Taxation of: Artistes & Sportspersons Pensions & Social Security Payments Students & Trainees Other Income

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1 Taxation of: Artistes & Sportspersons Pensions & Social Security Payments Students & Trainees Other Income The Chamber of Tax Consultants Workshop on Taxation of Foreign Remittances CA N. C. Hegde 20 th January 2017

2 Payments to Artistes and Sportspersons Article 17 2

3 Relevance International players participating in sporting events like the ICC World Twenty 20, Indian Premier League, PRO Kabaddi League, Davis Cup, etc. Non-resident sports association or institution earning income from games played in India Foreign artistes working in the Indian entertainment industry Foreign films shot in India Concerts and gigs in India by international bands and entertainers Non-resident artistes performing at Indian weddings and events 3

4 Taxability under the ITA Section 5 r.w.s 9 Section 115BBA TDS u/s 194E CBDT Circular No. 787 dated 10 February

5 Section 115BBA and Section 194E of the ITA A non-resident sportsman (including athlete) who is not a citizen of India and who earns income from: Participation in India in any game** or sport Advertisement Contribution of articles relating to any game or sport in India in newspapers, magazines or journals Applies to A non-resident sports association or institution that earns guarantee money in relation to any game** or sport played in India **other than lotteries, crossword puzzles, races, card games, gambling or betting of any form A non-resident entertainer who is not a citizen of India and who earns income from his performance in India A tax rate of 20% applies to the above income (gross) Deduction of expenditure incurred for earning the income is not allowed TDS would apply at the time of credit or payment, whichever is earlier No need to file a return if the above is the only income and tax has been withheld 5

6 CBDT Circular No. 787 dated 10 February 2000 (1/2) Receipts from events or shows for entertainment, sports, etc. may include: Sponsorship money Gate money Advertisement revenue Sale of broadcasting or telecasting rights Rents from hiring out of space, etc. Rents from caterers DTAA Article on Artistes and Sportsmen will apply to: Income from personal activities of sportsman or artist in India, which accrues to such sportsman/artist or to another person Advertising income Sponsorship income, if it is related directly or indirectly to performance or appearance in India DTAA Article on Royalty will apply to royalty payment for recorded performance DTAA Article on Other Income will apply to guarantee money arising to foreign sports association 6

7 CBDT Circular No. 787 dated 10 February 2000 (2/2) Examples of income not taxable in India: Performance in India gratuitously without consideration Performance in India for no consideration, to promote sale of records Consideration paid to acquire the copyrights of performance in India for subsequent, sale, broadcast or telecast abroad Examples of income taxable in India: Consideration for live performance or simultaneous live telecast or broadcast in India Consideration paid to acquire the copyrights of performance in India for subsequent, sale, broadcast or telecast in India Endorsement fee (for launch or promotion of products, etc.) that relates to the performance in India 7

8 Judicial rulings - Sections 115BBA, Section 194E (1/3) PILCOM [2011](335 ITR 147)(Cal HC): The only pre-condition for accrual of income u/s 115BBA is that an amount should be paid or payable to a non-resident sportsperson or association in relation to a game or sport played in India Section 115BBA is completely independent of other sections and has got nothing to do with the accrual or assessment of income in India as mentioned in section 9 of the ITA Section 115BBA is to be applied irrespective of place of making payment Once the income accrues u/s 115BBA, the statutory obligation of the payer u/s 194E comes into play. The language employed in section 194E has no correlation with the taxability Obligation to deduct u/s 194E is not affected by the DTAA, since such a deduction is not the final payment of tax, nor can it be said to be an assessment of tax. Advantage of the DTAA can be taken by the real assessee on whose account the deduction is made and not by the payer Payments in relation to matches not played in India would however not be liable to tax or TDS u/s 115BBA r.w.s. 194E 8

9 Judicial rulings - Sections 115BBA, Section 194E (2/3) INDCOM [2011](335 ITR 485)(Cal HC): Income from cricket matches played in India is deemed to accrue or arise in India u/s 9(1)(i) Amount paid to the foreign team for participation in a match in India, whether as prize money or towards administrative expenses, was income deemed to have accrued in India and was thus taxable u/s 115BBA r.w.s.194e The relevant DTAA did not contain any provision which excluded the operation of sections 115BBA or 194E. The DTAA in fact allowed taxing rights to the source State Umpires and match referee can, at the most, be described as professionals or technical persons. They are neither sportsmen (including an athlete), nor non-resident sports association or institution so as to attract the provisions of section 115BBA 9

10 Judicial rulings - Sections 115BBA, Section 194E (3/3) International Merchandising Corporation [2015](57 taxmann.com 179)(Del ITAT): Association of Tennis Professionals (ATP) is undisputedly a governing body of the world wide men's professional tennis circuit, that is responsible for the ranking of its players and co-ordinating tennis tournaments in the world. It is thus a non-resident sports institution Payments toatp would hence attract TDS u/s 194E r.w.s 115BBA Board for Cricket Control in India [2007](14 SOT 287)(Mum ITAT): In view of section 90(2), the provisions of the DTAA would prevail over the domestic law if more beneficial to the assessee. Hence, in case the payment in question was not taxable under the applicable treaty, there was no need to address to the scope of provisions of the domestic law DTAA allocates taxing rights when the source of income is in a country other than the country of residence. If concluded that India has the right to tax the guarantee money received by the overseas cricket board, the next question would be whether such receipts can be taxed at all under the provisions of the Act, and if so, in what manner 10

11 Taxability under the DTAA OECD MC Article 17(1) Entertainers & Sportspersons Notwithstanding the provisions of Article15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from that resident s personal activities as such exercised in the other Contracting State, may be taxed in that other State A Comparison of Article 17(1) of the Model Conventions UN MC Article 17(1) Artistes & Sportspersons Income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio, or television artiste, or a musician, or as a sportsman, from his personal activities as such exercised in the other Contracting State, which income would be exempt from tax in that other Contracting State under the provisions of Articles 7 (Business Profits) and 14 (Income from Employment) may be taxed in that other State, except where the amount of the gross receipts derived by such entertainer or sportsman, including expenses reimbursed to him or borne on his behalf, from such activities does not exceed twenty thousand United States dollars ($20,000) or its equivalent in for the taxable year of the payment US MC Article 16(1) Entertainers & Sportsmen Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from his personal activities as such exercised in the other Contracting State, may be taxed in that other State 11

12 Salient features of Article 17(1) The Article allows the country of performance i.e. the Source country, the right to tax the income arising to a non-resident entertainer, artiste, sportsperson from his personal activities i.e. performance in that country Application of the Article depends on whether the income is pre-dominantly attributable to the performer itself or to other activities or property rights, eg: activities of a political, social, religious or charitable nature would also be covered, if the entertainment character is present Factors which are not relevant for the purpose of Article 17(1) application:- Whether such entertainer, etc. is self-employed or has a PE in the Source country or is an employee i.e. Article 17 overrides Articles 7, 14 and 15 Location or residence of the payer Number of days stay in the Source country (except the DTAA with Egypt which requires the personal activities in the Source country to continue for period(s) > 15 days in a fiscal year) Whether the performance is one-time or otherwise The quantum of income in the Source state (except the India US DTAA which provides that the net income from activities in the Source country should > USD The US MC contains a de-minimus provision based on which tax will not apply in the Source country if (gross receipts + expenses reimbursed) < USD 20,000 in the taxable year of payment) 12

13 Entertainers, Artistes Meaning (1/2) Not expressly defined As per the OECD MC & Commentary thereon:- INCLUDES Theatre, motion picture, radio or television artiste Musician Stage performer Film actor or actor (including for instance a former sportsperson) in a television commercial A person who is not an actor but who gets a fee for a once-in-a-lifetime appearance in a television commercial or movie EXCLUDES A visiting conference speaker (e.g. a former politician who receives a fee for a speaking engagement) Model performing as such (e.g. a model presenting clothes during a fashion show or photo session) rather than as an entertainer Administrative or support staff (e.g. cameramen, producers, directors, choreographers, technical staff, road crew for a pop group, etc.) Impresarios and agents arranging the appearance of an entertainer or sportsperson 13

14 Entertainers, Artistes Meaning (2/2) As per judicial precedents in the context of section 80RR of the ITA:- INCLUDES Dress designer Tarun R. Tahiliani [2010](328 ITR 629)(Bom HC) Anchor of a TV programme Amitabh Bachchan [2007](12 SOT 95)(Mum ITAT) EXCLUDES Presenter, commentator, programme compere of sports on T.V. Harsha Bhogle [2003](86 ITD 714)(Mum ITAT) Endorsement of product (involving photo sessions and appearing in media launch sessions) Shahrukh Khan [2008](ITA No. 3894/Mum/2000)(Mum ITAT) Modelling and appearing in T.V. commercials Sachin R. Tendulkar [2011](11 taxmann.com 121)(Mum ITAT) Players of cricket associations of the countries participating in the World Cup would be entertainers for the purpose of Article 17 of the DTAA PILCOM [2001](77 ITD 218)(Cal ITAT) 14

15 Sportsperson, Sportsmen Meaning Not expressly defined. DTAA with UK and USA use the word Athletes instead of Sportspersons As per the OECD MC & Commentary thereon:- INCLUDES Runners Jumpers Swimmers Golfers Jockeys Footballers Cricketers Tennis players Racing drivers Billiards, snooker, chess, bridge tournaments & similar activities of an entertainment character An amateur who wins a monetary sports prize EXCLUDES A former or injured sportsperson commenting during the broadcast of a sports event in which he does not participate Owner of a horse or a race car Umpires and match referee - INDCOM [2011](335 ITR 485)(Cal HC) 15

16 Streams of income covered under Article 17 (1/2) Performance-based income (including participation fees, awards, prize money, salary) Remuneration for preparation, training and rehearsal (including for time spent on travelling) The preparation & training may relate to a specific performance or various performances generally Sponsorship, advertising or merchandising income that is directly/indirectly attributable to a performance Eg: Serena Williams wearing the Nike logo during a match Income from image rights (i.e. use of name, signature, personal image) if connected to a performance Income from participation in interviews, press conferences, etc. related to an appearance Payments for the simultaneous broadcasting of a performance, made directly to the performer or for his benefit Income from combined activities Eg: Clint Eastwood acting in a movie which he also directs Article 17 would apply only if the performing element is predominant. If both the actor-director roles are predominant, apportionment may be required 16

17 Streams of income covered under Article 17 (2/2) Article 17 thus covers all income that is connected to the entertainer, artiste, sportsperson s performance / appearance in the Source state Tests for ascertaining connection with a performance: Timing of the income-generating event (e.g. a payment received by a professional golfer for an interview given during a tournament in which she participates) Nature of the consideration for the payment of the income (e.g. a payment made to a star tennis player for the use of his picture on posters advertising a tournament in which he will participate, a daily allowance paid for participation in a tournament, etc.) Contractual arrangements which relate to participation in named events or a number of unspecified events 17

18 Income not covered under other Article 17 Payments received upon cancellation of a performance Income covered under other Articles Royalty, advertising fee, merchandising and other income not connected with a performance or appearance Payments to third party like agent, impresario, owner of rights or asset (racing car, horse) that are not on behalf of, or for the benefit of the performer Income from restrictive covenant (eg: an agreement or a legal obligation to do or abstain from doing something 18

19 Article 17(2) An anti-avoidance provision OECD MC Article 17(2) Where income in respect of personal activities exercised by an entertainer or a sportsperson acting as such accrues not to the entertainer or sportsperson but to another person, that income may, notwithstanding the provisions of Article 15, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised A Comparison of the Model Conventions UN MC Article 17(2) Where income in respect of personal activities exercised by an entertainer or a sportsperson in his capacity as such accrues not to the entertainer or sportsperson himself but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised US MC Article 16(2) Where income in respect of activities exercised by an entertainer or a sportsman in his capacity as such accrues not to the entertainer or sportsman himself but to another person, that income, notwithstanding the provisions of Article 7 (Business Profits) or 14 (Income from Employment), may be taxed in the Contracting State in which the activities of the entertainer or sportsman are exercised unless the contract pursuant to which the personal activities are performed allows that other person to designate the individual who is to perform the personal activities 19

20 Article 17(2) Background and Key aspects Was introduced with an objective to counteract avoidance devices whereby remuneration for performance of artiste/ sportsperson is not paid to him, but to another person popularly termed as an artiste-company or a star-company, that is typically registered in a tax haven Article 17(2) allows the Source country to tax income from the personal activities of an entertainer or sportsperson that accrues not to such entertainer or sportsperson, but to another person Another person could be a corporate or a non-corporate, eg: a management company, team, troupe, orchestra or a star-company that may be owned by the performer himself Article would apply even if the performer and another person are tax resident of different countries and it overrides the provisions of Articles 7, 14 and 15 The same income should not be taxed twice, eg: Article 17(2) allows the Source State to tax the star-company for a payment received in relation to the entertainer s activities & Article 17(1) also allows that State to tax the part of the remuneration paid by that company to the entertainer that is attributable to such activities. In such case, the Source State may, based on its domestic law: (i). either tax only the company or the entertainer on the whole income; or (ii). tax each of them on part of the income, e.g. by taxing the income received by the company but allowing a deduction for the relevant part of the remuneration paid to the entertainer and taxing that part in the hands of the entertainer 20

21 Article 17(2) Exclusions Prize money of the owner of a horse or race car that does not relate to the personal activities of the jockey or race car driver, but is a consideration for the activities related to the ownership and training of the horse or the design, construction, ownership and maintenance of the car - OECD MC Commentary (2014) Agency commission / remuneration paid and travel & other artiste expenses reimbursed to a foreign agent, were not covered under Article 18(2) of the India UK DTAA, as the same did not arise from the artistes personal activities in India Wizcraft International Entertainment (P) Ltd [2014](364 ITR 227)(Bom HC) Income of enterprises involved in production of entertainment or sports events, eg: income of independent promoter of concert from sale of tickets and allocation of advertising space- OECD MC Commentary (2014) 21

22 Article 17(2) some Indian DTAA Egypt, Libya Do not contain a para similar to Article 17(2) of the MC i.e. the DTAA do not provide for Source country taxation in respect of income accrued to another person Zambia Does not provide for Source country taxation in respect of income accrued to another person. However, Article 5(8) of the DTAA provides for a deemed PE if an enterprise s business consists of providing the services of public entertainers USA Article 18(2) provides that income accrued to another person will not be taxed in the Source country if the entertainer, athlete, etc. establish that neither they nor persons related thereo participate directly or indirectly in the profits of that other person in any manner, including the receipt of deferred remuneration, bonuses, fees, dividends, partnership distributions, or other distributions 22

23 Article 17(3) An exception to Articles 17(1) and 17(2) Provides for exemption by the Source country in respect of income of artistes, sportspersons for performances that are substantially supported by public funds The 1992 OECD MC Commentary articulated this exception through the following draft provision: The provisions of paragraphs 1 and 2 shall not apply to income derived from activities performed in a Contracting State by entertainers or sportspersons if the visit to that State is wholly or mainly supported by public funds of one or both of the Contracting States or political subdivisions or local authorities thereof. In such a case, the income is taxable only in the Contracting State in which the entertainer or the sportsperson is a resident. The above has been provided as Additional considerations relating to paragraphs 1 and 2 in the OECD MC Commentary (2014) on Article 17 This reservation finds place (generally in the form of Article 17(3)) in most of India s DTAA 23

24 Article 17(3) some Indian DTAA Armenia, Japan Income taxable only in the Residence state, if the activities are within the framework of cultural or sports exchange programs approved by both Contracting States Australia, Belgium Income taxable only in the Residence state, if that other person is substantially supported by public funds of Residence state, including those of any political sub-division or local authority Brazil, Bangladesh Income taxable only in the Residence state, if the visit to/ activities in the Source State are substantially supported by public funds of Residence state, including those of any political subdivision or local authority 24

25 Computation of income and Rate of tax DTAA does not provide for the manner of income computation or the rate of tax The provisions of the ITA (interalia section 115BBA r.w.s. 194E) would hence apply Applicability can be claimed of the beneficial DTAA provisions - TRC and Form 10F would be required for the purpose 25

26 Case Study - 1 Coldplay, a British rock band visited India for live stage performances, hosted in 3 cities over a span of 15 days, that was organised by a Foreign Management Company ( F Co ) and in India, by an Indian Event Management Company ( I Co ) Remuneration of Rs. 50 crores was paid by I Co CDs / DVDs of the Concert were released globally by Global Music Co., an Indian Company. Coldplay was paid Rs. 20 crores for the rights Coldplay received a fee of Rs. 10 crore for appearing in a reality show on T.V. Commission of Rs. 50 lakhs was paid to F Co Discuss taxability of the above items. What if the remuneration of Rs.50 crores for the performance was paid to F Co instead of Coldplay? 26

27 Case Study - 2 Neymar (a Brazil Resident), was contracted by FC Barcelona Club to play in Asian Group League (AGL) in India, Sri Lanka and China Group matches were played over 6 weeks in India, Sri Lanka and China and the final match was in India. Training took place in India Income of the Club - Prize money for winning AGL- Rs. 100 lakh (50% to be distributed among players) Income of Neymar:- Monthly compensation - Rs. 25 lakhs (including time on training) Player of the Series award - Rs. 20 lakhs Share of Prize money for winning AGL - Rs 15 lakhs Fee for wearing Nike and Qatar Airways logo and tradename: Rs. 5 lakh: during matches Rs. 10 lakh: during public appearances Rs. 50 lakhs for appearing in an Indian TV commercial 27

28 Delhi HC ruling in Formula One World Championship Ltd [2016](76 taxmann.com 6)(Del) (1/7) Facts: The assessee, FOWC was a UK tax resident company Consequent to agreements between the Federation International de I'Automobile (FIA, an international motor sports events regulating association), Formula One Asset Management Limited (FOAM) and FOWC, FOAM licensed all commercial rights in the FIA Formula One World Championship to FOWC for 100-year term effective from FOWC entered into a Race Promotion Contract(RPC) by which it granted to Jaypee Sports, the right to host, stage and promote Formula One (F1) Grand Prix India event for a consideration of USD 40 million An Artworks license Agreement (ALA) as per RPC was also entered into between FOWC and Jaypee the same day, permitting the use of certain marks and intellectual property belonging to FOWC for a consideration of USD 1 FOWC is the exclusive body for nominating the event promoter s participation The AAR was approached in relation to the taxability of the sum receivable by FOWC under the RPC 28

29 Delhi HC ruling in Formula One World Championship Ltd [2016](76 taxmann.com 6)(Del) (2/7) Facts: (Contd..) The AAR held that:- (i). The consideration receivable by FOWC in terms of the RPC, was royalty; (ii). FOWC had no Permanent Establishment (PE) in India The matter was carried in appeal before the Delhi HC HC s ruling: Fixed place PE In terms of the RPC, Jaypee was designated as the promoter or the event host, but its capacity to act was extremely restricted. At all material times, FOWC had exclusive access to the circuit, and all the spaces where the teams were located Though FOWC's access or right to access was not permanent, at the same time, the model of commercial transactions it chose is such that its exclusive circuit access - to the team and its personnel or those contracted by it, was for up-to six weeks at a time during the F1 Championship season 29

30 Delhi HC ruling in Formula One World Championship Ltd [2016](76 taxmann.com 6)(Del) (3/7) HC s ruling: (Contd..) The teams competed in the race in a given place and after its conclusion, moved on to another locale where a similar race is conducted. This nature of activity was a moving presence. With this kind of activity, both the exclusive nature of the access and the period for which it is accessed, makes the presence of a kind contemplated under Article 5(1), i.e. it is fixed. Thus, the presence is neither ephemeral or fleeting, or sporadic. The fact that RPC-2011's tenure is of five years, meant that there was a repetition Having regard to the OECD and Klaus Vogel's commentary on the general principles applicable that as long as the presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of the business, the circuit itself constituted a fixed place of business Did FOWC carry on business and commercial activity in India Only FOWC has the right to include a venue in any FIA annual calendar. FIA is bound to accord permission for such inclusion. FOWC also has exclusive rights for making sound, television and other recordings and exploitation of its media rights 30

31 Delhi HC ruling in Formula One World Championship Ltd [2016](76 taxmann.com 6)(Del) (4/7) HC s ruling: (Contd..) FOWC was entitled to charge fees for the recording, telecasting, broadcasting and creation of internet and media rights, etc. Also FOWC charged, a fee annually from Jaypee for the race event conducted on the circuit in India. The entire event was organized and controlled by the assessee FIA parted with all its commercial rights to FOWC. The bulk of the revenue earned is through media and related rights, and the basis of those rights is the event FOWC decides the venue and the participating teams are bound to compete in the race in the terms agreed with FOWC. All these, unequivocally show that FOWC carried on business in India for the duration of the race (and for two weeks before and a week after the race). Every right, which FOWC possessed was monetized and the amount which Jaypee paid was only a part of such commercial exploitation Consequently, FOWC carried on business in India within the meaning of the expression under Article 5(1) of the DTAA 31

32 Delhi HC ruling in Formula One World Championship Ltd [2016](76 taxmann.com 6)(Del) (5/7) HC s ruling: (Contd..) Did FOWC carry on business through its agents under Articles 5(4) or 5(5) Article 5(5) has certain preconditions if an entity has to be treated as dependent agent. The agent must have the authority to conclude contracts, which binds the represented enterprise, and it must habitually exercise such authority The mere circumstance that the three subsidiaries had a connection with FOWC was not enough. The agreements independently entered into by them with Jaypee, did not indicate that the contracts they entered into and the businesses they were engaged in, were for and on behalf of FOWC Whether the payment constituted royalty for use of trademark In India, trademark use even for advertisement purposes is to be preceded by prior consent of the proprietor and any unauthorized use could lead to an infringement of the trademark To secure registration from the Trademark Registry in India, FOWC and Jaypee entered into the ALA. The function of the ALA was (a) to provide for a strictly limited usage of the marks i.e. only for advertisement and promotion of the Indian Grand Prix Event; (b) to provide for restrictions on usage of such marks, i.e. not for any commercial purposes such as use on merchandise, etc 32

33 Delhi HC ruling in Formula One World Championship Ltd [2016](76 taxmann.com 6)(Del) (6/7) HC s ruling: (Contd..) The OECD Commentary states that payments solely made in consideration for obtaining the exclusive distribution rights of a product or service in a given territory are not royalty, since the resident distributor does not pay for the right to use the trade name or trade mark under which the products are sold but merely obtains the exclusive right to sell in his state of residence the product that he is agreeing to buy from the manufacturer; such payments will be characterized as business income The judgment in Ericsson A.B. [2012] 343 ITR 470(Delhi), held that a lump-sum payment which is not connected with the extent of the use of the IP rights would not constitute 'royalties' within the meaning of the DTAA. As the payments were not based on the revenue earned by Jaypee, it would hence not constitute royalties The payments made under the RPC are not 'royalty' either under the Act or the DTAA, as they are not for the use of trademarks or IP rights, but rather for the grant of the privilege of staging, hosting and promoting the event In the case of Sheraton International Inc [2009] 313 ITR 267 (Del), this Court held that incidental use of trademark did not amount to receipt of royalty. Jaypee was bound to use the F1 marks and logos only for the event and not on merchandise or services offered by it. The use was thus purely incidental 33

34 Delhi HC ruling in Formula One World Championship Ltd [2016](76 taxmann.com 6)(Del) (7/7) HC s ruling: (Contd..) Thus reversing the AAR ruling, the Delhi HC held that: The sums payable under the RPC would be taxable as business profits as the international race circuit constituted a fixed place PE of FOWC in India The sums were not taxable as royalty 34

35 Pensions and Social Security Payments Articles 18, 19 35

36 Pension, Social Security - Meaning and Scope Pension Generally not defined under the Article, except for certain DTAA like UK Commonly understood as a fixed periodic payment to a past employee, typically following his retirement from service. Relatives or dependents may receive the sum in case of the employee s death Should be actually paid or unconditionally made available to such past employee Social security A concept enshrined in Article 22 of the Universal Declaration of Human Rights recognizing that the society in which a person lives should help them to develop and to make the most of all the advantages offered in the country Also refers to the action programmes of the Government intended to promote the welfare of the population Also includes annuities in respect of past employment Article 18 does not cover: Pension received during the employment Pension based on old age, illness, disability Payments from private saving schemes set up to provide retirement benefits 36

37 Social Security Agreements executed by India India has signed SSA with 18 countries viz. Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Hungary, Japan, Luxembourg, Netherlands, Norway, Portugal, South Korea, Sweden and Switzerland The SSA apply to a person who is or has been subject to the legislation of either of the two countries and other persons who derive rights from such person Detachment Exemption is available in respect of specified social security contributions in the host country if home country contributions are continued and a certificate of coverage ( COC ) is obtained Benefits of SSA Totalisation The period of contribution in both countries (to the extent they do not overlap) is added to arrive at the eligible period for determining social security entitlements Export of benefits Enables portability of benefits across countries 37

38 Article 18 (other than Government service) OECD MC Article 18 UN MC Article 18 State of residence has the exclusive right to tax pensions and other similar remuneration paid in consideration of past employment Alternative A: Pension & other payments made under a public scheme which is part of the social security system of a State/political subdivision/local authority, are taxable only in that State. Otherwise, pension & other payments in consideration of past service, are taxable only in the State of residence Alternative B: In addition to the points under Alternative A, pension & other payments may also be taxed in the other State if paid by a resident of that other State or a PE situated therein 38

39 Article 18 Key Features Under both the Model Conventions, the recipient s country of residence has the right to tax pension and other payments in consideration of past employment. The only exception when the source country can tax these amounts is if the payments are made by a resident or a PE of such source country The right to tax social security benefits is with the source country under whose social security scheme, such payments are made 39

40 Article 19 (Government service) Salient aspects Article 19(1)(a) applies if:- There is a payment of salaries, wages and other similar remuneration (other than pension) Such payment is made to an individual by a State, a political sub-division or a local authority The payment is in respect of services rendered to the payer Salaries, etc. are taxable in the paying State if the above conditions are satisfied The only exception as per Article 19(1)(b) when the receiving State (i.e. the State where the services are rendered) can tax such payments, is if the individual is a resident or a national of that State and did not become a resident of that State solely for the purpose of rendering the services Article 19(2)(a) applies if:- There is a payment of pension to an individual The payment is by or out of funds created by a State, a political sub-division or a local authority The payment is in respect of services rendered to the payer The pension is taxable in the paying State if the above conditions are satisfied Article 19(2)(b) allows the pension to be taxed in the other State if the individual is a resident and national of that other State As per Article 19(3), Articles 19(1) and 19(2) do not apply to an employee of a government department or a government organization that carries on business in the other State. 40

41 Relevant provisions of the ITA Section Exempts 10(8) Foreign income and remuneration received by an individual who is assigned to duties in India by the Government of a foreign State in connection with co-operative technical assistance programmes and projects 10(8A) 10(8B) Remuneration received by a consultant out of funds made available to an international organization and any other income which accrues to him outside India and in respect of which he is required to pay any income or social security tax to the country of his origin Remuneration received from a consultant referred to in section 10(8A) by an individual who is assigned to duties in India by the Government of a foreign State in connection with co-operative technical assistance programmes and projects and any other income which accrues to him outside India and in respect of which he is required to pay any income or social security tax to the country of his origin 10(9) Income of any family member of an individual referred to in sections 10(8), 10(8A) and 10(8B) which accrues outside India and in respect of which such family member is required to pay any income or social security tax to the country of his origin 41

42 Case Study Mr. X is a resident and citizen of the UAE He has been employed by the Government of India He thus regularly visits India for work purpose In which country will his salary be taxable? 42

43 Sums received by Students and Trainees Article 20 43

44 Article 20 Scope Applies to a student or a business trainee or apprentice Who is or was immediately before visiting the host State, a resident of the other Contracting State He is present in the host State solely for the purposes of his education or training He receives payments for the purpose of his maintenance, education or training Such payments are received from sources outside the host State 44

45 Article 20 Salient features (1/2) General Applies only to individuals There is no difference between the UN MC and the OECD MC except that the OECD MC uses the words student or business apprentice, whereas the UN MC refers to student or business trainee or apprentice Purpose and Presence in the host State The words immediately before imply that the Article does not cover a student who was once a resident of a State but had subsequently become a resident of a third State, before visiting the host State The purpose of presence should be education or training. Thus Article 20 will not cover a person who comes to the host State primarily to work, but is also a parttime student US MC Commentary (2006) The Article is silent on the period within which the student should complete his education or training in the host State. Hence it appears that the Article will apply even where the education or training is undertaken for a long period of time Technical Explanation to the India US DTAA 45

46 Article 20 Salient features (2/2) Types of receipts As the Article applies to payments towards a student s maintenance, education or training in the host State, such payments should not exceed the expenses that may be incurred for these purposes OECD MC Commentary (2014) Article 20 applies only to the payments specified therein, e.g: it will not cover salary earned by a student who engages in part-time work during his free time - OECD MC Commentary (2014) Where the recipient s training involves work experience, the payments for services would have to be distinguished from the payments for maintenance, education or training - OECD MC Commentary (2014) Payments from sources outside the host State The payer should be located outside the host State. Payments made for and on behalf of a resident of the host State, or which are borne by a PE which a foreign enterprise has in the host State are not considered to arise from sources outside the host State OECD MC Commentary (2014) Payments arise outside the host State when made by a PE of a resident of the host State in a non-host State - Technical Explanation to the India US DTAA Substance prevails over form. Hence payments made by a person in the host State, but which have been routed through a source outside the host State (eg: a foreign subsidiary) are not considered to arise outside the host State - US MC Commentary (2006) 46

47 India s DTAA some distinctive features U.K.(Article 21) No tax in respect of grant, allowance, award, gifts from abroad for maintenance, study, etc., income from personal employment in the host State not exceeding 750 pounds sterling or its equivalent (1500 pounds during temporary presence not > 12 months) Exemption shall not extend for more than 5 years USA (Article 21) No tax on payments arising outside the host State for maintenance, education, training in the host State. Grants, scholarships & remuneration from employment in the host State, shall be entitled to the same relief, reduction in taxes, as are available to the residents of the host State Benefit shall extend only for the period of education or training Singapore (Article 20) No tax on grant, allowance, award, remittances from abroad for maintenance, study, etc, remuneration not exceeding USD 500 per month or its equivalent for performing services connected with the study, training or necessary for maintenance Exemption shall not extend for more than 5 years 47

48 Taxability under the ITA Section 10(16): Exempts scholarships granted to meet the cost of education The fact that the recipient does not spend the whole amount towards education or saves something out of it would not detract from the character of the payment being scholarship V.K. Balachandran [1985](147 ITR 4)(Mad HC) Exemption was to be allowed even where the surplus saved out of the scholarship received, was utilized for investment purpose Girish Saran Agarwal [2007](160 Taxman 79)(Ahmdbd ITAT) Section 56(2)(vii): Section 56(2)(vii) provides that subject to specified exemption (eg: sums received from relatives), any sum of money > Rs.50,000 that is received without consideration, would constitute the recipient s income from other sources The benefit under the DTAA would thus become relevant if the exemption u/s 10(16) is not available 48

49 Case Study Kate, a student (US citizen) is in India since the past six months for the purpose of her education and training She had never visited India earlier and was a resident of the US immediately before arriving in India For the purpose of her education and maintenance in India, Kate regularly receives payments from her father residing in the US Additionally, she has taken up a part-time job in India to support her education What would be the taxability in Kate s hands in respect of: The sums received from her father in the US The remuneration arising from her part-time employment in India 49

50 Other Income Article 21 50

51 Other Income Meaning and Scope Not always the same as Income from other sources under ITA A residuary provision that covers income, wherever arising, which is not dealt with in the other Articles of the DTAA Also covers income from sources not expressly mentioned wherever arising Covers income arising in a third State, i.e. a dual residence scenario dealt with / not expressly mentioned Does not necessarily mean that the item has been subjected to tax or that the treatment has been detailed under the other Article. Exclusion of the item would also constitute dealt with in the other Article. Contrary view possible. 51

52 Distinction between Model Conventions OECD MC (Article 21) UN MC (Article 21) US MC (Article 21) The State of residence has the exclusive right to tax Other Income Other Income is taxable in both the State of residence as well as the State of source. The State of residence will either grant credit for the taxes paid in the State of source, or will exempt such income in accordance with Article 23 of the applicable DTAA Similar to the OECD MC, the State of residence has the exclusive right to tax Other Income, except with an additional condition that the recipient of the income should be the beneficial owner of such income 52

53 India s Tax Treaties Majority of India s DTAA are based on the UN MC of 2001 i.e. Other Income is taxable in both the State of residence as well as the State of source DTAA with Korea, Philippines and Nepal provide for residence based taxation Other Income under India s DTAA DTAA with Namibia grants exclusive taxing right to the State of source DTAA with Singapore provides for taxation in accordance with the domestic laws of the respective States DTAA with Australia and Singapore refer to the Article as Income not expressly mentioned instead of Other Income DTAA with Greece, Libya and Netherlands do not have an Other Income Article 53

54 Inclusions and Exclusions Includes Winnings from lottery, gambling Alimony Prize money Punitive damages Non-compete payments Scholarships Social security payments Guarantee fees by a group company (if providing guarantees is not regular business) Maintenance receipt from relatives Annuity arising out of previous contributions Income from estate of deceased person Unexplained investments u/s 69 of the ITA Investment income from Mutual Fund units Non-business income from certain financial instruments Interest arising in a third State that is not effectively connected with a PE Provided the above are not covered under any other Article of the DTAA Excludes Items of income which are specifically covered under any other Article of the DTAA Income (other than income from immovable property) arising to a resident of a State if the income recipient carries on business in the other State through a PE situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such PE or fixed base. In such a case, Article 7 or Article 14, as the case may be, will apply 54

55 Absence of Article on FTS If the DTAA does not contain an Article on FTS (eg: DTAA with UAE, Thailand) Article 21 (Other Income) applies Lanka Hydraulic Institute Ltd [2011](337 ITR 47)(AAR) XYZ [2012](348 ITR 31)(AAR) Article 7(Business Profits) or Article 21 (Other Income) applies, ITA doesn t IBM India Pvt Ltd (ITA Nos. 489 to 498/Bang/2013)(Bang ITAT) Article 7 (Business Profits) or the provisions of the ITA apply TVS Electronics Ltd [2012](52 SOT 287)(Chenn ITAT) Article 7 (Business Profits) applies Bangkok Class Industry Co Ltd [2013](257 CTR 326)(Mad HC) Channel Guide India Ltd [2012](139 ITD 49)(Mum ITAT) ABB FZ-LLC(Mum ITAT)[2016](75 taxmann.com 83) 55

56 Case Study - 1 An Indian Co A pays royalty to another Indian Co B for the right to use commercial information The right or contract in respect of which the royalty is paid is effectively connected to Co B s PE in the UK How will the royalty payment be taxed under the India UK DTAA? outside India within India Indian Co A Effective connection with the underlying right/ contract pays royalty UK PE of Co B Indian Co B 56

57 Case Study - 2 A foreign ship owned by a Singaporean Co, made a deviation from its international voyage to touch two Indian ports for discharging its contractual obligation to an Indian Co. The ship was in Indian waters for 10 days The foreign Co did not have a PE in India As the sum received from the Indian Co was for coastal operation between two Indian ports, the AO held that Article 8 of the India-Singapore DTAA dealing with taxability of Shipping profits arising in international traffic, will not apply Under the circumstances, will the receipts constitute the Singaporean Co s Other Income in terms of Article 23 of the DTAA? 57

58 Abbreviations AO Assessing Officer CBDT Central Board of Direct Taxes DTAA Double Taxation Avoidance Agreement FTS Fees for technical services HC High Court ITA Income-tax Act, 1961 ITAT Income-tax Appellate Tribunal MC Model Convention OECD Organisation for Economic Co-operation and Development PE Permanent Establishment SSA Social Security Agreement TDS Tax deducted at source UK United Kingdom UN United Nations USA United States of America 58

59 Thank You 59