International Taxation: Recent Controversies & Jurisprudence

Transcription

1 WIRC of ICAI International Taxation: Recent Controversies & Jurisprudence September 15, 2012 CA Jiger Saiya

2 CASE STUDIES DISCUSSED Turnkey Contracts Buyback of Shares Attribution of Profits to Dependent Agent PE Secondment Arrangement 2

3 International Taxation: Recent Controversies & Jurisprudence September 15, 2012 CASE STUDY 1: TURNKEY CONTRACTS

4 CASE STUDY 1: TURNKEY CONTRACTS Consortium UK Contractor Ltd India Contractor Ltd Bid Onshore Supply Contract Offshore Supply & Onshore Services Contract Turnkey Infrastructure Ltd Tender for Erectioning & Commissioning of Power Plant Turnkey Infrastructure Ltd (Owner-Co) floated a tender for erection and commissioning of Power Plant on a lump sum basis. UK Contractor Ltd (UK-Co) and India Contractor Ltd (I-Co) came together to take up the project as a consortium with an intension to promote their business. Owner-Co entered into two separate contracts with UK-Co and I-Co, and agreed to pay them separately. Further, the contract with UK-Co was divided into two parts (1) For Offshore Supply & (2) Onshore Services MZSK & Associates 4

5 TURNKEY CONTRACT COMPOSITE CONTRACT Whether amount paid to the UK-Co for offshore supply is liable to tax in India and hence liable to withholding under section 195? Roxar Maximum Reservoir Performance (AAR) / Dongfang Electric Corporation (ITAT - Kolkata) Tender floated was composite and for complete work for erection and commissioning of project The contract awarded against the bid submitted was not for sale of material or merely for supply of services Separate payment schedule cannot alter the terms of tender Looking at the contract in light of the objective sought to be achieved, it cannot be accepted that the contract contains two distinct parts for the purpose of taxation AAR In case of Vodafone the Supreme Court has laid down that what is needed is to consider the transaction in its entirety and to look at the transaction as a whole Ishikawajima decision overruled Supply along with services liable to tax in India and hence liable to withholding u/s 195 5

6 TURNKEY CONTRACT CONSORTIUM ARRANGEMENT In case a contract is awarded to the consortium, can the consortium be treated as an AOP and accordingly income received by UK-Co chargeable to tax in India under the IT Act? ABC (AAR) / Alstom Transport (AAR) Basic principle in interpretation of a contract is to read it as a whole and to construe all its terms in context of object sought to be achieved and purpose sought to be attained by implementation of contract; reading parts of contract as imposing distinct obligations may not be proper way to understand a composite contract The consortium partners dividing the obligation amongst themselves after winning the bid cannot alter the status they acquire while entering into the contract with a common purpose and incurring a joint liability To determine the status of consortium as an AOP, it is relevant to consider the legal rights and obligations arising out of the transaction. Since consortium partners had entered into the arrangement with a common objective to earn profit & promoting their business, consortium ought to be treated as an AOP and its income be taxed as a whole. 6

7 International Taxation: Recent Controversies & Jurisprudence September 15, 2012 CASE STUDY 2: BUYBACK OF SHARES

8 CASE STUDY 2: BUYBACK OF SHARES 100% Mauritius Holding Co Ltd Selective Buyback USA Parent Co Inc 1% 100% Singapore Holding Co Pte Ltd 90% 9% India Subsidiary Co Pvt Ltd India Subsidiary Co Pvt Ltd (I-Co) is a part of a Group with investment from Mauritius Holding Co Ltd (M-Co), Singapore Holding Co Pte Ltd (S-Co) and ultimate holding company, USA Parent Co Inc (US-Co) I-Co proposed a buyback scheme from existing shareholders in accordance with section 77A of Companies Act. Mauritius Holding Co (M-Co) accepted the scheme for I-Co to buyback a portion of its holding. S-Co and US-Co did not exercise the buyback option MZSK & Associates 8

9 BUYBACK OF SHARES AVOIDANCE ARRANGEMENT In light of the fact that capital gains are not liable to tax in India under the India Mauritius DTAA, can the scheme of buy back be held as a Tax Avoidance scheme, thereby making it illegal? Otis Elevators (AAR) Armstrong World Industries (AAR) Facts in the case Closely held company No Dividend declared since introduction of Dividend Distribution Tax (DDT) Selective buyback by Mauritius shareholder Buyback by other companies may have resulted into tax liability in India AAR Selective buyback was primarily to remit money without payment of DDT Colourable device to avoid tax Payment in nature of dividend not covered by exception in 2(22) Liable to tax in India under Article 10 of India Mauritius DTAA AAR Tax department could not bring in adequate material to justify that the buyback arrangement was a scheme for avoidance of tax Mauritius company may be incorporated to take benefit of tax treaty, however, that cannot be ground for denying benefit in light of Supreme Court decision in case of Azadi Bachao Andolan Capital Gain arising out of buyback not taxable as per Article 13 of India Mauritius DTAA MZSK & Associates 9

10 BUYBACK OF SHARES TRANSFER PRICING Are the provisions of Transfer Pricing applicable in case of buyback of shares? Armstrong World Industries (AAR) There is an international transaction between associated enterprise Income arises out of such International Transaction The computation of the income is to be carried out before considering its chargeability. The fact that the income is not taxable and the transfer pricing exercise may not be fruitful cannot affect the applicability of the statutory provisions for determining Arms Length Price MZSK & Associates 10

11 International Taxation: Recent Controversies & Jurisprudence September 15, 2012 CASE STUDY 3: ATTRIBUTION OF PROFITS TO DEPENDENT AGENT PE

12 CASE STUDY 3: DEPENDENT AGENT PERMANENT ESTABLISHMENT Singapore Principal Pte Ltd Cost Plus Remuneration for services Sale of Products Singapore Principal Pte Ltd (S-Co) is engaged in selling engineering products S-Co appointed India Agent Pvt Ltd (I-Co) as exclusive agent for marketing its products to Indian Customers and managing collections from the said customers S-Co has no other presence in India I-Co qualifies as a Dependent Agent Permanent Establishment (PE) India Agent Pvt Ltd Marketing of Products of Principal Indian Customers I-Co entitled to Cost + 20% I-Co carries out Transfer Pricing study to demonstrate that the remuneration earned is at arm s length MZSK & Associates 12

13 DEPENDENT AGENT PE ATTRIBUTION OF PROFITS Whether payment of remuneration to I-Co at arms length extinguishes tax liability of S-Co in India? Morgan Stanley (SC) SET Satellite (Bombay HC) / BBC Worldwide (ITAT Delhi)/ Galileo (ITAT Delhi) / B4U International (ITAT Mumbai) Seagate Singapore International (AAR) PE to be considered as a distinct enterprise for the purpose of profit attribution Based on Transfer Pricing documentation and FAR analysis, compensation paid to PE considered at arm s length No further attribution required, if PE remunerated at arm s length Attribution of profits to be based on FAR analysis No further attribution required, if PE remunerated at arm s length Demarcated space made available in the warehouse by the logistics service provider constitutes fixed place PE In relation to the sales activity in India, PE should be treated as separate and distinct entity. Amounts paid to Indian entity and other expenses to be deducted from the attributable profits MZSK & Associates 13

14 DEPENDENT AGENT PE ATTRIBUTION OF PROFITS MTV Asia (ITAT - Mumbai) OECD Approved Approach In spite of global loss, 10% attributable to PE in India Profit attribution of 10% in addition to 15% commission paid to agent in India Functionally Separate Entity Approach - Dependent Agent and the Dependent Agent PE are two separate entities Analysis to be carried out separately for the functions of the Agent and the significant peoples function carried out by the Foreign entity in the source country, namely, risks assumed and economic deployment of assets Mere compensation to Dependent Agent at arm s length may not extinguish liability of tax in Source Country unless additionally remunerated for the significant peoples functions carried out by the Dependent Agent PE MZSK & Associates 14

15 International Taxation: Recent Controversies & Jurisprudence September 15, 2012 CASE STUDY 4: SECONDMENT ARRANGEMENTS

16 CASE STUDY 4: SECONDMENT ARRANGEMENTS USA Employer Co Inc Reimbursement of Salary India Captive Subsidiary Pvt Ltd Secondment / Deputation Employees of USA Employer Co Inc India Captive Subsidiary Pvt Ltd (I-Co) is captive service provider to the USA Employer Co Inc (US- Co) I-Co is remunerated cost plus mark-up for its services US-Co deputes its employees to I-Co to ensure efficiency and productivity of services Deputed employees shall function exclusively under direction, control and supervision of I-Co Salary of deputed employees is reimbursed by I- Co to US-Co 16

17 SECONDMENT ARRANGEMENTS REIMBURSEMENTS... Whether amounts paid by I-Co to US-Co are in the nature of reimbursement or income in the hands of US-Co? Verizon Data Services (AAR) / Target Corporation (AAR) Seconded employees remain employees of overseas company Payment of salaries is not dependent on Indian company they continue to get their salaries as long as they remain in their employment Without the overseas employer company, the employees have no locus standi vis-à-vis the Indian company Services performed by the seconded employees are performed by them as employees of overseas company and not as those of the Indian company The nature of the two receipts, one in the hands of overseas company for rendering services and the other in the hands of employees by way of salaries are of different character Thus, amounts paid by the Indian company to overseas company represents income in its hands 17

18 SECONDMENT ARRANGEMENTS REIMBURSEMENTS... Abbey Business Services (ITAT - Bangalore)/ IDS Software Solutions (ITAT - Bangalore) Where the requirements of employer-employee relationship such as the right to hire or accept the secondment, right to control and supervise, right to instruct, right to terminate from secondment are satisfied as in the case of the Indian company and secondees, overseas parent was only an employer in a legal sense and Indian subsidiary was their 'real and economic employer Mere fact that secondees remained on overseas company s payroll would not lead to the conclusion that the overseas parent is their actual employer There is no rendering of services by overseas company once Indian subsidiary is real and effective employer of secondees Reimbursement of salary costs to a foreign company under a secondment agreement does not involve profit element and is not liable to income tax. If however, there is a surplus, surplus would be taxed. MZSK & Associates 18

19 SECONDMENT ARRANGEMENTS FTS/ FIS If treated as income, whether the payment qualifies as Fees for Technical Services/ Fees for Included Services? Verizon Data Services (AAR) Abbey Business Services (ITAT Bangalore) Functions performed by the seconded employees are purely managerial in nature, covered under Article on FIS Managerial services rendered are not technical but consultancy services being managerial services, the requirement under Article 12(4) of the DTAA that these must be made available is not to be satisfied There is no rendering of services by overseas parent once Indian company is real and effective employer of secondees, thus 'provision of services criteria used in the definition of FTS is not satisfied MZSK & Associates 19

20 SECONDMENT ARRANGEMENTS PERMANENT ESTABLISHMENT Whether the secondment arrangement results in a Permanent Establishment for the US-Co in India? Centrica India Offshore (AAR) Secondees continue to be the employees of the overseas companies Employees rendering services for their employer in India by working for a specified period for a subsidiary or associate enterprise of their employer. Gives rise to a Service PE within the meaning of article 5 of DTAA

21 International Taxation: Recent Controversies & Jurisprudence September 15, 2012 THANK YOU