R U L I N G (By Mr. Justice Syed Shah Mohammed Quadri)

Transcription

1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI ========== P R E S E N T Hon ble Mr. Justice Syed Shah Mohammed Quadri (Chairman) Mr. A.S. Narang (Member) Monday, the Twenty-first August Two Thousand Six A.A.R. NO. 667 OF 2005 Name & address of the applicant ABC LTD. Commissioner concerned Present for the Department Present for the Applicant CIT-I Pune Mr. T.N. Chopra, Advocate Mr. Porus Kaka, Advocate Mr. Rajesh Kadakia, CA Mr. Vinesh Kriplani, CA R U L I N G (By Mr. Justice Syed Shah Mohammed Quadri) In this application under section 245Q(1) of the Income-tax Act, 1961 (for short the Act ), the applicant is a company incorporated in Switzerland and is a tax resident of that country. It is a part of the D Group of companies. E Ltd. is a one of the D Group of companies. It was incorporated in U.K. and it is a tax resident of U.K. The said company was engaged in the business of 1

2 manufacturing of turbochargers and providing engineering services. XYZ Ltd issued a letter of intent ( LOI ) duly specifying the key terms and conditions for the supply of turbochargers in favour of E. Ltd. for the purchase of turbochargers for L litres diesel engines in September, The D Group took up a restructuring exercise with the objective of centralizing key functions in Switzerland whereunder E. Ltd. transferred its business of manufacturing turbochargers on a going concern basis to the applicant w.e.f. 1 st January, Thereafter the applicant is engaged in the business of manufacture of turbochargers for passenger and commercial vehicles. Under the arrangement the LOI issued by XYZ Ltd to E Ltd. for the purchase of turbochargers was transferred by it ( E Ltd.) to the applicant as a successor. The applicant entered into a turbocharger development and supply (TDS) agreement with XYZ Ltd for manufacturing and supply of turbochargers for vehicles manufactured by XYZ Ltd using L litres diesel engines. The applicant proposes to establish an Indian subsidiary named J Pvt. Ltd. to be incorporated under the Indian Companies Act, which would be engaged in the business of supplying of turbochargers to customers including XYZ Ltd as per the TDS agreement. J Pvt. Ltd. would manufacture locally and supply turbochargers to XYZ Ltd. For that purpose the applicant would assign its rights, interests and obligations in the TDS agreement to J Pvt. Ltd. on agreed 2

3 consideration to be paid to the applicant in installments. As part of the agreement the applicant proposes to provide a volume guarantee to J Pvt. Ltd. to the effect, should the volumes under the TDS agreement fail to materialize from XYZ Ltd. at the prices indicated thereunder, the applicant would source additional turbochargers from J Pvt.Ltd. to make good such deficiency. In this backdrop the applicant has set forth the following questions to seek advance rulings of the Authority:- 1. On the facts and in the circumstances of the case, whether the receipt arising to the Applicant, from the proposed assignment of the Turbocharger Development and Supply Agreements in accordance with the assignment deeds be taxable in India having regard to the provisions of the Income-tax Act, 1961 ( the Act ) and the Double Taxation Avoidance Agreement between India and Switzerland ( the DTAA )? 2. If the answer to (1) above is in affirmative, then, to what extent and in which year/s would the receipt be taxable in India having regard to the provisions of the Act and the DTAA? 3. If in the facts and circumstances of the case, the receipt is not taxable in India, then, whether the assignee of the Turbocharger Development and Supply Agreement is required to withhold any tax under section 195 of the Act while making remittance to the Applicant? 2. The Commissioner of Income tax-i, Pune (for short the Commissioner ) has sent the following comments:- 3

4 XYZ Ltd will be using the technology and the product supplied by the applicant directly or indirectly through the subsidiary for being used and utilized in India and payments made by the subsidiary to the applicant will be out of the profits earned by the Indian subsidiary. Because such remittances would include element of taxable profits (of which no details are available at present) the same are taxable. It is a matter of record that the applicant had taken steps to register its subsidiary J Pvt. Ltd. on even before completion of one year from the date of execution of TDS agreement dated Though the applicant had made every attempt to show that no income would be deemed to accrue or arise in India as it has no business connection, source of income or assets or transfer of any capital asset situate in India. It has not given any reason as to how the assignment of the agreement would not be taxable under the provisions of the Act. Even under the Double Taxation Avoidance Agreement between the Government of the Republic of India and the Government of the Swiss Confederation dated 29 th December, 1994 (for short the Treaty ), article 7 would be attracted and if it has a permanent establishment (PE) in India it would be taxable. Every person designated to carry on any function on behalf of the foreign company would be treated as a PE. 4

5 Having regard to the sequence of events, namely, the applicant executed an agreement in August, 2004 and thereafter proposes to assign the same to subsidiary to be incorporated would disclose well thought over arrangement, therefore, receipt arising to the applicant out of proposed assignment of TDS agreement are taxable in India under the Act as well as under the Treaty. In regard to question no.2, it is stated that the financial year in which the assignment of the TDS agreement takes place, will be the year in which the consideration would be taxable. In regard to question No. 3, it is stated that since receipts by the applicant are taxable in India the provisions of section 195 of the Act will be attracted. 3. Mr. Porus Kaka, learned counsel appearing for the applicant, has submitted that the subject matter of assignment between the applicant and the J Pvt. Ltd. is the TDS agreement dated which would be executed outside India and the consideration for the assignment would also be received by the applicant outside India, therefore, the applicant, being a non-resident, would not be taxable. He argued that under section 9(1) of the Act no income would be deemed to accrue or arise in India to the applicant under any of the limbs of the Section 9(1)(i) of the Act. The applicant, it is submitted, has no business connection in India; the activities of J 5

6 Pvt. Ltd. consequent upon the assignment of the TDS agreement for manufacture and supply of turbochargers to XYZ Ltd would be in discharge of its own obligations under the agreement and could not be treated as for and on behalf of the applicant. Refuting the contention of Mr. T.N. Chopra, learned counsel appearing for the Commissioner, that the consideration paid to the applicant under the assignment agreement is in the nature of royalty, Mr. Kaka has submitted that the TDS agreement contemplates only supply of products turbochargers- to XYZ Ltd, no technical know-how, patents or license of any technology is involved therein, therefore, they are not the subject matter of transfer under the assignment agreement and J Pvt. Ltd. will have to procure separately the technology required for manufacturing turbochargers from a different D Group entity holding intellectual property rights. For these reasons, the consideration for assignment of TDS agreement cannot be regarded as royalty. Under the treaty also the consideration is not taxable. Article 7 of the treaty provides for taxation of business profits only when the applicant has a PE in India. As the applicant is not carrying out any business in India and it has no PE in India the consideration payable to the applicant will not be taxable. 4. Mr. T.N. Chopra, learned counsel appearing for the Commissioner, has contended that the assignment fee has nexus 6

7 with the running of business and therefore, is in the nature of revenue profits in the hands of the applicant and is taxable. It is not a case of simpliciter assignment without carrying on any activity in India. The Indian subsidiary set up by the applicant is merely a projection of foreign enterprise on the soil of India and the assignment fee is, therefore, liable to tax under section 9(1)(i) of the Act as well as article 7 of the treaty. What is purportedly labeled as assignment fee is in the nature of royalty liable to tax under section 9(1)(vi) of the Act as well as article 12 of the treaty. Since deduction of tax at source under section 195 of the Act is tentative and provisional subject to final determination at the time of regular assessment. Section 195 of the Act is attracted at the time of payment of so called assignment fee. 5. The rival contentions of the parties give rise to the following points for determination:- (i) (ii) (iii) Whether amounts payable under the assignment agreement, either in the nature of business receipts or royalty, are taxable under the Act. If the answer of the first point is that they are taxable as business receipts, whether the applicant has a PE in India? Whether the amounts payable under the TDS Agreement attract section 195 of the Act? 7

8 (i) To comprehend the real nature of payments to be made by the J Pvt. Ltd. to the applicant under the assignment agreement, it is necessary to read both the TDS agreement dated (Exhibit-2) as well as draft assignment agreement (Exhibit -4) because the subject matter of Exhibit-4 is the same as the subject matter of Exhibit-2. Exhibit-2 is between the XYZ Ltd and the applicant. We have carefully gone through it. It will be apposite to refer to the following clauses of the agreement Exhibit-2 which are relevant for the present discussion:- (1) The preamble of the agreement recites, inter alia, that as a result of long experience in the business of design, development and manufacture of trucks and passenger vehicles for the Indian and overseas markets, XYZ Ltd. has developed and has acquired and/or possesses technical knowledge in these fields and has industrial and intellectual property rights consisting of designs, product engineering, technological and other information with respect to those vehicles and related parts and components. (2) In regard to D Group, it is mentioned that PQR belongs to that group and as a result of long experience in the business of design, development 8

9 and manufacture of engine boosting systems for the worldwide market has developed and acquired and/or possesses specific knowledge, know-how, patents and technical information in the fields, inter alia, of engineering, design, development and manufacture of various types of turbochargers for various types of engines, which it manufactures at its factories worldwide. (3) XYZ Ltd wishes to use the products as defined therein in the engines being manufactured by it at its factories and therefore, it approached PQR to supply the products and PQR has agreed to supply the products developed for that purpose to XYZ Ltd on the terms and conditions. (4) Para of the Agreement which deals with Supply, Price and Payment, reads that XYZ Ltd agrees to purchase products from PQR as the sole supplier, subject to PQR meeting system specifications, quality, reliability, performance, delivery and price requirements of XYZ Ltd. as set out in this agreement and PQR agrees to supply on the terms and conditions set forth in the agreement. XYZ s Ltd. requirements for products for vehicles 9

10 manufactured by XYZ Ltd using L litres DICR TCIC Diesel engines. (5) If a new proven technology is developed that, when substituted for the products significantly improves the performance and price of the XYZ Ltd vehicles then XYZ Ltd. will provide PQR the first choice of offering the new proven technology and it is only when PQR unable or unwilling so to do then XYZ Ltd will be free to source the new proven technology from alternate sources. (6) It is also necessary to notice the following clause in para under the caption Prices :- Notwithstanding anything contained in this agreement, risk, title, ownership and property in the products shall pass to XYZ Ltd. once the products are handed over to the freight forwarder designated by XYZ Ltd. at the relevant PQR factory gate. (7) Para 2.3 Local facility and customer support is also worth noticing. In its endeavour to remain price competitive, PQR shall aggressively explore possibility of localization of Imported Products in India. In view of this, PQR will provide the following support. Local Support and Manufacture. PQR intends to localize/ manufacture its Products in India in two discrete phases. (A) Phase 1 10

11 (1) Supply base: PQR has positioned two person supply base team in India during Quarter 1, 2004 to develop local suppliers. This team will be responsible for local sourcing. (2) Engineering: PQR will provide XYZ Ltd. with engineering support in India as soon as reasonably required (assuming first part of the development of the engine will be led in Europe). PQR plans to place 2 engineers in India for support purposes OR earlier as per actual requirement of XYZ Ltd.. (3) Service network: PQR turbochargers are serviced through an established service network in Europe today. This existing network will accommodate the service needs of PQR turbochargers in the XYZ Ltd. European vehicles. PQR will establish a service organization to cover service requirements for PQR turbos in the XYZ Ltd. vehicles in India. PQR would set up service organization within a timeframe to be mutually agreed upon. In addition, PQR will evaluate the business case for setting up a Repair & Overhaul facility in India. (B) Phase 2 (1) Local assembly: PQR will set up a local assembly facility in India within 18 months of start of serial production at XYZ Ltd.. A plan to accomplish this will be provided to Customer within 3 months of signing this Agreement. (C) PQR will support the Products and supply spares for a period of 10 years from the end of serial production of the Products. (D) In the event significant changes occur within the Indian business environment, such as, but not limited to, political instability, or significant reductions in the volumes projected in Appendix I, PQR reserves the right to re-assess the timing and business case for setting up a local assembly facility in India. PQR and XYZ Ltd. will agree how to proceed to best ensure 11

12 the continued supply of Product to XYZ Ltd.. In addition, the local facility is subject to PQR obtaining all necessary approvals from the Government of India. (8) In regard to the delivery of the products, para 2.9 of the agreement reads thus:- PQR shall supply Products as per XYZ Ltd. schedules as indicated in Purchase Order or as communicated from time to time. PQR and XYZ Ltd. shall mutually agree on a logistics protocol prior to commencement of production. (9) Para 2.18 of the agreement has undertaken to assure continuity in supply of products recognizing the XYZ Ltd would be sourcing its requirements of products from them. It is also important to notice para 6 of the agreement which is in following terms:- Assignability This Agreement and the rights and obligations of any of the Parties hereto shall not be transferable or assignable by such Party without the prior written consent of the other Party hereto which consent shall not be unreasonably withheld. Notwithstanding the above, D will be allowed to assign this Agreement to any of their respective affiliate company and/or subsidiary, or in the event of a sale of all or substantially all of the assets required to manufacture the items that are the subject of this Agreement. From the above excerpt of the (Exhibit-2) agreement, it is evident that XYZ Ltd intended to offer and PQR has accepted to supply products (defined in of the agreement) which mean 12

13 imported products as well as local products, which, in combination, constitute a turbocharger at the agreed prices. The products would be handed over to the designated carrier of XYZ Ltd. at the PQR factory gate. PQR has also undertaken to explore the possibility of localization of imported products in India in two phases which have been noted above. It was specifically agreed upon between the parties that the rights and obligations of the parties shall not be transferable or assignable by such party without the prior written consent of the other party thereto and an exception to that clause provides that the applicant will be allowed to assign that agreement to any of their respective affiliate company and/or subsidiary on an event of sale or substantially all of the assets required to manufacture the items that are subject to that agreement. 6. This being the substance of Exhibit-2 - the TDS agreement, we shall now turn to the material clauses of Exhibit-4 - draft assignment agreement, as noted above. Exhibit-4 is between the applicant and the J Pvt. Ltd. The preamble of the Exhibit-4 states that the assignor (applicant) is engaged in the business of design, development and manufacture of engine boosting systems for the worldwide market and has acquired and/or possesses specific knowledge, know-how, patents and technical information in the fields, inter alia, of engineering, design, development and 13

14 manufacture of various types of turbochargers for various types of engines which it manufactures at its factories worldwide. In regard to assignee ( J Pvt. Ltd.), it is stated that it is a subsidiary of the assignor (applicant) in India and is also engaged in the business of manufacture and supply of turbochargers. Para (C) of the preamble mentions that the assignor has executed a TDS agreement with XYZ Ltd on pursuant to which XYZ Ltd. has effectively granted to the assignor a sole right to supply the products, as defined therein, in relation to the vehicles manufactured by XYZ Ltd using 1.4 litre DICR TCIC Diesel engines. The usual formal clause expressing the offer and acceptance is contained in para (E) and which runs thus:- The Assignor is desirous of assigning its rights and obligations under the TDS Agreement in favour of the Assignee and the Assignee is desirous of acquiring all the rights and obligations of the Assignor under the TDS Agreement on and subject to the terms and conditions hereinafter appearing. Para 2 of the draft assignment agreement is a substantive clause which provides that subject to the terms and conditions stated therein and in consideration of the payments of the consideration by the assignee, the assignor thereby irrevocably assigns all its legal and beneficial rights, title and interest including without limitation, all obligations and duties in and in relation to the TDS agreement in favour of the assignee, absolutely which the assignee thereby accepts. Para 2.2 provides that the assignee shall pay the consideration in installments in accordance with the 14

15 schedule to the agreement. The agreement, further, provides that the consideration shall be paid by the assignee by wire transfer to the accounts of the assignor scheduled bank i.e. F Bank. Para 2.5 of Exhibit-4 provides for payment of additional consideration being a percentage of additional sales from XYZ Ltd.. All the terms of payment of additional consideration would be mutually agreed upon between the parties separately. The agreement guarantees that in the event of failure of XYZ Ltd. to procure the products as per the volumes indicated in Appendix 1 to the TDS agreement (for any reason other than manufacturing defect and quality in workmanship), the assignor has agreed to procure from the assignee the necessary products (which may be of different capacities and makes) to compensate the deficiency in procurement by XYZ Ltd. from the assignee. Para 4 of Exhbit-4 also postulates that except to the extent stated in the assignment agreement, all the terms and conditions of TDS agreement shall apply mutatis mutandis to the assignor as is set out herein extenso. We have referred to some clauses of Exhbit-4 (the draft assignment agreement), which are material for the present discussion. It is seen that what is proposed to be assigned under the draft assignment agreement is the rights and obligations of the assignor under Exhibit-2 (TDS agreement). Exhibit 4 - agreement 15

16 is proposed to be signed outside India and the consideration is agreed to be paid by crediting in the accounts of the assignor in F Bank. Two clauses clause 2.5 and clause 3.2, which provide for payment of additional consideration and undertaking by the assignor to make good the shortfall demand special consideration. We shall advert to this aspect presently. Individual as well as conjoint reading of these two agreements leave us in no doubt that the subject matter of the assignment agreement is the rights and obligations of the applicant under Exhibit-2, which are culled out above. We are unable to find any clause indicative of transfer of secret formula, know-how or patents or license to manufacture turbochargers. 7. On these conclusions of facts, we shall turn to the relevant provisions of the Act. Section 5 of the Act deals with the concept of total income. As sub-section (1) of Section 5 of the Act relates to total income of a resident we shall skip it and advert to subsection(2) of Section 5 of the Act which deals with the total income of a non-resident of any previous year. Section 5(2) of the Act is in the following terms:- (2) subject to the provisions of Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or 16

17 (b) accrues or arises or is deemed to accrue or arise to him in India during such year. It contains two clauses (a) and (b) - and two explanations. Clause (a) says that the total income of a non-resident shall include all income from whatever source derived, which is received or is deemed to be received in India in any previous year by or on behalf of such person. The import of clause (b) is that the total income of a non-resident includes all income, from whatever source derived which accrues or arises or is deemed to accrue or arise to him in India during any previous year. In short it says that subject to the provisions of the Act the total income of any previous year of nonresident includes of income from whatever source derived which is (i) received or is deemed to be received in India in such year by or on behalf of such person (ii) accrues or arises or is deemed to accrues or arises to him in India during such year. This takes us to Section 9 of the Act, which elucidates the expression income deemed to accrue or arise in India. 8. On the contentions of the parties, provisions of clauses (i) and (vi) of sub-section(1) of Section 9 of the Act would be relevant which read as follows:- Income deemed to accrue or arise in India 9. (1) The following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in 17

18 India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. (ii) to (v) x x x x x x x x (vi) income by way of royalty payable by (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by, such person in India or for the purposes of making or earning any income from any source in India. Explanation 1 - x x x x x Explanation 2 For the purposes of this clause royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for (i) (ii) (iii) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; 18

19 (iv) [(iva) (v) (vi) Explanation 3 the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB;] the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v). x x x x x x It may be noticed that clause (i) speaks of the income which shall be deemed to accrue or arise in India to mean income accruing or arising whether directly or indirectly (1) through or from any business connection in India or (2) through or from any property in India, or (3) through or from any asset or (4) source of income in India, or (5) through the transfer of a capital asset situate in India. Out of the five categories, we are concerned with category (1) only. Explanation 2 of sub-section (i) of Section-9(1) of the Act defines the expression business connection which is in the following terms:- [Explanation 2 For the removal of doubts, it is hereby declared that business connection shall include any business activity 19

20 carried out through a person who, acting on behalf of the non- resident,- (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) (c) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the nonresident; or habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other nonresidents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business: Provided further that where such broker, general commission agent or any other agent works mainly on behalf of a non-resident (hereinafter in this proviso referred to as the principal non-resident) or on behalf of such nonresident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. We may point out that the explanation is declaratory in nature; it is inclusive and not exhaustive. It is, therefore, necessary to have a clear idea as to what does the expression business connection, denote? This expression has been subject matter of consideration by Courts. We may with advantage note here the 20

21 following decisions of the Hon ble Supreme Court to comprehend the full import of the expression business connection : - In CIT, Punjab, v. R.D. Aggarwal & Co 1, the essence of the expression is brought out in the following observation of the Supreme Court: The expression business connection postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activities within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. Hon ble Mr. Justice Shah (as he then was), for the purpose of Section 42 of the Income-tax Act, 1922, laid down- business connection contemplated by section 42 involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection. The requirement of continuity of transactions to form business connection between a non-resident and a resident was laid down by the Supreme Court as long back in 1952 in Anglo- French Textile Company Limited 2. Hon ble Mr. Justice Mahajan (as he then was) speaking for the Court, observed, an isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business 1 56 ITR ITR

22 connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection. In the light of above discussion, the essential features of business connection may be summed up as follows: - (a) a real and intimate relation must exist between the trading activities carried on outside India by a nonresident and the activities within India; (b) such relation, shall contribute, directly or indirectly, to the earning of income by the non-resident in his business; (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of business connection in India. 9. We shall now turn to the explanation-2 of sub-section (i) of Section 9(1)of the Act, quoted above. It says that business connection shall include any business activity carried out through a person who acting on behalf of the non-resident commits anyone of the activities outlined in clauses (a) to (c) of explanation-2 of subsection (i) of Section 9(1) of the Act. Clause (a) relates to 22

23 concluding contracts on behalf of the non-resident except the activity of purchase of merchandise for the non-resident, clause (b) speaks of habitually maintaining in India a stock of goods or merchandise from which such a person regularly delivers goods or merchandise on behalf of the non-resident though he has no such authority and clause (c) takes in habitually securing orders in India mainly or wholly for the non-resident or for that non-resident and other non-residents controlling or controlled by, or subject to the same common control as that of the non-resident. Obviously none of these activities are involved in this case. 10. Mr. Chopra has forcefully contended that the applicant has business connection in India but Mr. Porus Kaka with equal vehemence refutes it. We shall now advert to the contentions of the revenue, which are also reiterated by Mr. Chopra in his written submissions. It is stated that the D presence in India dates back to many decades and currently the business of D are headquarters across four locations in India - at Pune, Bangalore, Chennai & Gurgaon employing more than 5500 employees. The business of D in India is approximately worth US $ 300 million and is growing at an impressive rate. The Superbrands Council of India has recognized D as a super brand. The K. Pvt. Ltd. established in 1995, another wholly owned subsidiary of D has its registered office in Delhi and a 15 acre industrial park in Gurgaon. Corporate and 23

24 business development teams of India are a part of K. Pvt. Ltd. which has actively carried out survey and sales promotion for turbo chargers on behalf of E Ltd. which is a predecessor company of the applicant. Exhibit-3 (LOI) for development and supply of turbo chargers is the result of efforts made by K. Pvt. Ltd. in India. It was that company which worked for the applicant for obtaining the orders for supply of turbochargers. The LOI (exhibit-3), ultimately culminated in the TDS agreement dated (exhibit-2) Mr. Chopra has enumerated the following four factors which would show close business connection of the applicant with business operations in India:- (i) (ii) The Applicant would have close interaction with XYZ Ltd. so as to integrate the PQR i.e. PQR turbocharger with the diesel engine of Tata transport vehicles. For this purpose prototype, drawings, CAD data as well as participation in tests and interaction with AVL Austria, who have supplied the diesel engine to the XYZ Ltd would be required. Within three months of the letter of intent, Applicant would provide complete details regarding setting up of manufacturing and assembly facility in India such indigenous manufacturing facilities are to be set up in India within a period of eighteen months. Similar stipulations have been made in the TDS agreement dated (article 2.3 of the TDS agreement). (iii) (iv) Article of the TDS agreement is regarding the funding of toolings and Appendix 1 to the agreement speaks of initial expenditure of about 7 lacs euro to be incurred by the Applicant. TDS agreement also speaks of setting up of supply base as well as service network. In fact it is stated that supply base team has already been stationed in India during first 24

25 quarter of 2004 which would develop local suppliers of raw materials for the Applicant. 11. It may be pointed out that the requirements of business connection for the purpose of Section 9(1)(i) of the Act have to be examined with reference to the income in question. There must be nexus between the income in question and the business connection, which is responsible for accruing or arising of the deemed income. General business operations, which have no nexus to the income under consideration, would not satisfy the requirements of section 9(1)(i) of the Act. From that point of view factor (i), noted above, is wholly irrelevant. Factors (ii) to (iv) are the obligations arising under TDS agreement (exhibit-2) and we are not concerned here with the income that might have accrued or arisen to the applicant on working out the rights and obligations thereunder. Even assuming that what all is stated in the above para establishes business connection it could only be for the purpose of TDS agreement and has no relevance to the income accruing or arising under the assignment agreement to J Pvt. Ltd. Therefore, these factors would not, in our view, establish any business connection of the applicant within the meaning of section 9(1)(i) of the Act for the purpose of assignment agreement. Mr. Chopra has also emphasized that if an agreement has been entered into between the applicant and the XYZ Ltd. it is 25

26 incumbent upon the applicant to disclose before the Authority as to what extent the TDS agreement has been modified, rescinded or what is the status thereof on the date of the application and submitted that Section 245Q of the Act has been violated. We are unable to appreciate the submission in the context of the case of the applicant that pursuant to LOI (Exhibit-3), TDS (Exhibit-2) was executed and the rights and obligations under exhibit-2 are assigned in favour of J Pvt. Ltd. for consideration. The next submission of Mr. Chopra is that the assignee J Pvt. Ltd. - is a mere agent of the applicant and is carrying out activities of manufacture and supply of PQR brand turbo chargers to XYZ Ltd. for and on behalf of the applicant is untenable as it is not born out by any fact brought on record. Yet another complaint of Mr. Chopra is that the article of association of J Pvt. Ltd. have not been supplied and it is not stated when this subsidiary has been incorporated. This grievance does not survive after hearing of the case on because on that day a copy of article of association has been supplied and a copy of certificate of registration is placed on record. It is then submitted that during the hearing Mr. Kaka has stated that the subsidiary has been though incorporated but it is not mentioned as to when the business activities have commenced, therefore it is not possible to say whether J Pvt. Ltd. is carrying out business for and 26

27 on behalf of the applicant and that unless the constitution of J Pvt. Ltd. is given and details of the activities are known, it cannot be said that the applicant has no business connection in India under article 9(1)(i) of the Act and article 5 of the treaty is not applicable. 11. In our view to determine the business activities of a limited company it is not necessary to wait and watch the commencement of actual business activities. They can be ascertained from the articles of association and the attending circumstances. On the facts stated by the applicant, on the basis of the articles of association of J Pvt. Ltd. and the deed of assignment it is not possible to conclude that J Pvt. Ltd. is carrying out business for and on behalf of the applicant. Indeed what appears to us is that it would be carrying on business in its own rights and that it has also acquired business under the deed of assignment. It cannot be lost sight of that in view of section 245S of the Act, the advance ruling pronounced by the Authority shall be binding in respect of the transaction in relation to which the ruling has been sought and if there is really a change in law or facts on the basis of which the ruling has been pronounced, the ruling will lose the efficacy of its binding nature on the revenue. On the facts stated above and from the discussion of the above contentions, it is clear that neither the requirements of business connection culled out from the 27

28 decision of the courts nor the ingredients of the expression within the meaning of explanation-2, are satisfied. Before parting with the discussion on this question it is pertinent to notice the argument of Mr. Chopra. The nature of receipt of the consideration under the deed of assignment is revenue receipt and for this proportion he relied on Gammon India Pvt. Ltd. v. CIT 3. There is no controversy on this aspect and in our view nothing turns on this hypothesis. The real question centres round the situs of the assignment. We have noted above the specific averment in the application that the deed of the assignment would be executed in Switzerland and the consideration for the assignment would be payable in F Bank Nonetheless, Mr. Chopra has contended that all preliminary works to obtain the Letter of Intents (Exhibit-3) and execution of TDS agreement was with active assistance of D Group and Mr. B, Business Director, Turbo Technologies, K. Pvt. Ltd. K. Pvt. Ltd. therefore the applicant has business connection and that the same would be relevant in considering the deed of assignment. At the initial stage of arguments of this case only Exhibit-2 the draft TDS agreement -was available but on the last date of hearing a copy of deed of assignment which was executed on 23 rd February, 2006 was also made available. It is necessary to point that the deed is between the applicant and the J Pvt. Ltd. The factors, which have a ITR

29 bearing on execution of TDS, are irrelevant in regard to the deed of assignment with which alone we are concerned here. There is nothing on record to conclude that any person or company played any role in execution of the deed of assignment so as to establish a business connection between the applicant and J Pvt. Ltd. A perusal of the deed of assignment shows it is signed on behalf of Indian subsidiary by Mr. N. and on behalf of the applicant by Mr. S. The preamble to the deed of assignment says that it was executed at Switzerland on 23 rd February, The consideration payable for the assignment of the rights and obligations under TDS agreement is the amount equivalent to Amount-M,. The liability to pay taxes in relation to the assignment is that of the assignor though the stamp duty has to be borne by the assignee. Clause 6 of deed provides that it would be governed in all respects by the laws of Switzerland and that in case any dispute arises between the Parties during the subsistence or thereafter, in connection with the validity, interpretation, implementation or alleged material breach of any provision of this Agreement or regarding any question, the courts of Lausanne, Switzerland shall have exclusive jurisdiction in the matter. Therefore, it cannot but be concluded that the deed of assignment was executed outside India and the consideration for the assignment is payable outside India. The situs of the deed being of Switzerland (outside India), the income or profit if any, accruing or arising to the 29

30 applicant on account of deed of assignment cannot therefore be said to arise in India. The fact that the agreement is stamped in India would, in our view, make no difference to the situs of the execution of the agreement. Admittedly the provisions of the Bombay Stamp Act, 1958, which apply to the whole of the State of Maharashtra, would govern the chargeability of stamp duty on the assignment deed. It is useful to point out that article 5(h)(A)(iv) of the Bombay Stamp Act,1958, any agreement relating to creation of any obligation, right or interest and having monetary value is required to be stamped subject to minimum of Rs. 100/- and maximum of Rs. 10,00,000/-. In this connection Section 18 of the said Act cannot be lost sight of. This provision requires that every instrument chargeable to stamp duty and executed outside the State of Maharashtra should be stamped within 3 months after it has been first received in the State of Maharashtra. It has already been mentioned above that the obligation to pay the stamp duty on the assignment deed is on the assignee. Accordingly, the J Pvt. Ltd. (Indian subsidiary ) got the assignment deed stamped in India. Merely because the deed is stamped in India after its execution outside India would not change the situs of the assignment. 30

31 However, Mr. Chopra invited our attention to clauses 2.5 and 3.2 of deed of assignment, which are in the following terms, and strenuously contended that under the deed the business connection was established. Clause 2.5 In the event of the volumes of the Products procured by XYZ Ltd. from the Assignee pursuant to the TDS Agreement and this Agreement exceed the volumes indicated in Appendix 1 of the TDS Agreement, then the Assignee shall pay the Assignor an additional consideration to be mutually agreed upon by the Parties. The parties will also mutually agree upon the terms of payment of such additional consideration separately. Clause 3.2 The Assignor hereby convenants that XYZ Ltd. shall procure the volumes of the Products from the Assignee, as set out in the Appendix 1 to the TDS Agreement. In the event of failure of XYZ Ltd. to procure the Products as per the volumes indicated in Appendix 1 to the TDS Agreement (for any reason other than manufacturing defect and quality in workmanship), the Assignor agrees and undertakes that the volume risk vis-à-vis the Products shall be borne by the Assignor exclusively. In addition to the Assignment contemplated herein, in the even of a shortfall in the procurement of the Products by the XYZ Ltd. from the Assignee for the reasons stated above, compared with the volumes as indicated in Appendix 1 to the TDS Agreement, the Assignor agrees to procure from the Assignee, the necessary Products (which may be of different capacities and makes) to compensate the deficiency in procurement by XYZ Ltd. from the Assignee. It is hereby expressly clarified that such procurement shall make good the deficiency in relation to the gross margins that the Assignee would have earned in supplying the Products to XYZ Ltd. as per the volumes indicated in Appendix 1 to the TDS Agreement. We are afraid we cannot accede to the contention of the learned counsel. A plain reading of TDS agreement shows that a particular volume of the products was to be supplied by the applicant to XYZ Ltd.. It is that volume of products which is a subject matter of 31

32 assignment. Parties have provided the eventuality in the case of increase in the supply of volume of products as well as decrease in the volume of products. In neither case it can be accepted that the business connection is established. The rights and obligations under the agreement cannot be taken as proof of existence of business connection. The business connection must exist between a nonresident and an Indian resident, who is responsible for giving rise to the activities which yield income or profit to the non-resident. No such connection is shown to exist here. On the aspect of situs of the assignment we are supported in our view by the ruling of the Authority in Pfizer Corporation, In re 4. In that case the applicant a non-resident company owned the technology information pertaining to manufacture of certain nutritional supplement products, which an Indian company produced under a licence. Under a separate agreement, a non-resident company of Denmark agreed with the Indian company for termination of its licence and paid a sum of US dollars 7 million as consideration for the extinguishment of the licence. Under another agreement between the applicant and the said non-resident company of Denmark, the applicant sold the technology information to it for a consideration of US dollars 5 million and made available the technology information in the form of a dossier in Bangkok outside India. It appears that the foreign company withheld tax at 21 per cent ITR

33 from out of the consideration and deposited the same with the Government of India. On approaching the Authority for Advance rulings by the applicant on the question whether the applicant was liable to tax in India on the transfer of the dossier containing the know-how and technical information, it was held that the transfer of technology information in the form a dossier was transfer of a capital asset and that on the Indian company entering into agreement with the foreign company of Denmark for early termination of the licence to manufacture the products, technical information reverted to the applicant and that those facts showed that the situs of the technical information which was the subject matter of sale agreement was not in India. The amount of consideration for transfer of technical information in Bangkok represented receipt on transfer of a capital asset and was not chargeable to tax in India under section 5(2)(ii) read with section 9(1) (i) of the Act. In Ishikawajima-Harima Heavy Industries Co. Ltd, In re 5 the applicant was a non-resident company incorporated in Japan. The applicant formed a consortium, which was awarded by Petronet a turnkey project for setting up a liquefied natural gas (LNG) receiving, storage and regasification facility in Gujarat. Among other things supplying of materials and equipment was the responsibility of the applicant. The price of offshore supply and offshore services was ITR

34 paid in US dollars and for onshore supply of services, construction and erection partly in US dollars and partly in Indian rupees. The consideration for offshore supply of equipment and materials supplied from outside India was received by the applicant by credit to a bank account in Tokyo and the property in the goods passed to Petronet on high seas outside India. On these facts the Authority has ruled, inter alia, the consideration represents only the price of the goods and the transaction of sale is completed outside India and not by or through a business connection in India, so on the sale of goods profits cannot be deemed to accrue or arise in India. From the above discussion it follows that the applicant has no business connection in India, therefore, Section 9(1)(i) of the Act is not attracted. In as much as the preconditions of deemed income under section 9(1)(i) read with explanation-2 of the Act are not satisfied, it is superfluous to refer to articles-7 and 5 of the treaty because it is well settled that if no obligation exists under the Act the treaty does not create any additional charge for taxation of the income in question. In a case of an enterprise of a contracting state with which India has treaty, the provisions of the treaty will determine the rights and obligations provided the enterprise is entitled to invoke the provisions of the treaty and the provisions of the Act will apply to non-resident only when they are more beneficial to it than the terms of the treaty. For this reason no 34

35 discussion is warranted as to whether the applicant has a permanent establishment in India and whether a corporate body can be a permanent establishment of an enterprise of a nonresident. This position is well settled by the ruling of the Authority in re UPS Jetair Express Pvt.Ltd 6 wherein the judgement of Supreme Court Cassasione (Italy) in the case of Ministry of Finance (Tax Office) v. Philip Morris GmBH has been considered. 12. Now, we shall turn to the definition of royalty embodied in Explanation 2 to section 9(1)(vi) of the Act, quoted above. Explanation-2 defines the term royalty for the purpose of that clause to mean consideration including any lump sum consideration. It must be noted that from the definition of royalty the income of the recipient chargeable under the head capital gains is excluded. The consideration, which falls within the meaning of royalty, is the consideration for the: (i) transfer of all or any rights in respect of patent, invention, model, design, secret formula or process or trademark or similar property including granting license; (ii) imparting of any information concerning the working of, or use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, ITR