A. PAYMENT FOR DATA PROCESSING USING MAIN FRAME COMPUTER LOCATED ABROAD NOT TAXABLE
The Income Tax Appellate Tribunal (ITAT), Mumbai Branch, has held in the case of Kotak Mahindra Primus Limited (the company), that payment made for specialized data processing of raw data using mainframe computers located abroad is not liable to tax as royalty and the company is not liable to withhold tax from such payments.
Facts of the case:
The taxpayer, an Indian Company, was engaged in the business of providing finance for purchase of cars. The company was jointly formed by Kotak Mahindra Finance Limited, India and Ford Credit International Inc., USA (FCII). The company which is engaged in the business of providing finance for purchase of cars, had entered into a data processing agreement with Ford Credit Australia Limited (FCAL) to enable it to upload the raw data in the mainframe computer in Australia and the output data, after due processing would be transmitted back to the company.The fee payable had a fixed component for annual maintenance and licensing charges and a variable component based on the amount of data processed.
The company filed an application before the Assessing Officer (AO) for permission to remit the money to without deduction of tax at source since FCLA did not have a Permanent Establishment (‘PE’) in India . The AO directed the company to make the payment after withholding tax thereon by holding that the payment was in the nature of ‘royalty’ as the company had used the software of FCLA by accessing the mainframe computer and further since it was for the use of scientific equipment i.e. the mainframe computer. The Commissioner of Income-tax (Appeals) upheld the AO’s order.
Contentions of Parties:
The company contended that the payment was in the nature of business profits and in the absence of a PE in India the same could not be brought to tax. The company further contended that the payment could not be treated as ‘royalty’ under Article 12(3) of under the India-Australia Tax Treaty (DTAA) as the company did not have any physical access to the mainframe computer. Further, the company also contended that it did not receive any right to use any intellectual property or any equipment and further the payment was not for supply of information as it was only the information in possession of the company which was being processed by FLCA.
The Tax Department contended that the payment was ‘royalty’ under Article 12(3) of the DTAA as well as under section 9(1)(vi) of the Income-tax Act, 1961 as it was for the use of specialized software and for the use of equipment. The Tax Department also contended that the splitting of the data processing costs show that the payment was not for data processing alone. The fixed charge paid was certainly a royalty payment for right to use of mainframe computer and the cost per transaction was also a payment for use of computer as it pertains to actual usage of the computer.
Decision of ITAT:
The ITAT held that the payment could not be taxed as Royalty and since FLCA did not have a PE in India , the same is not subject to tax in India and there was no obligation on the company to withhold tax on the payments made to FLCA.
The ITAT observed that if the payment was not taxable under the DTAA, there was no need to consider the provisions of the Act. The ITAT pointed out that though the payment had a fixed and a variable component they had to be taken together and not in isolation. The fixed fee did not give any independent rights to the Indian company as it was only paid as the company could not avail the unit cost of processing unless the fixed fee was paid. The ITAT held that both these payments taken together were only payments for processing of data. The ITAT further observed that no part of the payment could be said to be for use of specialized software on which data is processed as no right or privilege were granted to the company to independently use the computer. The company had no control over the actual processing of data which was exclusively controlled by FLCA. The ITAT therefore held that the payment was not for use or right to use software. The ITAT further held that, even if the contention that the payment was for use or right to use of software was to be accepted it would still not lead to taxability thereof as the payment was for the copyrighted article and not the copyright itself. For this proposition the ITAT relied on the decisions of the Bangalore ITAT in the case of Lucent Technologies Hindustan Ltd. and Samsung Electronics Co. Ltd. and the decision of the Special Bench of the Delhi ITAT in the case of Motorola Inc. The ITAT accordingly held that the payment was not taxable under Article 12(3)(a)7 of the DTAA.
The ITAT observed that the company did not have any physical access or control over the mainframe computer therefore it could not be said that the payment was for the use or right to use of mainframe computer. The ITAT further observed that the payment was being made for data processing and not for the use of the computer though the use of the computer was an important aspect of the activity of data processing. The ITAT accordingly held that the payment was not taxable under Article 12(3)(b) 8 of the DTAA.
The ITAT held that as the information was infact furnished by the company (the processing of the same was done by FLCA) and therefore the payment was not taxable under Article 12(3)(c) 9 of the DTAA.
The ITAT observed that it could not be said that the payment was for ‘making available any technical knowledge, experience, skill, know-how or processes’ as the Indian company was not in a position to use the technical knowledge on its own without recourse to the provider of service which was a condition necessary for taxability under Article 12(3)(g) of the Tax Treaty.
The ITAT did not accept the Ruling of the Authority for Advance Rulings (AAR) in the case of ABC In re where it was held that such payments are in the nature of royalty and therefore subject to tax. The ITAT said that it was not in agreement with the views of the AAR . The ITAT held that the decisions of the AAR could at best only have a persuasive value and the ruling was only binding on the applicant and therefore they were not obliged to follow it.
B. INCOME FROM BRANCH-HO TRANSACTIONS TAXABLE IF SAME ATTRIBUTABLE TO BUSINESS CARRIED OUT IN INDIA
The Income Tax Apellate Tribunal (ITAT) has in the case of Dresdner Bank, expounded the principles to compute income accruing in India to a foreign enterprise. The assessee is a Germany based non-resident banking company — Dresdner Bank — with branch in India . In the assessment proceedings, the bank maintained that the branch and head office transactions are transactions with oneself and emphasised that the incomes from inter-branch transactions are not taxable in India . The AO however differed from this view and held that this income of the assessee would be covered by section 9(1) of the Act. The same view was expounded by the Commissioner of Income Tax (Appeals).
After hearing the arguments the ITAT observed that for the income accruing or arising in India , an income which accrues or arises to a foreign enterprise company in India can essentially be only such a portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India .
The ITAT however observed that the expression ‘income deemed to accrue or arise in India’ is concerned, section 9 of the IT Act elaborately deals with the same, but the expression ‘income accruing or arising in India’ is not defined in the Act nor any judicial precedent has been cited. Seeing this ITAT observed that, to determine income accruing or arising in India to a foreign enterprise (‘general enterprise’ or as ‘GE’) one has to compute income attributable to such branch(es) in India , or other form(s) of presence (or ‘permanent establishment’ or ‘PE’).
The only way to ascertain profits arising in is by treating the Indian PE as a fictionally separate profit centre. ITAT held that cross-border dealings within an enterprise, which necessarily concern at least two tax jurisdictions; need to be examined in a different perspective. The tribunal held that “the interest earnings from the head office are to be taken into account for the purposes of computing profits arising in or accruing in India ”. It also held that the income to be accruing or arising in India and therefore, it is not really relevant whether the income can be treated as ‘deemed to accrue or arise in India ’”.
Source: Financial express
C. EXISTENCE OF PE AT THE TIME OF RECEIPT OF INCOME NOT NECESSARY FOR TAXABILITY
The Income Tax Appellate Tribunal (ITAT) has ruled that foreign companies doing project-specific work in India are liable to pay tax even if they do not have a permanent establishment when they actually receive the income for projects carried out earlier.
The income-tax department has been facing situations where foreign companies were not paying tax on income earned in India on the grounds that they did not have permanent establishments when the income was received.
A division bench of ITAT held that, "There is no condition that PE should be in existence in India in the year of receipt of the amount by the enterprise." The ruling was passed in the case of Van Oord Dredging and Marine Contractors BV, formerly known as Ballast Ham Dredging BV , one of the largest dredging companies.
In the assessment year 2001-02 (financial year 2000-01), Van Oord executed various contracts in India and it maintained a project site office. In the tax returns filed by the company in 2000-01 it did not add Rs 307.8 million received from New Mangalore Port Trust (NMPT) to its income. Van Oord said it was for a project completed in 1995-96 and for which there was no PE. In 1994-95 and 1995-96, Van Oord carried out maintenance and capital dredging work for the development of additional facilities at NM Port for which, the company had set up a project site which qualified as a PE under Article 5(3) of the relevant Indo-Dutch treaty. In 1995-96, NMPT project was completed and the site office ceased to exist. Van Oord made a claim of Rs 892.5 million for additional work. NMPT, however, made counter claims leading to arbitration and later, court proceedings between the two players.
The ruling of ITAT emphasizes the principle that existence of PE at the time of carrying out the activities for which income is received is relevant and it is not necessary that PE should be in existence even at the time of receipt of actual amount.
Source: Economic Times
D. DOWNLINKING SERVICES NOT LIABLE TO TAX IF NO PE EXISTS
In a ruling which is bound to provide significant relief to foreign satellite companies, the Delhi Bench of the Income-Tax Appellate Tribunal (ITAT) has held that there would be no tax liability for downlinking services of satellite companies based in countries that have a Double Taxation Avoidance Agreement (DTAA) with India . In view of this, the broadcasters would not be required to deduct tax at source on this account.
This decision was given by ITAT in the case of US-based PanAmSat International Systems Inc, which provides downlinking of channels in India for broadcasters like Doordarshan, BBC, Sony, Turner, ESPN, Ten Sports, CNN and Discovery Channel, etc.
The issue had been under litigation since 1997-98 when it involved a sum of Rs 300 million. “Over the last 10 years, PanAmSat had provided to the Government of India, bank guarantees for a significant amount.
The ITAT has held that fees for downlinking of television signals into India paid to Pan Am Sat, which is a tax resident of the US, would not be taxable in India, in the absence of its permanent establishment in India as per Article 7 of the Indo-US DTAA. These fees could not be taxed either as royalties or as fees for included services under Article 12 of the DTAA, the Tribunal noted.
However, this ruling had not been applied in the case of Asia Satellite Television Ltd, a tax resident of Hong Kong whose subscription fees were deemed to be taxable in India as royalties, as India does not have a DTAA with Hong Kong .
E. TDS PAYMENT NOT ALLOWABLE AS DEDUCTION IN THE ABSENCE OF CONTRACTUAL LIABILITY
The Income Tax Tribunal (ITAT) has rejected the claim of Marubeni India (a wholly-owned subsidiary of Marubeni Corporation, Japan ) to allow tax paid on behalf of the employees as deduction from its income.
The ITAT held that the tax paid so paid cannot be allowed as deduction since there is no contractual agreement in writing between Marubeni India and Marubeni Corporation, Japan for paying the taxes for the employees, on the salary they receive in Japan . These employees were on the rolls of Marubeni Japan . However, their services were utilized by Marubeni India , its Indian subsidiary. Marubeni India waited for two years before making the tax payment.
The ITAT held that the Japanese company should have deducted the tax in respect of salaries received by the employees outside India from the parent and paid to the Indian government. This was not done for the assessment period 1996-1998 and the Indian company paid the taxes later under an arrangement with the income tax authorities. The deduction was claimed for the assessment years 1997-98 and 1998-99.
The ITAT also clarified that there was no contractual liability on the part of Marubeni India to pay the tax and the taxes paid on the salary was not expended out of necessity or need to support the trade but for commercial expediency of the company’s business.
Source: Business Standard
F. TRAINING FEES PAID IN RESPECT OF KNOW-HOW TAXABLE IN INDIA AS KNOW-HOW NOT A "PROPERTY" FOR DTAA
In a significant order which is bound to have considerable impact, the Income-tax Appellate Tribunal - Mumbai Bench (ITAT) has held in the case of Hindalco Ltd. that the training fees paid to a US based company, which are integral to the import of know-how from that company, are taxable in India . It also made a very significant ruling that “Know-how” is not a “Property” for the purpose of Article 12 of Double Taxation Avoidance Treaty (DTAA) between India and USA .
Hindalco had not disputed the taxability of the fees for assistance provided by the US Company. However, it claimed exemption on another set of payments, a quarterly fee for training of Hindalco’s personnel. At the core of the dispute is Article (12) of DTAA. Article 12 (4) covers royalties and fees for “included services” which are taxable.
The facts of the case are as follows. Hindalco had entered into a technical assistance agreement with Reynolds ( Europe ), USA . Under the arrangement, the assessee had to pay $50,000 (net of taxes) each calendar year as fees for technical services and another $12,500 as basic fees for training of Hindalco’s personnel at the Reynold’s facilities abroad. For training at Hindalco’s premises in excess of 120 man days, training fees were fixed at $650 per person per day while for training at Reynold’s subsidiaries outside India, fees were payable at $200 per person per day.
Hindalco took a stand that training fees cannot be construed as fees for included services that are taxable. Instead, training fees are to be considered as integral and “inextricably and essentially linked” to the sale of know-how, and therefore of property, and hence are outside the tax purview in India .
The ITAT disagreed with this view and held that training fees in this context are not exempt from tax because ‘know-how’ cannot be treated as ‘property’ for the purposes of Article 12. Based on judicial precedents, including those by western courts, and the context in which Article 12(5) exists in tax treaties, ITAT held that the scope of ‘property’ under Article 12 is very limited and narrow.
The ITAT held that the provision under Article 12 of the Indo-US DTAA is meant to put the taxation of fees for a subsidiary transaction on a par with the taxation of the main transaction. According to ITAT, the meaning of the expression “sale of property” as used in Art 12(5) is limited in that the expression refers only to sale of property that would not give rise to compensation that could be construed as royalty. This is a landmark judgment as until now know-how was treated as ‘property’ for the purpose of Article 12(5) of the Indo-US treaty, and therefore exempt from income-tax in India .
The impact of this decision would not be limited to transactions between India and USA but also on similar transactions between India and other countries since other tax treaties also have identical provisions.
Source: Economic Times
G. ONUS OF PROVING THAT DEBT HAS BECOME BAD DOES NOT REST ON THE ASSESSEE
A special bench of the Income Tax Appellate Tribunal (ITAT) in Mumbai has ruled that the onus of proving that debt has become bad does not rest on the assessee. The bench, in its order has also clarified that tax deduction on such cases can be claimed in the year in which the amount is written off in the balance sheet.
The bench was set up following a number of conflicting rulings on the issue. Such disputes arise when taxpayers follow the mercantile method of accounting wherein the sales given on credit are also accounted for in the books.
As there were a few cases where deduction in respect of bad debts written off was denied by the assessing officers and since the Government received representations on this matter, the Government effected amendment in the Income Tax Act in the year 1989, to facilitate deduction in the year in which the bad debts were written off. If any bad debt which was written off in the books earlier was recovered subsequently, the same can be taxed under Section 41 of the Income Tax Act. However, even this amendment did not solve the problem since the assessing officers started asking taxpayers to prove that debt being written off was really bad. Their contention was that for categorizing any debt as bad, the assessee is required to prove that the same has become bad. This again led to a spate of litigations and finally the matter was referred to the Special Bench of the Tribunal in view of conflicting decisions.
The decision of the special bench has now put to rest all controversies by ruling that taxpayers need not establish that the debt has become bad.
Source: Economic Times
H. FOREIGN ENTITIES SUPPLYING "SHRINK WRAP" SOFTWARE FOR RESALE NOT LIABLE TO PAY TAX IN INDIA
The Income Tax Appellate Tribunal, Delhi Bench (ITAT) has held that foreign entities supplying “shrink wrap” software — standard software to an Indian company for resale purposes were not liable to pay tax in India. The decision by ITAT on a case filed by Lotus Development (Asia Pacific) would make it easier for MNCs to supply such software without having to pay tax here as royalty income on it.
The decision is based on an earlier case involving Samsung, which was decided by the Bangalore bench of the Tribunal as to whether software supplied to the Indian distributors for resale to end users was in the nature of royalty income and so taxable in India. The case was decided in favour of Samsung, but the income tax department has appealed against the order in the High Court and the matter is yet to be heard.
In the present case, the company contended that the supply of the software did not grant any license to duplicate the software to the distributors or to end users. Accordingly, there was no intellectual property right or copyright transfer in the arrangement. However, the revenue department said the computer software was only licensed to end users in India for use. The sum paid, therefore, did not comprise a sale and was, instead, a consideration for grant of a license to use the product. It therefore qualified as a royalty income liable to be taxed in India .
The term shrink-wrap refers to the practice of software manufacturers, including a written agreement printed either inside or on the outside of the box the software comes in. It stipulates that opening the box, i.e. removing the shrink-wrap or opening a separate shrink-wrapped set of disks was explicit acceptance of the agreement.
This decision on top of the earlier decision will bolster the contention of MNCs that sale of “shrink wrap” software does not involve grant of any license so as to come within the meaning of the term “royalty”.
Source: Economic Times
I. LONG TERM CAPITAL LOSSES CAN BE SET OFF AGAINST SHORT TERM CAPITAL GAINS (A.Y. 1988-89 TO 2002-03)
A special bench of the Income Tax Appellate Tribunal in Mumbai has ruled in a long pending income tax case that Foreign Institutional Investors (FIIs) could set off long-term capital losses against short-term capital gains. The ruling will have applicability to all cases until the Financial year ended on 31 st March 2002 (i.e., up to Assessment Year 2002-03), as the Income Tax Act was silent on whether the losses could be set off in such a manner. FIIs are set to benefit considerably by this decision since this would ensure that long-term capital losses are set off against short term capital gains which suffer a higher tax rate of 30%. It is pertinent to note that while short-term capital gains were taxable at a higher rate of 30%, long term gains were taxed at 10%. The Income Tax department argued that this was not permissible and that FIIs should have set off the losses only against long term gains. The net effect of this decision is that the tax department stands to lose 20% in revenues, which runs into several millions of rupees.
J. DETAILS OF EXPENSES NOT NECESSARY UNLESS ALLOWANCES ARE UNREASONABLE/DISPROPORTINATE
The Income-Tax Tribunal, Mumbai (ITAT) has held in the case of an employee with the Shipping Corporation of India that if a salaried employee spends his allowance during the course of his duty, the I-T department is bound to accept the contention of the tax payer that he had spent the allowance in full, even if the claim is not backed by the necessary evidence. The allowance thus claimed should appear reasonable and should be in proportion to the salary.
In this case, the employee with the Shipping Corporation of India had claimed exemption for uniform making allowance and uniform washing allowance amounting to Rs 51,554. The tax authorities declined to exempt the allowance from taxation on the ground that the evidence produced to prove that he had actually spent the amount, was insufficient. Section 10 (14) (I) of the Income-Tax Act provides for allowances for the purpose of meeting expenses incurred for official duties, but the exemption is available only to the extent to which such expenses are actually incurred. The assessing officer disallowed the exemption only on the ground that there were insufficient proofs that the tax payer has actually spent the allowance.
The ITAT order says that the tax authorities cannot insist on details of expenses actually incurred unless the specific allowances are disproportionately high compared to the salary received by him or is unreasonable with reference to the nature of duties performed by the taxpayer. The ITAT, in its order, had also quoted from CBDT circular dated April 1 1955 that “Special allowance or benefit being reasonable and not disproportionately high — No details of expenses actually incurred need be asked for the purpose of granting exemption under section 4 (3) of 1922 Act”, in support of its decision.
A.K. PURCHASE OF DESIGNS FROM ABROAD NOT TO ATTRACT WITHHOLDING TAX
The Income Tax Appellate Tribunal (ITAT), Mumbai has held that amount paid for purchase of designs from abroad from a party which does not have a Permanent Establishment (PE) in India , was not taxable in India and hence the question of deducting withholding tax does not arise.
The decision was taken by ITAT, Mumbai, on an appeal filed by Indian Hotels Company, the owners of Taj group of hotels, against the Income-tax department, which asked the hotel to pay TDS (tax deducted at source) for remitting $350,000 for a design it bought from the Singapore based Hirsh Bender Associates (HBA). The department saw the remittance as a royalty that is taxable. The design was sought for renovating the Taj hotel.
The Assessee argued that tax is not payable on such remittances because the payment on account of the purchase of the design and drawings do not amount to royalty. Royalty fees are recurring in nature, but in this case the purchase of the design was outright and remains the property of Indian Hotels. The Assessee further argued that the transaction did not amount to technical services too for which tax was payable in India because the whole transaction took place outside India . Transfer of the property, in this case the design and drawings, took place in Singapore . And hence this amount was not taxable in India .The Assessee pointed out that Hirsh Bender does not have a permanent establishment (PE) in India . Under the provisions of Double Taxation Avoidance Agreement (DTAA) between India and Singapore , the question of paying tax on such transactions arises only if Harsh Bender has a PE in India . Under the provisions of most DTAAs, tax is payable on payment of royalty or technical services and it is imperative to prove that the remittance do not amount to royalty or payment for technical services.
The ITAT did not accept the department’s contention that the remittance should be considered royalty because under the provisions of the agreement between Taj and Hirsh Bender, the designs and drawings are not to be used for any other purpose other than covered by the agreement between HBA and Taj. The ITAT held that Taj was not liable to deduct tax from the remittances to Hirsh Bender.
Source: Economic Times
L. CONSULTANCY SERVICES OF NON-TECHNICAL NATURE ARE NOT TAXABLE
The Income Tax Appellate Tribunal (ITAT) has held in the case of Mckinsey & Co. Inc. that consultancy services of non-technical nature will not be subject to tax in terms of India – USA Double Taxation Avoidance Agreement
Mckinsey & Co.Inc. ( Philippines ) (MCIP) did not have a Permanent Establishment (PE) in India . The Indian branch office of Mckinsey & Co. Inc. is engaged in the business of providing strategic consultancy services to its clients in India and it received certain geographical specific data and information inputs from MCIP for a consideration. MCIP argued that Article 12(4) of the India – USA Double Taxation Avoidance Agreement (DTAA) is not attracted since services are of a non-technical nature.
The Income Tax Appellate Tribunal (ITAT) held that geographical specific data and information inputs supplied by MCIP were in the nature of commercial and industrial information and such services are of non-technical nature. It therefore held that the consideration received for the supply of such information could not be treated as “fees for included services” under Article 12(4) of the DTAA.
ADIT V. Mckinsey & Co. Inc. ( Philippines ) (2006) 99 TTJ 857 (Mum)
M. SPECIFIC PROVISIONS OF DTAA TO OVERRIDE GENERAL PROVISIONS OF DTAA
The Income Tax Appellate Tribunal (ITAT) has held in Metchem Canada Inc. case that a specific provision in the Double Taxation Avoidance Agreement would override any general provision and accordingly allowed deduction of fairly allocated share of Head Office expenses from the income of its Permanent Establishment (PE) in India .
Metchem Canada Inc. (MCI), a company incorporated in Canada had a PE in India . MCI had allocated the proportionate share of overhead expenses incurred by the Head Office to its PE in India and claimed the same as deduction from the income of its PE in India . MCI contended that in view of the provisions of Article 24 of the Double Taxation Avoidance Agreement between Canada & India (DTAA), Section 44AC of the Income Tax Act (the Act) would have no applicability. The assessing Officer rejected the contention of MCI on the ground that as per the provisions of Article 7(4) of the DTAA, the profits of the PE have to be computed in accordance with and subject to the limitations of the taxation laws in India and hence limitations contained in Section 44AC would apply.
The ITAT held that Article 24 being a specific provision would override the provisions of Article 7 which are in the nature of general provisions. It also further held that whenever there is a conflict between the provisions of the Act and the DTAA, the provisions of the Act are applicable only to the extent the same are beneficial to the assessee and in all other cases, the provisions of the DTAA would prevail. Therefore, the ITAT held that MCI is to be allowed deduction of head office expenses as can be fairly allocated to the PE.
DCIT V. Metchem Canada Inc. (2006) 99 TTJ 702 (Mum)
WITHHOLDING TAX OBLIGATION OF TELECASTING COMPANY
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) in the case of Satellite Television Asian Region Ltd. Hong Kong (Star TV), has held in a landmark decision that Star TV making payment for purchase of advertisement air-time to its group companies engaged in telecasting of programmes, is obliged to withhold tax on such payments and the withholding tax obligation on the foreign company survives independent of the fact that the payer company and the payee company are both non-residents. It also further held that the incomes of the channel companies are taxable in India .
FACTS OF THE CASE:
Star TV, a non-resident company incorporated in Hong Kong , was carrying on the business of selling “Air Time” to various Indian advertisers through an advertising sales agent. It acquired the air time from various television channel companies like Star News, Star Plus, etc. that were its group Companies incorporated in Hong Kong. Star TV claimed a deduction of payments made to the channel companies against its taxable income. The claim was disallowed by the tax authorities since it had failed to withhold tax on the payments made to the channel companies.
CONTENTIONS OF RIVAL PARTIES:
Star TV appealed against the decision of revenue authorities and claimed that
the Income-tax Act does not contain any provision stipulating its applicability beyond India . On the contrary, it contended that the applicability of the Income Tax Act, 1961 is specifically restricted only to India . Support was drawn from previously decided cases by the Indian & UK Courts and commentaries on tax jurisprudence. It also argued that there could be situations where although income is chargeable to tax in India , in the absence of machinery to withhold tax, tax withholding cannot be prescribed from the payments and the chargeability of income to tax in the hands of the recipient and withholding of tax by the payer are independent of each other.
Star TV further argued that the chargeability of payments to tax in India in the hands of the recipient is a pre-condition / prerequisite for triggering the withholding tax provisions and the chargeability of the recipient cannot be decided in an assessment proceeding of the payer but only in the recipients’ own case after providing such recipient, full opportunity of being heard. It is not proper to expect a payer to prove / establish whether or not the recipient is chargeable to tax in India . Thus, Star TV contended that the chargeability needs to be first determined in the hands of the channel companies without which the provisional nature of the withholding tax proceedings cannot be completed and a disallowance cannot be made in the hands of the payer.
On the question of taxability of income of channel companies, Star TV contended that all the activities of the channel companies were carried on outside India and none in India . The content for the channels was procured by the channel companies from a central content procurement company outside India . The channel companies do not enter into any contract with Indian Content Providers or with any Indian party for the sale of Ad Airtime in India . The channels were up-linked outside India and then down linked in India by the cable operators on their own account. The entire Ad Airtime on the channels was sold by the channel companies to the Company and the sale was made outside India on a principal to principal basis. The channel companies were incorporated outside India and they did not have any office or agent or subsidiary in India . They did not have their men or material or machinery or combination thereof used in India . The business strategy, marketing and all other operational features are determined by Star TV. Star TV also claimed that the channel companies did neither have any business connection in India nor did they carry out any operations in India and further it was not an agent of the channel companies.
The revenue authorities argued that the Income-tax Act, 1961 (the Act) applies to the whole of India and if any entity whether resident or non resident, by virtue of its residence, or having a source of income, falls into the tax net, then all the provisions of the Act are applicable. They also contended that while the withholding tax provisions do not extend the Act to territories outside India , if any foreign entity has income chargeable to tax in India , it is bound by all the provisions of the Indian Income-tax law and such an entity has to follow the domestic taxation laws of India . The withholding tax provisions do not make any distinction between payments within India and payments outside India and the situs of payment or the source of payment is not relevant and further the withholding tax provisions provide for a mechanism whereby an application can be made to the tax authorities to decide the rate at which tax is to be deducted or whether no tax withholding is required.
The revenue authorities also pointed out that the statute casts an onus on the payer to accord a satisfaction regarding the chargeability of the payments for withholding of tax or obtaining of appropriate direction for NIL withholding or withholding at a lower rate. Further, separate consequences are prescribed on the payer for non-compliance with the withholding tax provisions. They also emphasized that the opportunity to be provided to the payer is limited to the chargeability of the payments to tax in India and the law does not provide that the payee should also be given an opportunity while doing the assessment of the payer.
On the question of taxability of the income of channel companies, the revenue authorities contended that the nature of telecasting activities carried on by the channel companies and the functional relationship amongst the channel companies, the assessee and other associate concerns showed that the channel companies had a business connection with India . Their business operations were being carried out in India and the relationship between the channel companies and the assessee were not of a principal to principal.
DECISION OF TRIBUNAL:
ITAT observed that the sovereign jurisdiction of a country is confined to its own territorial boundaries as expounded by the principle embedded in “the doctrine of territorial nexus” and the writ of a state is ultimately to be executed by the strength of the force available at its command. It pointed out that the substantial provisions of chargeability and the machinery provisions of deductibility are inseparable pillars of a tax code and if the collection machinery cannot be initiated in a case even after chargeability is established, the substantial provisions of law governing the chargeability themselves become redundant. ITAT held that even if a tax demand raised by income-tax authorities in India against a foreign party in foreign soil cannot be executed in the absence of machinery, it is not a defense to plead exoneration from withholding tax provisions and withholding of tax at source is one of the modes of collection / recovery of the tax. The provision for recovery of tax directly from the recipient is only an alternate mode of collection of tax and does not exonerate a non-resident payer from its withholding tax obligations and further, the withholding tax provisions do not differ depending on the residential status of the payer. ITAT further held that even if the payment is made to a non resident whether in India or outside or in any manner, the payer is liable for deducting tax at source. The governing force of the withholding tax law is not the payment, but payment of income chargeable to tax. The situs of the payment or the source of the payment is not relevant and the law provides for a taxpayer to approach the tax authorities to decide the rate at which tax is to be withheld or for that matter whether tax is to be withheld or not. A failure of the taxpayer to exercise this option fastens such taxpayer with an obligation to withhold tax and the payer is bound to comply with the withholding tax provisions and in the absence of such compliance, it shall invite the consequences specified in the statute.
As regards taxability of income if the channel companies, ITAT held that The business of the channel companies was that of telecasting through different brand channels using the medium of satellite and transponders, along with the supporting network provided by the cable operators, these could not be divided and segregated into transferable modules from channel companies to the Company and then to other selling agents and these have to be carried out simultaneously. It observed that advertisement Airtime was the telecasting time utilized for commercial purposes and it was not something like an ordinary commodity, merchandise, property or asset and could not be a subject matter of “outright sale”. Airtime was borne and exhausted instantaneously, moment after moment and could not be delivered in advance. Therefore, it was not possible for Channel companies to make any “outright sale” of Airtime to the Company outside India . ITAT pointed out the agreements between the Company and the channel companies provide only a permissive right to the assessee to use and exhaust the Airtime within Indian territory . Though, there could be other countries other than India coming under the footprint of the satellite telecast, this was not a reason to hold that the activities of telecasting were not done in India . ITAT also observed that the channel companies had maintained their commercial and financial interest in the activities carried on by the Company. The revenue collected by the Company was shared with the channel companies and the channel companies monitored all the business and operational aspects of the Company relating to viewership, marketing and other strategic aspects of the Airtime business. The flow of the telecasting began with the up-linking done by the channel companies outside India and terminated with downlinking done by the cable operators in India and ultimately reaching to the screens of the viewers at large.
In view of the foregoing, ITAT held that there was a direct connection between the channel companies and the cable operators that was involved in the actual operation of the process of telecasting and this resulted in establishing a business connection with India . It pointed out that the ultimate delivery of programmes was made by the channel companies in India through the medium of its agent and the cable operators and therefore, the channel companies had a continuous business relation supported by a continuous business operation in India that was a source of revenue for them. ITAT finally observed that even though for the purpose of engineering and technology, the telecasting was transmitted through the satellites situated in the high sky, Indian space was a definite place of business. The business connection, business activity, place of business and every such ingredient of a taxable relation between non-residents and India were to be inferred from the nature of the business operations carried on by the concerned parties.
Based on these observations, ITAT concluded that the incomes of the channel companies were taxable in India .
O. ACTUAL PAYMENT OF INCOME TAX IN A COUNTRY NOT A PRE-REQUISITE FOR CLAIMING DTAA BENEFITS
In a recent decision, a Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the actual tax payment in a country was not necessary for a taxpayer to claim the benefits under a Double Tax Avoidance Agreement (DTAA)
Facts of the case:
The taxpayer was a shipping line based in the United Arab Emirates (UAE) and it claimed in its tax return that its income from shipping operations is taxable only in UAE in terms of Article 8 of the DTAA between India and UAE.
The Assessing Officer (AO) rejected the taxpayer’s claim on the ground that as the taxpayer was not paying income tax in UAE, it was not eligible to the relief under the DTAA. The AO relied on the decision of Authority for Advance Ruling (‘ AAR ’) in the case of Cyriel Eugene Pereria inre  239 ITR 650 in support of his conclusion.
The Commissioner of Income-tax Appeals (CIT-A) set aside the order of the AO. The CIT-A held that as the taxpayer had produced a tax residency certificate issued by the Ministry of Finance and Industry in the UAE, the taxpayer was entitled to relief under the DTAA.
The Tribunal upheld the order of CIT-A based on the following reasoning:
As the Supreme Court has held in the case of Azadi Bachao Andolan v. U.O.I.  263 ITR 706, rulings of the AAR are not binding on the persons other than the applicant and since it is a well settled proposition that decisions of the Supreme Court are binding on the Courts below and on the tax authorities, the reliance placed by the AO on the ruling of the AAR in Cyriel Eugene Pereria (supra) was misplaced.
As the Supreme Court had in Azadi Bachao Andolan’s case (supra) rejected the contention that avoidance of double taxation arises only when a taxpayer pays income-tax in one of the treaty countries, the contention of the AO that the taxpayer was not entitled to treaty benefits as it did not pay tax in UAE was without merit.
The reliance by the tax authorities on the subsequent ruling of the AAR in the case of Abdul Razak A. Menon in re  276 ITR 306 was also not acceptable as rulings of the AAR have no precedence value in general and that the ruling by itself was not sufficient to decide the issue one way or the other.
ITAT also observed that DTAA not only prevents ‘current’ but also ‘potential’ double taxation and irrespective of whether UAE actually levies income-tax on corporate entities, once the right to tax UAE resident’s vests only with the
UAE Government, that right, whether exercised or not, continues to remain an exclusive right of the UAE Government.
ITAT concluded that to allow treaty benefits, all that is necessary to be seen is that the claimant of treaty benefits should be ‘liable to tax’ in the contracting state by reason of domicile, residence, place of management, place of incorporation or any other criterion of a similar nature which essentially referred to the fiscal domicile of such a person.
The High Court had earlier
held that the directors of the company would be personally liable
for payment of wages to the workers of the company under the Payment
of Wages Act. It had also held that the authorities could proceed
against the assets of the company in the hands of the directors
or the assets acquired by the directors from the income of the company
but the personal property of the directors could not be proceeded
against if it was acquired from sources other than the income of
The brief facts of the
case are as under :
The company had sought permission under the Industrial Disputes
Act from the Madhya Pradesh Government for closure of mills but
the same was rejected in 1991. Trade unions and the workers of the
closed mills continued litigations in the labour court. In 1993,
the company was declared sick by the Board for Industrial and Financial
Reconstruction. The Inspector of wages filed cases against the factory
manager and eight directors for non payment of wages to workers.
The authorities as well as the High Court rejected the contention
of the directors that they were not personally responsible for non
payment of wages and that only the factory manager was responsible.
P. ENHANCEMENT OF TAX LIABILITY BY ITAT
The Income Tax Appellate Tribunal (ITAT) has taken an unusual and extraordinary stand of enhancing the tax liability in the case of Sakura Bank (bank) by applying a higher income-tax rate based on subsequent retrospective amendment to the Income Tax Act.
FACTS OF THE CASE:
There was a Double Taxation Avoidance Agreement (DTAA) between India and Japan which has provisions against discrimination. The case was in relation to the assessment in the year 1992-93. The assessing officer first taxed it at a higher rate applicable to foreign companies, but the Commissioner of Income Tax –Appeals (CIT) referred the case back to the assessing officer for revision in favour of the assessee. Thereafter, the assessing officer and the CIT took a stand in favour of the bank, taxing it at the rate domestic companies are taxed. The CIT also allowed the company’s plea that it be considered as a widely held company where, the rate of tax is less than the tax leviable on closely held companies. Incidentally, the rate of tax applicable to domestic companies during the relevant period was 45% and it was 60% for foreign companies. The appeal against the CIT’s order was filed by the department. In this case, the issue was whether the bank should be taxed at the rate of tax applicable to the Indian companies or at the higher rate of tax applicable to foreign companies.
DECISION OF ITAT:
The ITAT held in this landmark judgment that the powers of ITAT are not confined to deal with the issues arising out of the orders of the authorities below, who are the Commissioner (Appeal) and the assessing officer. As long as, an issue has relevance regarding the accurate determination of taxes payable, in respect of the year, and particularly when relevant facts can be found from the material already on record, it is open to the parties concerned to raise that issue. The Tribunal also pointed out that there has been cases in the past where the Tribunal enhanced the income of the assessee resulting in more tax liability than the liability that would have arisen if the taxpayer had opted to accept the original tax demand.
The interesting fact about the ITAT decision was that it took into account a material that was not part of the earlier decisions by AO or the CIT (Appeal). This additional material is the Finance Act 2001, which amended section 90 of the I-T Act, which allows taxation of a foreign company at a higher rate, despite the provisions in DTAA against discrimination. This amendment was part of the Finance Act 2001, and with retrospective effect. Since the amendment with retrospective effect was enacted after the matter was decided by the AO and CIT, the ITAT decided to take into account this amendment, though such a practice was against the convention of not entertaining new grounds.
This judgment of ITAT has raised a few contentious issues regarding admissibility of new materials which did not exist at the time when the decisions were given by the lower revenue authorities and it will be interesting to see the outcome if this matter is taken up before the High Court.
Q. LIAISON OFFICE OF WESTERN UNION NOT A PE & HENCE NOT LIABLE TO TAX
The Mumbai bench of ITAT has held that money transferor Western Union was not liable to pay tax, though they have a liaison office in India .
The Income Tax department argued that factors like having a liaison office and several agents in India , including the Post & Telegraph department and several banks, and supplying software to its agents were enough to consider that Western Union has a Permanent Establishment (PE) in India.
Western Union argued that the liaison office does not carry out any significant business activity. Western Union contended that having independent agents, through which it transfers money to the recipient, or having software for facilitating such transfer of money, do not amount to having a permanent establishment. It further argued that transactions between Western Union and its agents in India are at ‘arms length’, and the activities of Indian agents like the P&T departments are not wholly devoted to Western Union . They have their own independent business and, at best, their services to Western Union constitute only a minor part of their activity. Further, it also contended that the liaison office could not be construed as a PE as no significant business activity is carried out through the office and it is manned by two junior employees. As there is no fixed place of business, it cannot be held that Western Union has a PE in India .
ITAT, after considering all the submissions, held that the liaison office of Western Union cannot be construed as its PE and hence it is not liable to pay tax. This decision is bound to have a far reaching impact and it is expected that the Income Tax Department would appeal against this order by taking up the matter before the higher judicial authority.