T.P.OSTWAL BOMBAY CHARTERED ACCOUNANTS SOCIETY

T.P.OSTWAL BOMBAY CHARTERED ACCOUNANTS SOCIETY

CONTROL AND MANAGEMENT MORGAN STANLEY S.C. KOTAK MAHINDRA PRIMUS CARGO COMMUNITY NETWORK (INDIA PE- DOES NOT PLAY ANY ROLE PE- PLAYS ROLE RECENT JUDICIAL TREND IN INDIA DEPENDENT AGENCY PE AND ATTRIBUTION FORCE OF ATTRACTION SALE OF SHARES BY NR TO NR 2

RADHA RANI HOLDING (P) LTD. DEL. 99%INDIAN SHAREHOLDER INDIA SINGAPORE COMPANY 1%S PORE SHARE HOLDER S POR E ISSUES FOR CONSIDERATION~ S.6(3)(ii)of the IT Act 1961 Tax residency certificate issued by S pore authorities is held to be conclusive evidence 3

Indian co Individuals Provision of services-i T,A/C Reco., Research Services 1 Services 2 Secondment of some individuals to Indian co(to work under Indian cos. control Other Affiliates US Co. Individuals Financial matters Services ~1: Service fees=cost+29% Services~2(i. e. secondment of some individuals ) :All comp + benefits paid by Us co to individuals. pure cost reimbursement by Indian co. Stewardship individuals :All comp +benefits paid by us co to individuals. No charge to Indian co. Some individuals sent to India were not seconded to India co-instead, they will undertake stewardship activities for Usco (i.e., to ensure high quality 16-01-2008 standard T.P.OSTWAL are met. 4

Morgan Stanley : Does US co have a PE in India? Furnishing of services through employees... PE (India US treaty contain equivalent of Art.5(3)(b),UN model)? Yes Secondment arrangement causes a PE in India: constitutes the furnishing of services through employees,... by US co to Indian co. 5

Morgan Stanley: Does US Co have a PE in India? Furnishing of services through employees... PE? Yes Secondment arrangement causes a PE in India: constitutes the furnishing of services through employees,... by US co to Indian co. India US treaty contain equivalent of Art.5(3)(b),UN model Secondment= furnishing of services through employees,... by US co to Indian co? Should be No :...if receiving company responsible for supervision, work quality and work product, Only Yes...if allowing secondment itself = the benefit or the service REASON FOR COURT DECISION? 6

Indian co Individuals Provision of services-i T,A/C Reco., Research Services 1 Services 2 Secondment of some individuals to Indian co(to work under Indian cos. Control) Other Affiliates US Co. Individuals Supreme Court Of India 1.Provided Indian co was remunerated at an arm s length level for services ~1(which it was ), the profit attributable to US Co s Pein India is NIL 2.Echo of Zero sun game re Agency PE? Some individuals sent to India were not seconded to India co-instead, they will undertake stewardship activities for Usco (i.e., to ensure high quality 16-01-2008 standard T.P.OSTWAL are met. 7

Indian co Provision of services-i T,A/C Reco., Research Services 1 Services 2 Secondment of some individuals to Indian co(to work under Indian cos. Control) Other Affiliates US Co. Supreme Court Of India 1.Provided Indian co was remunerated at an arm s length level for services ~1(which it was ), the profit attributable to US Co s Pein India is NIL 2.Echo of Zero sun game re Agency PE? Individuals Individuals Another example of practice of setting PE issue by getting the transfer Some individuals sent to India were not seconded to India co-instead, they will undertake stewardship activities for Usco (i.e., to ensure high quality pricing right? 16-01-2008 standard T.P.OSTWAL are met. 8

Services Australia n Service provider KOTAK MAHINDR A PRIMUS Payment AUSTRALI A INDIA Australian co provided data processing services Fixed annual system maintenance fees Data processing fees based on no. of transactions Tax authority s view Payment for use of equipment Kotak s view both payment s are f or one service of data processing 9

CARGO COMMUNITY NETWORK Server in S pore Ezy Cargo: internet portal for booking cargo on airlines Subscription agreement and payment of fees Ezy Cargo Indian customer Singapore India Server- at Singapore Portal displayed on Indian customer computer terminal Indian AAR Subscription fees Royalty Portal( disoplayed on Indian customers computer)and server integrated commercial and scientific equipment Subscription fees=payment for the use of that equipment 10

The meaning of relevant business activity is uncertain & debatable. This approach is applied inconsistently by the countries using this method. There are differences within the countries using this approach on time period to be applied : Some on the basis of an income year, while others treat income period longer than a year. 11

Article is ambiguous & difficult to apply: the rules are not clear on the manner in which assets & liabilities are to be allocated to a PE & other uncertainties. Once a legal fiction is used, considerable uncertainty is created for both taxpayers & tax agencies in determining the extent of the fiction. There is a strong risk that an international enterprise s accounts may be manipulated through transfer pricing to shift a branch s profits to a lower-tax jurisdiction. 12

These are consistent: 7(1) should be interpreted in the light of 7(2), with the latter being treated as stating underlying principles. These are inconsistent & inconsistencies may be resolved by treating 7(2) as prevailing over the other as 7(2) is more a specific provision. Art. 7(1) is a substantive provision on the attribution of profits & it should not be given a subordinate role. 13

OECD Model (Para 16) on Art. 7 states that Art. 7(3) clarifies the general directive laid down in Art. 7(2). But the role of Art. 7(3) is confusing & contentious. The approaches for deductibility of general admn. expenses is however an exception to the general rule set out in Para 16 on Art. 7 stating that actual amount incurred should be allowed. 14

It has been held by the Supreme Court in the case of CIT v Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 (SC)) "This apportionment of profits between a number of businesses which are carried on by the same person at different places determines also the place of accrual of profits" 15

The Anglo-French Textile Company Ltd. v. CIT [1954] 25 ITR 27 (SC). The above passage is also sufficient in our opinion to establish that the apportionment of income, profits and gains between those arising from business operations carried on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of Section 42(3) of the Act but on general principles of apportionment of income, profits and gains " 16

Ishikawajima-Harima Heavy Industries Ltd v. DIT, Mumbai [2007] 288 ITR 408 (SC). Different elements of a contract can be broken apart & offshore supplies of goods & services were outside the territorial jurisdiction of India. C I T and Another v Hyundai Heavy Industries Co. Ltd [2007] (SC) (291 ITR 482). 17

Offshore supplies & services Turnkey contract: LNG - IHHI member of consortium Supreme court Profit attributable to PE limited to activities performed through PE SINGLE TURNKEY CONTRACT NOT RELEVANT OOnshore supplies & services 18

PE- PLAYS ROLE Facts and circumstances of each individual case will be decisive. How much to Attribute? Rolls Royce Plc Vs DDIT, ITAT, DEL. GALILEO INTERNATIONAL INC Vs DDIT,ITAT,DEL. Clifford Chance Vs DCIT 82 ITD 106 MUMBAI. Nokia Vs DDIT 95 ITD 269. 19

PE- PLAYS ROLE..Rolls Royce. Equipment sold Visiting Rolls Royce employees used Indian office as base in India RRIL(100% Sub of Rolls Royce) Indian PE UK INDIA 20

Supply contract for hardware and software Nokia Networks OY, Finland ( NOY ) WOS Marketing services agreement Telecom operator Nokia India Pvt Ltd ( NPL ) Installation agreement and Technical support agreement Liaison office ( LO ) Organisation structure Contractual arrangements 21

PE- PLAYS ROLE..Clifford Chance. CLIFFOR D CHANCE UK PARTNE R SHIP FIRM SERVICES RENDERED FROM UK AND THROUGH PRESENCE OF EMPLOYEES IN INDIA Indian clients in uk UK INDIA Amounts received in respect of services rendered in relation to projects in India is liable to tax INDIAN CLIENT S INDIAN CLIENT S 22

In Morgan Stanley & Co. (292 ITR 406) S.C. has held that once associated enterprise which is considered as PE of the non-resident assessee & is remunerated at arms-length, nothing further would be left to be attributed to the PE of the non-resident. GALILEO INTERNATIONAL INC Vs DDIT,Delhi-ITA No 1733/Del/2001,2473-2475/Del/2000 & 820-823/Del/2005. SET Satellite (Singapore) Pte,Ltd. ITAT Mumbai 106 ITD 175. 23

Morgan Stanley SC on attribution of profits MSCo Functions Assets Risks MSAS Cost plus 29% markup as ALP No further attribution TNMM most appropriate method for determination of arm s length price PE (MSAS) Whether need for further remuneration for service PE 24

PE- PLAYS ROLE Galileo Galileo-CRS services through main frame computer Located in USA 15% commissio n paid Interglobe independent distributor Connectivity provided by independent service provider from France USA India Independent distributor may be holding job of many principles but as far as CRS is concerned sole distributor hence is dependent on Galileo. CRS existed in India through broad band connectivity Computer screen is fixed place of business PE and Interglobe a dependent agent PE Attribution of 15% commission on Arms length basis extinguish the principle of further tax liability. Connectivity provided 800 Travel Agents 25

SET Satellite (Singapore) Pte Ltd Attribution of profit to agency PE. SINGAPORE CO(BROADCASTING BUSINESS) SINGAPORE INDIA fees DEPENDENT AGENT IN INDIA CUSTOMERS IN INDIA Arm s length remuneration Agent habitually concludes contracts binding on sing. co Whether need for further income attribution in the hands of sing co 26

Profits may be taxed but only so much of them as is attributable to-. (a) that PE; (b) sales in that other state of goods or merchandise (G or M) of the same or similar kind as those sold through that PE; (c) other business activities carried on in that other state of the same or similar kind as those effected through that PE. 27

customers SNC- Lavalin/Ac res INC PROJECT PE in India Canad a India Others business activities custom er Direct sales customer Canada/India tax treaty:...profits attributable to PE, plus the profit attributable to other business activities of the same or similar kind as those effected through the PE 28

SALE OF SHARES BY NR TO NR HK investor UK investor Nil foreign dividend capital gains tax in countries TAX HAVEN (NO TREATY WITH INDIA) MAURITIUS Sale of shares Trinity corporation AAR NO 740 OF MAURITIUS 2 2006? INDIA (JV) 29

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