains arising would be taxable only in Mauritius in view of Article 13(4) of the DTAA relying on the decision of UOI vs. Azadi Bachao Anodolan. 144 ML-412

2 7 The Revenue on other hand contended that only 4 out of 55 investors were from Mauritius and that this was a case of routing the investments by the investors through Mauritius so as to evade taxation on the capital gains that they would make and such an attempt should not be allowed to succeed. 8 It was then contended that only two of the Directors of the applicant were from Mauritius and the three others were from India and decisions were taken from India by the Board of Directors. Ruling 1 The Hon ble AAR held that it was not possible to accept the contention of the Revenue that the control of the applicant lies in India as there was no adequate material to support this contention. It observed that the applicant had produced a list along with the written submissions dated to show that two of the Directors are residents of Mauritius, one a resident of India and one though an Indian, was a resident of the United States of America. Further, the applicant asserted that the decisions were taken by the Board of Directors from Mauritius and the control of the affairs of the company lies in Mauritius. 2 It further observed that the argument that unless the capital gain is actually taxed in Mauritius the DTAA would not apply in the context of section 90(1) and section 90(2) of the Act, though attractive, could not be entertained in view of the decision in UOI vs. Azadi Bachao Andolan. It held that even though capital gain was not actually taxed in Mauritius, the question raised was seen to be concluded by the above decision and the Authority was bound by that decision. 3 Accordingly, it held that the applicant being a tax resident of Mauritius in the light of going by the decision in UOI vs. Azadi Bachao Andolan, the gain that may arise to the applicant was not chargeable to tax in India. 4 It further observed that since Chapter X-A introduced into the Act by the Finance Act, 2012 is to come into force only on , section 90(2A) of the Act had no relevance at this stage. Same was the position regarding section 90(4) of the Act introduced. come into force, it would be open to the revenue to consider those aspects; notwithstanding this ruling. Cases referred a. UOI vs. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) B] HIGH COURT JUDGMENTS II. Transfer Pricing Arm s Length Price Whether when the rate of royalty is not in dispute, there can be no adjustment to the ALP of the royalty paid by way of reduction in the value thereof on account of the assessee's customers failing to pay the assessee for the product purchased by them from the assessee? Held : Yes CIT vs. CA Computer Associates India Pvt. Ltd. (ITA No. 20 of 2011 Bom) Assessment Year : Facts 1 The assessee, CA Computer Associates India Pvt. Ltd., entered into a Software Distribution Agreement with CA Management Inc. ( CAMI ) under which it was appointed as a distributor of the products of CAMI in India and was liable to pay an annual royalty on all amounts invoiced at a rate of 30%. 2 During the year the assessee paid royalty declaring a loss of about ` 14,55,99,340/-. The Assessing Officer ( AO ) referred the matter to the Transfer Pricing Officer ( TPO ) for ML

3 determining the Arm's Length Price ( ALP ) in respect of the royalty paid by the respondent to CAMI. 3 The assessee claimed the ALP at the contractual value of about ` 7.43 crores whereas the TPO and AO computed the ALP of the royalty at about ` 5.85 crores. 4 The TPO by the order under section 92CA(3) of the Act observed that the assessee's contention regarding the rate of royalty being justified was not relevant, as there was no dispute regarding the same but that the issue was whether the payment of royalty by assessee to CAMI should be allowed in respect of sales which had resulted in bad debts. It took a view that ALP of royalty payable in respect of sales which had resulted in bad debts be computed at nil. 5 Following the TPO s order, the Assessing international transactions by reducing the value of the royalty payment. The CIT(A) dismissing the assessee s appeal made a similar observation and held that the assessee's contentions that it had paid royalty at a lower rate than in the comparable transactions was irrelevant because the rate of royalty is not in dispute. 6 On futher appeal, the Hon ble Tribunal ruling in favour of the assessee held that merely because the assessee had paid the royalty even in respect of the products sold by it to the clients, who had not paid for the same, it would make no difference to the determination of the ALP of the transaction. 7 Aggrieved, the Revenue appealed to the Hon ble High Court. Judgment 1 The Hon ble High Court observed that the ALP (the rate of royalty) was not disputed either by the department and the CIT (A). The only basis of the order of the AO and the CIT (A) was that the respondent had paid the royalty to its principal CAMI even in respect of sales which had resulted in bad debts. It was asserted that such cases ought to be dealt with on the basis that no sales had occurred and therefore, there was no question of payment of any royalty to that extent, as the payments were not received by the assessee and were written off in its books of account. It thus held that the Hon ble Tribunal was right in coming to its conclusion. 2 It further observed Section 92C of the Act providing for the basis for determining the ALP in relation to international transactions, does not either expressly or impliedly consider failure of the respondent's customers to pay for the products sold to them by the respondent to be a relevant factor in determining the ALP. Indeed in the absence of any statutory provision or the transactions being colourable, bad debts on account of purchasers refusing to pay for the goods purchased by them from the assessee can never be a relevant factor while determining the ALP of the transaction between the assessee and its principal. 3 Thus ruling in favour of the assessee, the Hon ble High Court held that once it is accepted be no reduction in the value thereof on account of the assessee's customers failing to pay the assessee for the product purchased by them from the assessee. 4 In the absence of a contract to the contrary, the purchaser's / licensee's obligation to pay the consideration under its transaction with its vendor / licensor is not dependent upon its recovering the price of the products from its clients. The two are distinct, unconnected transactions. 5 Accordingly, it held that the transactions between the assessee and CAMI were unrelated to the transactions between the assessee and its clients i.e. purchasers of the products from the assessee and CAMI was not concerned with the assessee's inability to recover the consideration from its clients. 146 ML-414

4 III. Section 206AA read with section 139A of the Act Deduction of Tax at source Requirement to furnish PAN Whether the provisions of section 206AA is unconstitutional and has to be read down from statute and made inapplicable to persons whose income is less than taxable limit? Held : Yes Banking and financial institutions should not insist upon PAN from small investors opening bank accounts and having income below taxable limit? Held : Yes Smt A. Kowsalya Bai vs. UOI [2012] 22 taxmann. com 157 (Kar) Facts 1 The petitioners, small investors, having income not exceeding the maximum taxable limit as per section 139A of the Income-tax Act, 1961 ( the Act ) had approached the respondents for depositing their savings, for earning better interest/returns. They even filed Form 15G as required under section197a of the Act to enable the respondents not to deduct tax at source as per section 193 of the Act. 2 However, they were informed by the respondents that even Form 15G filed by them cannot be accepted for the purpose of exemption from deduction unless their PAN is communicated, pursuant to the amendment to section 206AA of the Finance Act, 2009 based on which the 3rd and 4th respondents insisted for furnishing of PAN. 3 Agrieved, the petitioners filed a writ petition before the Hon ble High Court to challenge section 206AA of the Act as being arbitrary and unconstitutional to the extent that it compelled persons with no taxable income to obtain a PAN. Judgment 1 The Hon ble High Court observed that the very intent of section 206AA of the Act is to make it conditional for every person who wish to have a transaction in the bank or financial institution including small investors/depositors, invariably to have a PAN. This runs contrary to what has been contemplated under S. 139A of the Act which was introduced by the Legislature in its wisdom. 2 It further observed that it is not in dispute that persons whose income is below the taxable limit need not have a PAN and also they need not furnish income tax declaration/returns. Such of the small investors who come forward to invest their savings from earnings as security for their future, by virture of the present S.206AA of the Act, necessarily have to give their PAN. The poor and illiterate/uneducated persons are government departments particularly the Income Tax Department go get their PAN. 3 Such investments (savings from their earnings or by way of agriculture or any other source) in banking and financial institutions would also further the financial position from the point of the country's economy. But imposing condition to invariably go for a PAN on such small depositors would cause hindrance and discourage such small investors to come forward to invest their money. 4 The Hon ble High Court also observed that section 139A of the Act which is introduced way back in April 1991 is in vogue and this provision stands the scrutiny of Article 14 of the Constitution for reasonableness. But, section 206AA of the Act which is contrary to section 139A appears to be discriminatory as if it is over riding section 139A introduced earlier. Though the intention of the Legislature is to bring the maximum persons under the net of income tax, when necessarily it provides for exemption up to taxable limit, it may not insist such persons whose income is below the taxable limit to compulsorily go for PAN. If any mischief of avoiding of tax or any other act of concealing the income is detected, that could be taken care of by penal provisions. ML

5 5 The Hon ble High Court thus held that in the Act, section 206AA of the Act is to be made inapplicable to and read down from the statute for persons whose income is less than the taxable limit as per the Finance Act, However, it clarified that section 206AA of the Act would of course, be made applicable to persons whose income is above the taxable limit. 6 It further held that the banking and upon PAN from such small investors like the petitioners as well as from persons who intend to open an account in the bank or financial institution. IV. Transfer Pricing Writ Petition Whether where contrary to the Petitioner s submission, the AO has duly obtained Commissioner s prior approval and afforded adequate opportunity of being heard and also in view of the fact that alternate and efficacious remedy in form of filing objections before DRP is available, writ petition challenging Transfer Pricing reference is not maintainable? Held; Yes Bhatia International vs. ACIT [TS-494-HC- 2012(MP)] Assessment Year : Facts 1 The assessee, Bhatia International Ltd, engaged in the import of coal for the purposes of reselling, engaged ships on time charter / voyage charter basis, from foreign shipping companies for importing coal. 2 During the year under consideration, a reference was made to the TPO by the AO, for computation of ALP of the assessee s international transactions with its AEs. The TPO asked the assessee to submit details regarding incorporation documents, balance sheet and P&L account of its AE, as well as comparison of freight expenses paid to third parties and the AE. However, the requisite details were not furnished and the TPO passed an order on October 29, The assessee filed a writ petition challenging the TPO s order before the Hon ble Madhya Pradesh High Court on the ground that the AO had made a reference to the TPO, without obtaining the Commissioner s approval. It also argued that there was a violation of principles of natural justice. Judgment 1 The Hon ble High Court on a perusal of the records produced before the Court, observed that the Commissioner s approval was duly obtained before making a reference to the TPO. It held that the impugned order was passed by an authority who was jurisdictionally competent to pass such an order and it could never be said that the order was passed by the respondents without jurisdiction. 2 Referring to the provisions of section 144C of the Act, the Hon ble High Court held that Panel (DRP). It observed that a complete mechanism has been provided under the Act itself for resolving such a dispute and therefore, there was no reason for the Court to interfere at this stage in the matter. 3 The Hon ble High Court further relied on the Hon ble Bombay High Court s judgment in the case of Hindalco Industries Ltd., wherein the grounds. It observed that keeping in view the above judgment, as reasonable opportunity was granted to the petitioner, which was evident also keeping in view the fact that the order has been passed by an authority competent to pass such an order, the question of interference at this stage, under Article 226 of the Constitution of India did not arise. 148 ML-416

6 Case referred a. Hindalco Industries Ltd. vs. ACIT [2012] 17 taxmann.com (Bom.) V. Whether when from the two methods available for reorganizing their shareholding, the promoters have chosen to adopt a tax exempt route and a legally recognized route for reorganizing rather than a taxable route, the same would not amount to tax avoidance? Held : Yes Whether Azadi ruling not contrary to McDowell's case, following SC ruling in Vodafone and McDowell cannot be read as laying down that every attempt at tax planning is illegitimate? Held : Yes Whether Income tax authority are not required to be impleaded or be heard while sanctioning the Scheme under Sections of the Companies Act, 1956? Held : Yes AVM Capital Services (P.) Ltd. & Ors. [2012] 23 Taxmann.com (Bom HC) Facts 1 The petitioners in the instant case sought sanction of the Hon ble High Court under sections 391 to 394 read with sections 80, 100 to 103 of the Companies Act, 1956 to a Scheme of arrangement, whereunder the five Companies ( Transferor Companies) holding shares of Unichem Laboratories Limited ( Transferee Company ) were sought to be merged with the Transferee Company. Pursuant to the Scheme, would be cancelled and equivalent number of shares would be issued to the promoter of Unichem, Dr. Prakash Modi. 2 The above Scheme was approved by the shareholders of the Transferor Companies and the Transferee Company. At a meeting of the shareholders of the Transferee Company on majority of the shareholders holding 99.99% (in the value of shareholders present) voted in favour of the Scheme. However, Mr. Shailesh Mehta - the Objector, who held 750 shares of the Transferee Company, constituting 0.001% of the total share capital of the Transferee Company opposed the Scheme. 3 The primary objection of the Objector was that the Scheme was propounded to avoid capital gains tax that would have arisen if the Transferor Companies would have directly transferred their shares to the Promoters. It was alleged that the object of the Scheme was not to help the Transferee Company, but to transfer these shares to the Promoter Dr. Prakash Modi. According to the Objector, the Scheme was a colourable device to evade tax, since such a transfer could well have been effected through the stock market. 4 He relied on the Hon ble Supreme Court Judgment in McDowell & Co Ltd vs. CTO and also contended that the Hon ble Supreme Court Judgment in Azadi Bachao Andolan was contrary to the decision in McDowell. For this purpose, he referred to the AAR ruling in Groupe Industrial Marcel Dassault. 5 He further submitted that this Court should direct the Transferee Company to implead the income tax authority as a necessary party. 6 The Petitioners however argued that the merger would help in consolidating and streamlining the Promoter holding in the Transferee Company. It would enable the Promoter thereof to hold shares directly in the Transferee Company, rather than indirectly. The Promoters were not aiming for the exit of the Transferee Company through divestment, and had adopted one of the available methods for reorganizing their shareholding. The purpose of this Scheme was to provide long-term stability and transparency in the Transferee Company and it was perfectly legitimate. ML

7 Judgment 1 The Hon ble High Court referring to the Judgment of the Hon ble Supreme Court in Azadi Bachao Andolan observed that it had considered McDowell s case and held that the decision in McDowell's case cannot be read as laying down that every attempt at tax planning is illegitimate, or that every transaction or arrangement which is perfectly permissible under the law, but has the effect of reducing the tax burden of the assessee must be looked upon with disfavour. Accordingly, it rejected the objection of the objector that the decision in the case of Azadi Bachao Andolan is contrary to the decision in McDowell s case. 2 The Hon ble High Court further referred to the Hon ble Supreme Court Judgment in Vodafone International Holdings wherein it decisions of Azadi and McDowell, and that it could not be said that all tax planning was illegal / illegitimate / impermissible. It further held that the decision in the case of Wood Polymer Limited relied on by the Objector was no longer good law, in view of the decision in the case of Vodafone International Holdings. 3 It also held that the ruling of the AAR in Groupe Industrial Marcel was of no assistance to the Objector since the decision in the case of Vodafone International Holdings has now settled the controversy once and for all. 4 The Hon ble High Court observed that prior to the Scheme, the shares were owned / controlled by the same Promoter albeit, through the Transferor Companies. Under the Scheme the only difference was that the Promoter would now hold shares directly in the Transferee Company. Thus, it ruled that it was correctly submitted by the Transferee Company that there was nothing illegal or unlawful or dubious or colourful in the Scheme and the same was a perfectly legitimate scheme and permissible by law. 5 Accordingly, it rejected the objection of the Objector that the Scheme for avoidance of tax and approved the Scheme. 6 The Hon ble High Court further held that Income Tax Authority was not required to be heard while sanctioning the Scheme. Cases referred a. McDowell & Co. Ltd. v. Commercial Tax b. Wood Polymer Limited (1977) 109 ITR 177 (Guj) c. Groupe Industrial Marcel Dassault (2011) 16 taxmann.com 21 (AAR) d. Union of India vs. Azadi Bachao Anodolan (2003) 263 ITR 706 (SC) e. Vodafone International Holdings vs. Union of India (2012) 341 ITR 1 (SC) f. Jindal Iron & Steel Company Limited (Company Application No.123 of 2004 connected with Company PetitionNo.76 of 2004) g. Scheme of Arangement between Tata Services Limited and Tatanet Services Ltd. (Company Petition No. 758 of 2005 connected with Company Application No. 540 of 2005) (Bom.) h. Scheme of Arrangement between Balkrishna Industries Limited and Balkrishna Paper Mills Limited and Balkrishna Synthetics Limited (Company Petition No. 713 of 2007 connected with Company Application No. 771 of 2007) (Bom) C) TRIBUNAL DECISIONS I) Royalty Whether when the nonresident received royalty income from an Indian concern, the gross amount of royalties taxable as per the treaty would include the taxes paid by the licensee in the light of section 10(6A) Held: Yes; Whether any computation under the Act is required for finding 150 ML-418

8 the gross amount of royalties paid to the assessee Held : No; Whether in terms of the treaty, the royalty income is taxable on accrual basis or on cash basis - Held : On Cash Basis Article 12 of India-USA DTAA. Pizza Hut International LLC vs. DDIT 2012-TII-59- ITAT-DEL-INTL Assessment Year : Facts: i) Pizza Hut International LLC, the assessee is a tax resident of USA. It earns royalty from Yum Restaurant India Ltd. under a technical licence agreement. The tax payable on the royalty was borne by the Indian company. ii) iii) In its return of income, the assessee claimed the benefit of the India-USA DTAA and the tax on the royalty income was The AO found that the assessee had claimed exemption u/s 10(6A) of the Act in respect of tax on royalty borne by Yum. The AO was of the opinion that the assessee could not avail the benefits of section 10(6A) and at the same time claim that tax should be 15% under the DTAA. He held that since the assessee had claimed the exemption, the income had to be 20% as provided in the Act. Thus, the additional tax payable along with interest was worked out and charged. The assessee filed appeal before the CIT(A) who allowed the taxability of the assessee s 15%. Under Section 10(6A), the tax paid in respect of royalty etc, is exempt if the agreement is after 31st March,1976 but before 1st day of June, The CIT(A) held that the assessee had claimed the exemption for AY as the agreement was signed on This exemption had not been claimed in the AY as the agreement for this year was signed after Therefore, he held that the AO had erred in not granting exemption u/s 10(6A) for assessment year Decision: The Tribunal held as follows: i) Paragraph No. 2 of Article 12 of the DTAA contemplates 15% of the gross amounts of royalties. The term Gross amounts has not been defined in the treaty. In common parlance, these words mean the amount received along with tax deducted etc. at source. If the intention was to tax only that amount which is actually paid to the assessee, then the word amount only would have been used. Therefore, it is clear that the intention is to tax the gross amount and not the net amount of the royalty. We also find that this term has not been defined in the DTAA. Therefore, the guidance will have to be sought, if available, from the Act. We find that the Act, in section 198, provides that all sums deducted in accordance with the provisions of Chapter XVII shall be deemed to be income received for computing the income of an assessee. This section embodies in itself the principle that tax deducted at source, for which credit is available to the payee, is nothing but payment of income, utilised for payment of tax on behalf of the payee. of computational provision would be available to the assessee and, therefore, the amount of tax deducted at source would be excluded from the total income u/s 10(6A) of the Act. We do not agree with him in this behalf for the simple reason that no computation is required paid to the assessee. As mentioned earlier, as a matter of common understanding, this expression includes within its ambit the actual payment and tax deducted at ML

9 iii) source, paid to the Central Government on behalf of the assessee. In this light, the provision in section 198 is in the nature of CIT(A) is reversed on this issue. The second question is whether, the income by way of royalty is taxable on cash basis or mercantile basis? We find that this issue has been decided by B Bench of Delhi Tribunal in the case of CSC Technology Singapore Pte. Ltd. in This decision takes care of the submissions of the Sr. DR and the Counsel in our case. The Tribunal considered the decision in the case of DCIT vs. Uhde GmbH, National Organic Chemical Industries Ltd. vs. DCIT and CIT vs. Standard Triumph Motor Co. Ltd.. In the decision it has been mentioned that paragraph No. 1 uses the words royalties and fees for included services arising in a contracting state and paid to a resident of the other contracting state. Thus the initial point of taxation is the arising of the royalty in India, but it is finally taxed on the basis of amount of royalty paid to the nonresident. The payee had provided for the payment of royalty in the books of account of this year but such royalties were not paid to the assessee in absence of any agreement approved by the RBI or for which it could be deemed that the approval has been granted. What is important to note is that royalty for this period has not been paid. Since royalties are taxable on cash basis, it is not necessary for us to go into press note No. 8 (2000) relied upon by the Counsel and press note No. 9 (2000) relied upon by the Sr. DR. Accordingly it is held that the amount provided by the licensee in its books of account but not paid to the assessee is not taxable. Case followed i) CSC Technology Singapore Pte. Ltd. (2012-TII-35-ITAT-DEL-INTL) II) Whether before insertion of section 40(a)(ia) disallowing payments without deduction of tax at source in the hands of the residents, the provision of section 40(a)(i) providing for similar disallowance in the case of non-residents alone was discriminatory and hence not permitted Held : Yes; Whether Article 26(4) of India-France DTAA is pari-materia with Article 26(3) of India-USA DTAA Held : Yes, in assessee s favour. DCIT vs. M/s Incent Tours Pvt Ltd TII-54- ITAT-DEL-INTL Assessment Year: to Facts i) The assessee is in the business of inbound tour operation and provides services to foreign tourists visiting the Indian subcontinent. The assessee does not have new clients it entered into agreement with one Mr Patrice Dedeyn, a resident of France who was appointed as a business development representative of the assessee for Europe. iii) The AO referring to sections 9(1)(i) & 9(1) (vii) held that the amount paid by the assessee as taxable under the provisions of section 9(1)(vii) read with Explanation 2 thereof. Since no tax was deducted at source, the entire payments were disallowed invoking the provisions of section 40(a)(i). Before the CIT(A), the assessee argued that disallowance u/s 40a(i) was permissible 152 ML-420

10 only if the payment was chargeable to tax under the Act ; that no income was chargeable u/s 9(1)(i) as no operations of the non-resident were carried out in India and no part of his income was attributable to any Indian operations; Since India had a DTAA with France, the assessee was entitled to opt for the provisions of the v) Payment to Mr. P. Dedeyn did not fall service which was restricted in terms of the treaty with France. It was argued that the provisions of section 9(1)(vii) read with explanation 2, were not applicable as the payment made by the assessee to Mr. Dedeyn did not refer to rendering services of managerial, technical or consultancy but was providing marketing support to generate incremental business to the assessee. vi) Moreover, the provisions of nondiscrimination as contained in Article 26 of Indo-French Treaty were also applicable. Considering all the above arguments, the CIT(A) allowed the appeal. Decision: The Tribunal held in favour of the assessee as follows: i) The assessments involved in the present case are also prior to assessment year , therefore, section 40a(i) as prior to its amendment by the Finance Act, 2003 w.e.f will be applicable. It can be seen from the aforementioned wording of Article 26 which in both the DTAAs with France and USA, are almost pari materia. The main substance of this article is that by applying non discriminatory clause what is really to be seen is whether two persons of the resident of the same state and were being treated differently. If the facts of present case are considered in the light of decision of Co-ordinate Bench in ii) the case of Herballife International India (P) Ltd. where considering the similar provisions, it has been held that the provisions of section 40a(i) as it existed prior to its amendment by the Finance Act, 2003 w.e.f applied to payments made by the assessee outside India to a non-resident only. After , the provisions apply equally to both resident and nonresident. A similar payment made to a resident prior to amendment does not result in disallowance in the event of non deduction of tax at source. Thus, a resident has been left with a choice of dealing with a resident or a non-resident in business, would opt to deal with a resident rather than a non resident owing to the provisions of section 40a(i) of the Act. To that extent, the non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide against such discrimination and says that deduction should be allowed on the same condition as if the payment is made to a resident. iii) By virtue of provisions of section 90(2) to whom the DTAA is applied should be followed. Therefore, respectfully following the aforementioned decision, we hold to invoke the provisions of section 40a(i) of the Act to disallow the claim of the assessee even on the assumption that the sum in question is chargeable to tax in India. Since on the above aspect of the matter, it is held that CIT(A) has rightly deleted the addition. We do not consider it necessary to go into other aspects of the matters and the appeals filed by the revenue are dismissed. Cases followed i) Herbal Life International India (P) Ltd. vs.. ACIT (2006-TII-15-ITAT-DEL-INTL) ML

11 ii) Millennium Infocom Technologies Ltd. vs. ACIT (2008-TII-16-ITAT-DEL-INTL III) Whether when an Indian company is the sole shareholder having 100% share-holding in a company outside India, the nonresident company is not to be treated as an independent legal entity, and its income is liable to be included in the total income of the domestic company Held: No, in assessee s favour Whether when the non-resident company is a limited liability company located in a Free Trade Zone, the same is not a body corporate recognised by the provisions of the DTAA - Held: No, in assessee s favour - India-UAE DTAA. AIA Engineering Ltd. vs ACIT 2012-TII-38-ITAT- AHM-TP Assessment Year: Facts: i) The assessee company has made investment in UAE in the Ajman Free Zone. The AO noted that the income earned through the said establishment of ` lakhs was not shown as income of the assessee company in the books. The AO further noted that since in this entity, the assessee was the sole shareholder having 100% shareholding, the assessee was asked to explain the legal status of this entity and to explain how this entity was legally independent entity managed and controlled wholly from UAE. ii) In reply, the assessee stated that this entity M/s. Vega Industries (Middle East) FZE was a body corporate duly established under the law of UAE, Government of Ajman. The assessee also placed a letter cum certificate issued by the Director General Ajman Free Zone Authority dated confirming that M/s. Vega iii) Industries was a registered company, a body corporate incorporated in the Free Zone of Ajman UAE under the law laid down under the Amiri Decree No.2 of 1996 on amending the Amiri Decree No.3 of 1988 (the Amiri Decree). The issued by Executive Director of Revenue & Budget i.e., Ministry of Finance of UAE certifying that in pursuance of agreement between Government of UAE and Government of India for avoidance of double taxation, Vega Industries (Middle the DTAA provisions. The A.O. was not satisfied. He stated in the assessment order that the term company has been defined in DTAA with UAE in Article 3(1)(f), and Emirates of Ajman and Government of UAE do not have taxation law in force for the purpose of administration of Corporate Tax. In view of this, there was no provisions available stating that the above said entity was a company or body corporate recognized under the taxation laws in force in Emirates of Ajman or UAE. The A.O. further stated that the company was defined under Article 4 of Commercial Company Law (CCL) of UAE. He noted that as per UAE law as well as Indian Companies Law, company should have at least two shareholders and it should have perpetual succession, common seal and legal entity apart from member constituting it. He observed that Vega Industries (Middle East) FZE did not comply with any of these conditions. He further noted that the assessee had shown as founder/the owner of the said establishment as sole shareholder. He came to the conclusion that the entity did not have separate legal identity vis-à-vis its sole shareholder and for any noncompliance, the owner was responsible legally whereas in Indian Companies Act, 154 ML-422

12 1956, shareholders are not legally liable for any act of the company or its Board of Directors. The A.O. further noted that the assessee company submitted its reply on this issue vide letter dated and stated that Vega Industries (Middle East) FZE was a subsidiary company duly established under the laws of UAE, Government of Ajman. He further noted that tax residency certificate issued by Ministry of Finance UAE merely stated that it was eligible for the benefit under the treaty without taking any responsibility, whatsoever on the Ministry of Finance. He also stated that this letter of the requirement of the treaty definition of the company. He concluded that in view of this, the said entity was treated as proprietary concern of the assessee which was carrying out business from Ajman free zone. The A.O. also recorded that the assessee was not able to prove that this FZE was managed and controlled wholly in the UAE. He also observed that as per the Memorandum of Incorporation, Mr. P R Shah was shown as Manager of FZE but as per the copy his passport furnished by the assessee, it did not show that he stayed in UAE during that period. On this basis, he stated that Vega Industries (Middle East) FZE cannot be treated as resident of UAE for treaty purpose. Accordingly, the A.O. treated the income of the Vega Industries (Middle East) FZE of ` lacs as income taxable in India in the hands of the assessee u/s 5(1). v) In appeal before the Tribunal, the assessee submitted that : (a) as per the tax residency certificate dated issued by UAE, that Vega UAE was a registered company as a body corporate in (b) (c) (d) the free zone of Ajman (UAE) with limited liability and had a body corporate capacity. It was further clarified that UAE Commercial Company Law did not apply to those companies incorporated in UAE Free Zone and this certificate had been issued by the Ministry of Finance with full responsibility. Having regard to the categorical certificate issued by Ministry of Finance UAE certifying that Vega UAE is a Registered company and is a body corporate incorporated in a Free zone of Ajman with limited liability and has the body corporate capacity, it is not open to Indian Tax Authority to adjudicate upon the issue as to whether Vega UAE is a company or sole proprietorship concerns of the assessee. Submitted that the said Amiri Decree mentions in its Second Article that any establishment in Free Zone will be called the Free Zone Establishment with limited liability and shall have the body corporate status and shall belong to one natural person or one judicial person. It was submitted that under this Amiri Decree, the Free Zone Authority of the Emirate of Ajman was set up, and this Free Zone Authority has the power to register Companies, and regulate them. It was the submission that Emirates in UAE can promulgate their own legislation for company law in their respective Emirates in UAE and since Vega UAE was incorporated in Ajman. Regarding UAE Commercial Company Law (CCL), it was submitted that DRP/ A.O. had wrongly relied on the ML

13 (e) (f) provisions of UAE CCL in reaching to the conclusion that Vega UAE was not a company. The assessee also submitted that the A.O. incorrectly interpreted the Circular No.8 (26)/2(7)/63-PR dated under the Companies Act 1956 and the provision of Section 2(17) of the Act to conclude that Vega UAE cannot be recognized as body corporate due to nonsatisfaction of (a) perpetual succession; (b) a legal entity apart from members constituting it. With regard to these points, it was submitted that Section 2(17) of the Income tax Act, 1961 defines a company to include any body corporate incorporated by or under the laws of a country outside India. It is thus clear that this section makes no reference to the provisions of Companies Act 1956 regarding need to have at least two shareholders to be treated as body corporate. It was submitted that what is relevant here is the law of the country outside India and not what is prevalent in India. Decision: The Tribunal held in favour of the assessee as under: i) As per the provisions of Section 2(17), for other than an Indian company, a company means any body corporate incorporated by or under the laws of a country outside India and Vega UAE is definitely not an Indian company. of the A.O. because as per Article (1) of the said Memorandum of Incorporation, it has been stated that this entity is established with corporate entity and independent iii) and separate financial liability from those of its owner in accordance with this memorandum of incorporation and the only situation where the owner will be treated as personally responsible is regarding omission of some specified information that the entity is a free zone establishment (FZE) and it will be pursuant to Amiri Decree No.(3) of 1988 as amended. In our considered opinion, this is a situation where it specifies that corporate veil may be lifted. This may differ from country to country and in India also, in some situations, corporate veil can be lifted and, therefore, because of this restriction alone, it cannot be said that Vega UAE is not a separate legal entity. The argument of the revenue is this that as per CCL of UAE, two shareholders are required and as per Article 151 of the Constitution of UAE, the provisions of constitution shall have precedence over the constitution of Emirates which are the members of the federation but the contention of the counsel for the assessee is that an exception has been carved out in Article 149 of the said constitution. For the regulation of a company, the Emirates can have their own legislation and for this, Article 151 is not applicable and, therefore, it has to be accepted that Amiri Decree issued by Emirates of Ajman is not in conflict with the constitution of UAE and, therefore, it is valid; v) Vega UAE is duly incorporated as a body corporate under the law of a country outside India which is a requirement of Section 2(17) of the Income-tax Act, 1961 and, therefore, Vega UAE has to be accepted as a company within the definition of Section 2(17) of the Income tax Act, Once it is accepted, the addition made by the A.O. by holding that Vega UAE is a sole proprietorship concern of the assessee company is not sustainable. 156 ML-424

14 IV) Whether directions issued by Commissioner in revision petition regarding non deduction of tax at source binds the Assessing Officer while completing the assessment of the recipient Held: No; Whether in turnkey projects when the overall transaction is split in an unfair and unreasonable manner with a view to evade taxes, the transactions should be looked at as a whole, and not on standalone basis Held: Yes; Whether where the offshore supply contract and onshore services and supply contract, has a cross fall breach clause which provides that a breach in one contract will automatically be classified as breach of the other contract, the contract may be viewed as a single one Held: Yes; Whether when the assessee has incurred a loss on its entire project, whether onshore or offshore, the fact that the assessee has incurred a loss on onshore activities can lead to a presumption that the value of the onshore activities was deliberately kept at a lower amount to avoid taxability in India Held: No; Whether the A.O can automatically apply transfer pricing provisions in such cases Held: No; the ITAT remanded back the matter to the A.O. for fresh adjudication - Articles 5 & 7 of India-China DTAA. Dongfang Electric Corporation vs. DDIT 2012-TII- 66-ITAT-KOL-INTL Assessment Year: Facts i) The assessee, Dongfang Electric Corporation (DEC), a Chinese company ii) entered into two separate contracts with Indian entities, for setting up turnkey thermal power units. Each of these contracts were divided into two parts : (i) the supply of equipment and materials of main plant turnkey package and (ii) erection and services of main plant turnkey package to be carried out through consideration against these contracts were to be received on account of offshore supply of equipment outside India and for local supplies, design, engineering and construction, fabrication, erection, installation, testing and commissioning of thermal power unit in India. The assessee applied u/s 197 asking the AO for a certificate to the effect that no taxes were required to be withheld from payments made to the assessee with respect to the (i) offshore supplies of equipment as the same were not taxable in India under the domestic law and the DTAA; and (ii) in respect of local supplies and service portion, as the assessee expected to incur substantial loss. The a revision petition u/s 264 of the Act, before the DIT (International Taxation) who upheld the claim of the assessee that offshore supplies were not taxable in India as long as the offshore supplies were found to be unrelated to assessee s PE in India. disclosing a loss of ` Crores. The AO noticed that in both the contracts the original tenders were for setting up of turnkey thermal power projects but the entire scope of work was split up in two contracts. There was a cross-fall breach clause which ensured that performance of entire contract was treated as single point responsibility of the assessee and non-performance of any part of portion of contract was to be treated as a breach of the whole contract. ML

15 The AO was of the view that entire bidding could have been done only by one person but the contract was split into two parts, at the convenience of the foreign contractor and manipulated. He found that the amount included in the on shore supply and services component for rendering services in the nature of transport and insurance coverage of the offshore equipment was grossly activities in India would always result in losses. v) The AO observed that the assessee s PE had a definite role to play in inspection, fabrication and testing within the scope of supply contract and should be adequately remunerated. As the PE was not compensated for its services, and in view of difficulties in quantifying the reward attributable to PE for such services, the TPO estimated ` 30 Lakhs as arm s length remuneration for services rendered by the PE in connection with offshore supplies. He did not accept the contention that the role of the PE was restricted solely towards the performance of the services part of the contract and held that in the present case where the contract was cut into pieces and the price of its components manipulated to show disproportionate result, transfer pricing was the only A reference was therefore made by the AO to the TPO who determined the ALP, on the basis of Cost Plus Method (CPM) of onshore services at ` lakhs. vi) The assessee objected to the DRP and submitted that all its operations in connection with the offshore supply were carried out outside India, the property in such goods passed on to the buyer outside India; invoices were also raised directly from China to the Indian buyer; and the consideration for such offshore supply was also received outside India. The assessee relied upon the Supreme Court s judgment in Ishikawjima Harima Heavy Industries Ltd vs. DIT where it was held that income from supply of offshore supplies were not taxable in India. The DRP deleted the estimated addition as compensation to the PE on the ground that this adjustment was not based on any recognized method of determining the arm s length price, and thus not in accordance with the provisions of the transfer pricing legislation. As regards the main adjustment of ` lakhs, assessee s grievance was rejected and the action of the Assessing Officer was Decision The Tribunal held in assessee s favour as under: i) While the impugned addition is made by the Assessing Officer by resorting to computation on the basis transfer pricing provision, it will be too naive and simplistic to treat the impugned addition as of transfer pricing simplicter. In substance, it is a case in which, according to the Assessing Officer, the contract for onshore services and supplies was shown at a lesser amount, by correspondingly inflating the value of offshore supplies contract, so as to avoid tax liability in India. As a plain reading of the material on record clearly shows, the basic case of the Assessing Officer is that both the contracts, i.e. contract for offshore supplies as also contract for onshore supplies and services, constitute one integrated contract and this splitting of contract is done, as per convenience of the assessee, so as to avoid taxability of assessee s income in India. The Assessing Officer has discussed at length as to how "the contract was.. split into two parts, at the convenience of the foreign contractor and manipulated in such a way 158 ML-426

16 ii) iii) that its activities in India will always result in losses"; As regards assessee s reliance on Commissioner s revision order holding that no taxes are required to be deducted with respect to the payments for offshore supplies, it is only elementary that the directions issued regarding non deduction of tax at source do not bind the Assessing the recipient. Whatever the Commissioner has held applies only with respect to the tax deduction at source requirements and it does not extend to the assessment proceedings; The assessee s basic defence of the assessee then consists of its reliance on Ishikawajima-Harima Heavy Industries Ltd. s case decision, which has been rejected on the Assessing Officer on the ground that whereas sale of equipment came into existence, the offshore supplies are a continuous process in the present case and the PE is fully involved in this process. but then there is a school of thought that the said decision does not hold good in law as evident from the observations made by the Authority for Advance Ruling, in the case of Alstom Transport SA. While one may have legitimate issues as to whether these observations regarding "looking at the transactions as a whole and not adopting dissecting approach" can indeed be applied in all cases in which separate contracts are entered into for offshore supplies and onshore services, in our considered view, these observations are certainly applicable in the cases in which the values assigned to the onshore services are prima facie unreasonable vis-à-vis values assigned to the offshore supplies, which make no economic sense when viewed in isolation with offshore supplies contract. To that limited extent, our views are the same as of the learned Authority for Advance Ruling. In other words, the transactions are to be essentially looked at as a whole, and not on standalone basis, when the overall transaction is split in an unfair and unreasonable manner with a view to evade taxes; v) In order that such a situation can arise, it is sine qua non that while the assessee submits the bids for different segments (e.g., offshore and onshore in the present case) separately, these bids are considered together, as a single cohesive unit, by the other party, and this fact must be apparent from material on record. On the facts of this particular case, we have also noted that each set of contracts, i.e. offshore supply contract and onshore services and supply contract, has a cross fall breach clause which provides that a breach in one breach of the other contract; vi) In the present case, however, the assessee has stated that all the activities of the assessee company, i.e., onshore as also offshore, resulted in huge losses due to inordinate delays in the project. The assessee has also filed audited accounts of its Indian projects, including in respect of offshore supplies, which show losses in both segments - onshore as also offshore. The Dispute Resolution Panel has taken note of this submission, by observing, at page 8 of the order, that "it has been further contended that consolidated auditors in respect of two power projects undertaken by DEC, China in India for it was stated that losses were incurred not only on onshore supplies undertaken in India but also on offshore supplies executed from China", but has not dealt with the same at all; ML