RULE OF RESIDENCE
Resident status for Individual means:
a)In case of citizen of India who leaves India for employment outside India or as member of crew of Indian ship if he is in India for 182 days or more during previous year
b)In case of citizen of India who being outside India comes on visit to India if he is in India for 182 days or more during previous year
c)In any other case , if he is India for 182 days or more or is In India for 60 days or more in current PY and for 365 days or more in preceding 4 PYs
Non resident means a person who is not resident
Resident not ordinarily resident means a person who is not resident in India in 9 out of 10 preceding PY or is in India for 729 days or less during immediately 7 preceding PY.
Residence Status in case of foreign company
-Under Income Tax Act, a foreign company is resident in India if control and management of affairs is wholly in India
-However under DTC, a foreign company is resident in India if POEM (place of effective management) is in India during any part of the year. POEM is defined under s. 314(192) of DTC as place where BOD or ED makes decisions or where BOD routinely approves commercial and strategic decisions of ED.
Hence foreign company having dinner at Taj to decide about new subsidiary shall make it resident in India.
A relative concept is CFC i.e. controlled foreign company i.e. company in which more than 50% shares are held by resident in India . Even if such company shies from declaring dividend, its undistributed profits are proportionately considered to calculate total income of resident in India
SCOPE OF TOTAL INCOME
In case of Resident TI constitutes:
-Income received or deemed to be received in India
-Income accruing or arising or deemed to accrue or arise in India
-Income accruing or arising outside India
In case of Non resident TI constitutes:
-Income received or deemed to be received in India
-Income accruing or arising or deemed to accrue or arise in India
In case of RNOR
-Income received or deemed to be received in India
-Income accruing or arising or deemed to accrue or arise in India
-Income accruing or arising outside India if it is from business controlled in India or profession set up in India
Income deemed to accrue or arise in India and TDS
As per s. 9(1)(i) , Income accruing or arising directly or indirectly through or from
-Business connection in India or
-Property in India or
-Asset or source of Income in India or
-Transfer of capital asset in India is deemed to accrue or arise in India.
As per S. 195,
• Any person responsible for paying to
• Non-resident/foreign company
• Any interest/any other sum chargeable under the Act
• At the time of payment or credit, whichever is earlier
• Deduct tax at the rate in force
Now if a non resident is having income from assets or source of Income in India, he shall be taxable in respect of such income both in India as well as country outside India and tax deductible u/s 195 by the payer of such income .To avoid such double taxation DTAA are framed
DOUBLE TAXATION AVOIDANCE AGREEMENTS
DTAA=ADTA=TAX TREATY
Agreements under DTAA are following types:
-Comprehensive Agreements: 82 agreements
-Limited Agreements: 8 e.g. covering Aircrafts operations only
-Limited Multilateral agreements: 7 agreements with SAARC countries
-Other Agreements: 3
-Tax Information Exchange Agreements (TIEA): 5 such agreements
-Specified Association Agreements: 1(Taipei)
Two Models of DTAA
OECD Model : Advocates residence based taxation . generally adopted by developed countries
UN Model: Advocates source based taxation and generally adopted by developing countries
DTAA provides relief in two ways:
Exemption method
Tax credit method
Specified Associations agreements are entered between two entities u/s 90(1)(a)(ii) and adopted by Central Govt under s. 90A
-DTAA is entered with countries outside India
-DTAA is also entered with some non sovereign territories outside India which are not countries but independent territories having independent rules but protection is provided by other country e.g. Hong Kong having ruler but protected by China.
-Agreements are entered with countries for information exchange to check tax evasion as well as for recovery of evaded tax
DTAA with Switzerland helped India in asking for information regarding black money stashed away in Swiss Banks
-If certain terms are used in DTAA and not defined in DTAA or ITA, as per 90(3) CG can define such terms but it is not possible. Because mutual agreement is required
-In case of conflict between Income tax Act and DTAA, the provisions beneficial to assessee shall apply as per 90(2)
S. 195 vs. 90(2) vs. 206AA
U/s 206AA, if a person is entitled to receive any sum or income or amount on which tax is deductible fails to furnish PAN, TDS at higher of
-Rates in Income Tax Act
-Rates in Force as per FA
-20%
Now if foreign company doesn’t have PAN gets income where FA rate is 30%, DTAA 10%.
U/s 90(2), In case of conflict between Income tax Act and DTAA, the provisions beneficial to assessee shall apply. Hence income taxable @10%
Now whether TDS u/s 206AA at DTAA rate of 10% or 20%
One school of thought International agreements prevail over domestic laws, hence TDS @ 10% only
Other School of Thought
S.206AA starts with “Notwithstanding anything contained in this Act”
DTAAs itself are framed u/s 90(1) of IT Act
Hence 206AA shall prevail over DTAA
TAXATION OF IMMOVABLE PROPERTY of Non resident Article 6 of DTAAA
As per Article 6 of DTAA, Income from immovable property to be taxed where property is situated
Same provision under section 9(1)(i) which says that income accruing or arising from property in India is deemed to accrue or arise in India.
Hence if property is in India and owner is non resident. Tenant is also non resident and stays in property in India for few days and pays rent outside India, rental income shall be taxable in India and TDS u/s 195 to be deducted
Capital Gain on Immovable property of Non resident sold in India Article 13 of DTAA
-As per Article 13 of DTAA, capital gain chargeable where property is situated
-Also as per S. 9(1)(i), income accruing or arising from transfer of capital assets in India shall be deemed to accrue or arise in India.
-As per s. 163, buyer shall be treated as agent of non resident because as per s. 163(1)© agent of non resident includes person through or from whom non resident is in receipt of income directly or indirectly.
-TDS u/s 195 on full value of consideration because s. 195 talks about any sum chargeable to tax in India. Moreover it is not possible for buyer to work out gain of seller.
-If buyer wants to deduct TDS on capital gains part, he shall have to apply u/s 195(2) to AO
-If seller i.e. Non resident wants to apply for lower TDS he shall apply in Form 15C/15D under R. 29B
-This transaction although not unlike other transactions exigible to TDS like, works contract, brokerage, professional or technical fee shall get covered u/s 195 because u/s 195 any sum chargeable to tax in India.
Capital Gain on Immovable property of Resident sold outside India
Say property in London is sold
Resident taxable for income accruing or arising outside India also under s.5
Tax as per domestic laws of UK also
DTAA shall apply and income shall be exempted in India under article 13 of DTAA
Capital Gain on Movable Property in India
To be taxed where PE is situated
If no PE, then residence based taxation to be retorted
For shares, DTAA says sale shall be taxable where sit us of shares that is issuing company is situated.
However in Tax heavens like Mauritius, Cayman Islands, Singapore there is no tax on sale of shares. Also confirmed in E- Trade Mauritius Ltd case (2010) (324 ITR 1)
This opportunity in tax heavens gave rise to Vodafone International case
VODAFONE INTERNATIONAL CASE
-Hutch Group formed and invested in India in HEL (Hutchison Essar Ltd.) in 1992 and thus invested in telecomm sector in India.
-On 12-01-1998, Hutch Group Co. HTIL (Hutchison Telecommunication International Ltd.) formed CGP -Investments Ltd. In Cayman Islands and acquired 100% shares in CGP Investments Ltd.
-HTIL was also incorporated in Cayman Islands.
-CGP acquired 52% shares in HEL and had option to purchase another 15% shares in HEL
-HTIL sold entire shareholding of CGP Investments Ltd. To Vodaphone International Holdings (VIH)
-Thus VIH through CGP acquired 67% holding in HEL
-Sale of shares in CGP by HTIL to VIH is non taxable in Cayman Islands.
-Revenue authorities made a case:
True intention of sale of shares in CGP is to transfer controlling interest in HEL and there by rights and entitlements of HEL like customer base, non compete rights, options etc.
Hence there is transfer of capital asset in India
S. 9(1)(i) gets attracted
TDS u/s 195 leviable on consideration paid to HTIL
High Court confirmed the view of revenue authorities
Held by Supreme Court:
-HEL and CGP are two distinct entities Holding- subsidiary relation to be honored and corporate veil can not be lifted.
-Department should prove tax abuse to justify lifting of corporate veil
-Section 9(1)(i) is not look through provision i.e. indirect transfers of capital assets in India are not covered. High Court ought to have applied look at approach taking holistic view of transaction. Because entire maze of holding subsidiary has been transferred through this transactions. No bifurcation of consideration in terms of factors like customer base, non compete rights, options etc. has been made.
-S. 163 (1) may result in treating a person as agent of non resident on the grounds that from him or through him non resident is in receipt of income. But this can not lead to collection of tax from him.
Tax Planning vs. Tax Avoidance
Vodafone case is also now a land mark judgment for advocates of tax planning
Other prominent cases which got confirmed by this judgment
Westminister’s Law (Old case)
Craven vs. White (1988)
Mc Niven (2001)
Azadi Bachao Andolan (2003): Mc dowell case is not exception but exception to settled principles of law.
Porrits and Spencer (P&H): Mc dowell case got explained by larger bench of SC in Azadi Bachao
E-Trade Mauritius Ltd.
Under DTC s. 123 GAAR is going to be introduced where revenue has power to hold any transaction as Impressible Avoidance Arrangement.(IAA)
GAAR can even prevail over DTAA under DTC
Capital Gain on Securities in Indian Company purchased in Foreign Currency by Non resident (Where transfer of shares not taking place in Tax Heavens)
-U/s 10(38) if equity shares of company or units of Equity oriented Mutual Fund are transferred and STT has been paid on transaction, LTCG is exempt If transaction not covered above
-First Proviso to s. 48 shall apply i.e. conversion of sale and purchase price in foreign currency used for purchasing shares and cap gain there on by re-conversion in Indian currency. No indexation allowed under second proviso of section 48.
-then under S. 112,
on unlisted shares tax @ 20% and for listed shares, units, ZCBs tax @10% shall be charged. If STCG, then tax @ 15% under s. 111A.
-no deduction under CH. VI-A
-Slab exemption of Rs. 180000 not available.
U/s 115AB, where OFO entered agreement with PS bank, PFI, MF for purchasing units in MF in foreign currency, then 10% LTCG on sale of units. Conditions and Relaxations
-First Proviso to s. 48 shall not apply
-2nd proviso also not to apply i.e. no benefit of indexation
-Chapter VI-A deduction not available
-Chapter VI on set of and carry forward of losses applicable
-No exemption to file return of Income even of tax deducted fully and no other income
-Slab exemption of Rs.180000 is not available
U/s 115AC ADR/GDRs acquired in foreign currency by NR/FC are transferred in India LTCG @10%. Conditions and relaxations referred in 115AB shall apply in same manner
However in above case i.e. if ADR/GDR acquired by non resident are transferred outside India to another non resident, transaction is exempt u/s 47(viia).
U/s 115AD, if securities of FII are transferred then LTCG @ 10% (If STCG then tax @ 30%). Conditions and relaxations referred in 115AB shall apply in same manner
Under Chapter XII-A, LTCG on foreign exchange asset (i.e. shares, debentures, central govt. securities in convertible foreign exchange)of non resident Indian (NRI)(i.e. citizen of India or person of Indian origin who is non resident) taxable @ 10%. Conditions and relaxations referred in 115AB shall apply in same manner except that ;
filing of ROI is exempt if no other income and TDS deducted
Exemption from LTCG if reinvestment in another foreign exchange asset with in 6 months from date of transfer to be retained for 3 years from date of Acquisition.
Interest Income of Non Resident from foreign currency Loan Art 11 of DTAA
-As per Art 11 of DTAA, Interest is taxable in country of source
-As per section 9(1)(v), interest payable by Govt or resident or Non resident for use of B/P in India is deemed to accrue or arise in India.
Hence in both cases source rule to be applied.
U/s 115A, NR/FC giving loan to Govt or Indian Concern in foreign currency, tax @ 20 % on interest and normal tax on balance income (i.e. 40% +3% cess (S/C @2% if Income> Icr) Conditions and Relaxations
No deduction u/s 28 to 44C
No deduction under Chapter VI-A
Losses under Chapter VI can be set off
Slab exemption of Rs. 180000 not available
Exemption from ROI if no other Income and TDS deducted.
Special provisions of Chapter XII-A applicable to NRI are same as general provisions under S. 115A in respect of Interest except that where non resident Indian becomes resident in subsequent year he can give declaration that provision of CH. XII-A shall continue to apply in respect of investment income
U/s 115AC, interest income of NR/FC from FCCB/FCEB in foreign currency invested in Indian Company or PSU (e.g. 100000 12% debentures of IOC disinvested), then 10% tax. Same Conditions and relaxation as under 115A to apply.
U/s 115AD, Interest Income from securities in FII taxable @ 10%. Same conditions and relaxations except that no exemption from ROI
Since 115A, 115AC,115AD, Chapter-A provisions are similar, specific provisions of 115AC, 115AD shall prevail over general provisions of 115A and hence department can not enforce tax @20% instead of 10% rate in 115AC, 115AD.
Royalty and Fee for Technical Services DTAA Art 12
As per Art 12,
if PE exists, then tax where PE is situated
If PE doesn’t exist, source rule to be applied
As per S. 9(1)(vi)/(vii), royalty or FTS payable by :
-Govt or
-Resident for use in B/P in India
-Non resident for use in B/P in India shall be deemed to accrue or arise in India
Historical Background
The above provisions i.e. 9(1)(v)/(vi)/(vii) were brought by Finance Act 1976 wef 1-6-76.
In 2007 SC in Ishikawajima-Harima Indus. Ltd. (2007) 288 ITR 408 held:
Income from services not rendered in India even if used for B/P in India, no income can be deemed to accrue or arise in India i.e. territorial nexus is required between rendering of service and utilization
In Finance Act 2007, Explanation to S.9 inserted retrospectively w.e.f 1-6-76, to the effect that income under 9(1)(v)/(vi)/(vii) shall be deemed to accrue or arise in India notwithstanding that non resident has no residence or business or business connection in India.
However Karnataka High Court held in Jindal Thermal Power Company that amendment made by FA 2007 does not affect Ishikawajima- Harima
Thereafter Finance Act 2010 reinserted explanation to S.9 w.e.f 1-6-76 to the effect that income under 9(1)(v)/(vi)/(vii) shall be deemed to accrue or arise in India whether or not that non resident has no residence or business or business connection in India and whether or not non resident has rendered services in India
However Ishikawajima-Harima has not lost relevance. It is still applicable to incomes other than 9(1)(v)/(vi)/(vii). E.g. Commission Income of non resident for services rendered outside India and paid outside India can not be deemed to accrue or arise in India where there is no PE in India
Taxation of Royalty and FTS (where PE not in India) s. 115A
Where NR/FC enters into agreement with
-Govt or
-India Concern and agreement is approved by govt or where agreement is as per Industrial policy, then automatic approval is assumed
Where royalty/FTS is from agreement entered
Between 1-6-76 to 31-5-97 tax @ 30%
Between 1-6-97 to 31-5-2005 tax @ 20%
After 31-5-2005 tax @ 10%
Conditions and relaxations
No deduction u/s 28 to 44C (incl unabsorbed depreciation) and %&
Deduction under Chapter VI-A is available. In case of royalty /FTS this is exception to general rule of foreign taxation of not allowing deduction under CH VI-A
Chapter VI deduction for losses are available
No exemption for filing return of Income even if no other Income or TDS deducted fully. (perhaps because royalty and FTS constitutes substantial income of NR/FC which govt does not want to go unscrutinised.)
Historical Background of 44DA
s. 44DA came into existence by Finance Act 2003 w.e.f. 01-04-2004
Before s. 44DA , s. 44D was there which reiterated provisions of s. 115A saying that notwithstanding anything contained in 28 to 44C no deduction of any expenditure shall be allowed against royalty and FTS in respect of agreements after 01-06-1976.
Now NR/FC having PE had to pay tax @ 10% even if they incurred huge establishment expenses in initial years.
On the other hand Art 12 of DTAA provided for taxation of royalty and FTS as per Art 7 of DTAA
Art 7 Para 3 permitted deduction of expenses incurred for PE according to domestic law
Held in various following judgments that 44D can not be ignored for purposes of DTAA :
Pipeline Engg 28 SOT 121
Steel Authority 105 ITD 679
Erricsson Telephone 224 ITR 203
AAR Ruling 228 ITR 487
Hence s. 44DA brought to book by FA 2003 w.e.f. 1-4-2004. Circular 7 of 2003 said:
“With a view to harmonize the provisions relating to income from royalty and FTS attributable to PE in India with similar provisions in DTAA, act inserted new s.44DA”
As per SC ruling in Gold Coin Health Food 304 ITR 308 and Allied Motors in 224 ITR 677, clarificatory provisions are to be applied retrospectively.
But held in Pipeline Engg,Steel Authority, Erricsson Telephone that s.44DA not applicable retrospectively because it is substantive in application and is applicable to agreements entered after 31-03-2003.
s. 44DA
NR/FC having royalty /FTS income from govt or Indian concern according to agreement after 31-03-2003
And having PE in India for B/P (including fixed place from where business is carried on wholly or partly) e.g. 5 rooms in Taj taken by technicians
And royalty /FTS is effectively connected to PE in India only
PGBP provisions to apply. Tax rate for foreign Co.40% + 3% cess (2% S/C if TI> 1 cr.)
Deduction for exp of PE only
No deduction for HO/other office expense except reimbursement for actual expense incurred by HO/other office on behalf of PE in India
Books to be maintained u/s 44AA
Audit report in Form 3CE. No penalty prescribed under 271(1)(b)
s. 44DA vs. 44BB
44DA applies to royalty & FTS and royalty includes rental income from plant also.
44BB applies to Hire Income from oil machinery used for oil extraction
Where income received for seismic survey and data acquisition services in oil exploration (in nature of FTS) it was held by AAR in Geofizyka Torun and SeaBird Exploration that since 44BB is more specific it shall prevail over 44DA.
Hence amendment by Finance Act 2010 w.e.f. AY 2011-12 that 44BB shall not apply to income in nature of royalty and FTS.
Samsung Electronics (Karnataka High Court)
Held by HC that packaged software results in royalty because it involves granting of license to copy the software . This view upheld even for distributors reselling software. Hence TDS u/s 195 deductible.
Confirmed by Sunray Computers
Contrary view in Erricsson AB 16taxmann.com 37
Already held in Motorola case that distinction should be made between copyright and copyright article 95 ITD 269
Held by SC in Tata Consultacy Service that canned software is goods 2004 271 ITR 40
SLP against Samsung Electronics is pending.
Resident status for Individual means:
a)In case of citizen of India who leaves India for employment outside India or as member of crew of Indian ship if he is in India for 182 days or more during previous year
b)In case of citizen of India who being outside India comes on visit to India if he is in India for 182 days or more during previous year
c)In any other case , if he is India for 182 days or more or is In India for 60 days or more in current PY and for 365 days or more in preceding 4 PYs
Non resident means a person who is not resident
Resident not ordinarily resident means a person who is not resident in India in 9 out of 10 preceding PY or is in India for 729 days or less during immediately 7 preceding PY.
Residence Status in case of foreign company
-Under Income Tax Act, a foreign company is resident in India if control and management of affairs is wholly in India
-However under DTC, a foreign company is resident in India if POEM (place of effective management) is in India during any part of the year. POEM is defined under s. 314(192) of DTC as place where BOD or ED makes decisions or where BOD routinely approves commercial and strategic decisions of ED.
Hence foreign company having dinner at Taj to decide about new subsidiary shall make it resident in India.
A relative concept is CFC i.e. controlled foreign company i.e. company in which more than 50% shares are held by resident in India . Even if such company shies from declaring dividend, its undistributed profits are proportionately considered to calculate total income of resident in India
SCOPE OF TOTAL INCOME
In case of Resident TI constitutes:
-Income received or deemed to be received in India
-Income accruing or arising or deemed to accrue or arise in India
-Income accruing or arising outside India
In case of Non resident TI constitutes:
-Income received or deemed to be received in India
-Income accruing or arising or deemed to accrue or arise in India
In case of RNOR
-Income received or deemed to be received in India
-Income accruing or arising or deemed to accrue or arise in India
-Income accruing or arising outside India if it is from business controlled in India or profession set up in India
Income deemed to accrue or arise in India and TDS
As per s. 9(1)(i) , Income accruing or arising directly or indirectly through or from
-Business connection in India or
-Property in India or
-Asset or source of Income in India or
-Transfer of capital asset in India is deemed to accrue or arise in India.
As per S. 195,
• Any person responsible for paying to
• Non-resident/foreign company
• Any interest/any other sum chargeable under the Act
• At the time of payment or credit, whichever is earlier
• Deduct tax at the rate in force
Now if a non resident is having income from assets or source of Income in India, he shall be taxable in respect of such income both in India as well as country outside India and tax deductible u/s 195 by the payer of such income .To avoid such double taxation DTAA are framed
DOUBLE TAXATION AVOIDANCE AGREEMENTS
DTAA=ADTA=TAX TREATY
Agreements under DTAA are following types:
-Comprehensive Agreements: 82 agreements
-Limited Agreements: 8 e.g. covering Aircrafts operations only
-Limited Multilateral agreements: 7 agreements with SAARC countries
-Other Agreements: 3
-Tax Information Exchange Agreements (TIEA): 5 such agreements
-Specified Association Agreements: 1(Taipei)
Two Models of DTAA
OECD Model : Advocates residence based taxation . generally adopted by developed countries
UN Model: Advocates source based taxation and generally adopted by developing countries
DTAA provides relief in two ways:
Exemption method
Tax credit method
Specified Associations agreements are entered between two entities u/s 90(1)(a)(ii) and adopted by Central Govt under s. 90A
-DTAA is entered with countries outside India
-DTAA is also entered with some non sovereign territories outside India which are not countries but independent territories having independent rules but protection is provided by other country e.g. Hong Kong having ruler but protected by China.
-Agreements are entered with countries for information exchange to check tax evasion as well as for recovery of evaded tax
DTAA with Switzerland helped India in asking for information regarding black money stashed away in Swiss Banks
-If certain terms are used in DTAA and not defined in DTAA or ITA, as per 90(3) CG can define such terms but it is not possible. Because mutual agreement is required
-In case of conflict between Income tax Act and DTAA, the provisions beneficial to assessee shall apply as per 90(2)
S. 195 vs. 90(2) vs. 206AA
U/s 206AA, if a person is entitled to receive any sum or income or amount on which tax is deductible fails to furnish PAN, TDS at higher of
-Rates in Income Tax Act
-Rates in Force as per FA
-20%
Now if foreign company doesn’t have PAN gets income where FA rate is 30%, DTAA 10%.
U/s 90(2), In case of conflict between Income tax Act and DTAA, the provisions beneficial to assessee shall apply. Hence income taxable @10%
Now whether TDS u/s 206AA at DTAA rate of 10% or 20%
One school of thought International agreements prevail over domestic laws, hence TDS @ 10% only
Other School of Thought
S.206AA starts with “Notwithstanding anything contained in this Act”
DTAAs itself are framed u/s 90(1) of IT Act
Hence 206AA shall prevail over DTAA
TAXATION OF IMMOVABLE PROPERTY of Non resident Article 6 of DTAAA
As per Article 6 of DTAA, Income from immovable property to be taxed where property is situated
Same provision under section 9(1)(i) which says that income accruing or arising from property in India is deemed to accrue or arise in India.
Hence if property is in India and owner is non resident. Tenant is also non resident and stays in property in India for few days and pays rent outside India, rental income shall be taxable in India and TDS u/s 195 to be deducted
Capital Gain on Immovable property of Non resident sold in India Article 13 of DTAA
-As per Article 13 of DTAA, capital gain chargeable where property is situated
-Also as per S. 9(1)(i), income accruing or arising from transfer of capital assets in India shall be deemed to accrue or arise in India.
-As per s. 163, buyer shall be treated as agent of non resident because as per s. 163(1)© agent of non resident includes person through or from whom non resident is in receipt of income directly or indirectly.
-TDS u/s 195 on full value of consideration because s. 195 talks about any sum chargeable to tax in India. Moreover it is not possible for buyer to work out gain of seller.
-If buyer wants to deduct TDS on capital gains part, he shall have to apply u/s 195(2) to AO
-If seller i.e. Non resident wants to apply for lower TDS he shall apply in Form 15C/15D under R. 29B
-This transaction although not unlike other transactions exigible to TDS like, works contract, brokerage, professional or technical fee shall get covered u/s 195 because u/s 195 any sum chargeable to tax in India.
Capital Gain on Immovable property of Resident sold outside India
Say property in London is sold
Resident taxable for income accruing or arising outside India also under s.5
Tax as per domestic laws of UK also
DTAA shall apply and income shall be exempted in India under article 13 of DTAA
Capital Gain on Movable Property in India
To be taxed where PE is situated
If no PE, then residence based taxation to be retorted
For shares, DTAA says sale shall be taxable where sit us of shares that is issuing company is situated.
However in Tax heavens like Mauritius, Cayman Islands, Singapore there is no tax on sale of shares. Also confirmed in E- Trade Mauritius Ltd case (2010) (324 ITR 1)
This opportunity in tax heavens gave rise to Vodafone International case
VODAFONE INTERNATIONAL CASE
-Hutch Group formed and invested in India in HEL (Hutchison Essar Ltd.) in 1992 and thus invested in telecomm sector in India.
-On 12-01-1998, Hutch Group Co. HTIL (Hutchison Telecommunication International Ltd.) formed CGP -Investments Ltd. In Cayman Islands and acquired 100% shares in CGP Investments Ltd.
-HTIL was also incorporated in Cayman Islands.
-CGP acquired 52% shares in HEL and had option to purchase another 15% shares in HEL
-HTIL sold entire shareholding of CGP Investments Ltd. To Vodaphone International Holdings (VIH)
-Thus VIH through CGP acquired 67% holding in HEL
-Sale of shares in CGP by HTIL to VIH is non taxable in Cayman Islands.
-Revenue authorities made a case:
True intention of sale of shares in CGP is to transfer controlling interest in HEL and there by rights and entitlements of HEL like customer base, non compete rights, options etc.
Hence there is transfer of capital asset in India
S. 9(1)(i) gets attracted
TDS u/s 195 leviable on consideration paid to HTIL
High Court confirmed the view of revenue authorities
Held by Supreme Court:
-HEL and CGP are two distinct entities Holding- subsidiary relation to be honored and corporate veil can not be lifted.
-Department should prove tax abuse to justify lifting of corporate veil
-Section 9(1)(i) is not look through provision i.e. indirect transfers of capital assets in India are not covered. High Court ought to have applied look at approach taking holistic view of transaction. Because entire maze of holding subsidiary has been transferred through this transactions. No bifurcation of consideration in terms of factors like customer base, non compete rights, options etc. has been made.
-S. 163 (1) may result in treating a person as agent of non resident on the grounds that from him or through him non resident is in receipt of income. But this can not lead to collection of tax from him.
Tax Planning vs. Tax Avoidance
Vodafone case is also now a land mark judgment for advocates of tax planning
Other prominent cases which got confirmed by this judgment
Westminister’s Law (Old case)
Craven vs. White (1988)
Mc Niven (2001)
Azadi Bachao Andolan (2003): Mc dowell case is not exception but exception to settled principles of law.
Porrits and Spencer (P&H): Mc dowell case got explained by larger bench of SC in Azadi Bachao
E-Trade Mauritius Ltd.
Under DTC s. 123 GAAR is going to be introduced where revenue has power to hold any transaction as Impressible Avoidance Arrangement.(IAA)
GAAR can even prevail over DTAA under DTC
Capital Gain on Securities in Indian Company purchased in Foreign Currency by Non resident (Where transfer of shares not taking place in Tax Heavens)
-U/s 10(38) if equity shares of company or units of Equity oriented Mutual Fund are transferred and STT has been paid on transaction, LTCG is exempt If transaction not covered above
-First Proviso to s. 48 shall apply i.e. conversion of sale and purchase price in foreign currency used for purchasing shares and cap gain there on by re-conversion in Indian currency. No indexation allowed under second proviso of section 48.
-then under S. 112,
on unlisted shares tax @ 20% and for listed shares, units, ZCBs tax @10% shall be charged. If STCG, then tax @ 15% under s. 111A.
-no deduction under CH. VI-A
-Slab exemption of Rs. 180000 not available.
U/s 115AB, where OFO entered agreement with PS bank, PFI, MF for purchasing units in MF in foreign currency, then 10% LTCG on sale of units. Conditions and Relaxations
-First Proviso to s. 48 shall not apply
-2nd proviso also not to apply i.e. no benefit of indexation
-Chapter VI-A deduction not available
-Chapter VI on set of and carry forward of losses applicable
-No exemption to file return of Income even of tax deducted fully and no other income
-Slab exemption of Rs.180000 is not available
U/s 115AC ADR/GDRs acquired in foreign currency by NR/FC are transferred in India LTCG @10%. Conditions and relaxations referred in 115AB shall apply in same manner
However in above case i.e. if ADR/GDR acquired by non resident are transferred outside India to another non resident, transaction is exempt u/s 47(viia).
U/s 115AD, if securities of FII are transferred then LTCG @ 10% (If STCG then tax @ 30%). Conditions and relaxations referred in 115AB shall apply in same manner
Under Chapter XII-A, LTCG on foreign exchange asset (i.e. shares, debentures, central govt. securities in convertible foreign exchange)of non resident Indian (NRI)(i.e. citizen of India or person of Indian origin who is non resident) taxable @ 10%. Conditions and relaxations referred in 115AB shall apply in same manner except that ;
filing of ROI is exempt if no other income and TDS deducted
Exemption from LTCG if reinvestment in another foreign exchange asset with in 6 months from date of transfer to be retained for 3 years from date of Acquisition.
Interest Income of Non Resident from foreign currency Loan Art 11 of DTAA
-As per Art 11 of DTAA, Interest is taxable in country of source
-As per section 9(1)(v), interest payable by Govt or resident or Non resident for use of B/P in India is deemed to accrue or arise in India.
Hence in both cases source rule to be applied.
U/s 115A, NR/FC giving loan to Govt or Indian Concern in foreign currency, tax @ 20 % on interest and normal tax on balance income (i.e. 40% +3% cess (S/C @2% if Income> Icr) Conditions and Relaxations
No deduction u/s 28 to 44C
No deduction under Chapter VI-A
Losses under Chapter VI can be set off
Slab exemption of Rs. 180000 not available
Exemption from ROI if no other Income and TDS deducted.
Special provisions of Chapter XII-A applicable to NRI are same as general provisions under S. 115A in respect of Interest except that where non resident Indian becomes resident in subsequent year he can give declaration that provision of CH. XII-A shall continue to apply in respect of investment income
U/s 115AC, interest income of NR/FC from FCCB/FCEB in foreign currency invested in Indian Company or PSU (e.g. 100000 12% debentures of IOC disinvested), then 10% tax. Same Conditions and relaxation as under 115A to apply.
U/s 115AD, Interest Income from securities in FII taxable @ 10%. Same conditions and relaxations except that no exemption from ROI
Since 115A, 115AC,115AD, Chapter-A provisions are similar, specific provisions of 115AC, 115AD shall prevail over general provisions of 115A and hence department can not enforce tax @20% instead of 10% rate in 115AC, 115AD.
Royalty and Fee for Technical Services DTAA Art 12
As per Art 12,
if PE exists, then tax where PE is situated
If PE doesn’t exist, source rule to be applied
As per S. 9(1)(vi)/(vii), royalty or FTS payable by :
-Govt or
-Resident for use in B/P in India
-Non resident for use in B/P in India shall be deemed to accrue or arise in India
Historical Background
The above provisions i.e. 9(1)(v)/(vi)/(vii) were brought by Finance Act 1976 wef 1-6-76.
In 2007 SC in Ishikawajima-Harima Indus. Ltd. (2007) 288 ITR 408 held:
Income from services not rendered in India even if used for B/P in India, no income can be deemed to accrue or arise in India i.e. territorial nexus is required between rendering of service and utilization
In Finance Act 2007, Explanation to S.9 inserted retrospectively w.e.f 1-6-76, to the effect that income under 9(1)(v)/(vi)/(vii) shall be deemed to accrue or arise in India notwithstanding that non resident has no residence or business or business connection in India.
However Karnataka High Court held in Jindal Thermal Power Company that amendment made by FA 2007 does not affect Ishikawajima- Harima
Thereafter Finance Act 2010 reinserted explanation to S.9 w.e.f 1-6-76 to the effect that income under 9(1)(v)/(vi)/(vii) shall be deemed to accrue or arise in India whether or not that non resident has no residence or business or business connection in India and whether or not non resident has rendered services in India
However Ishikawajima-Harima has not lost relevance. It is still applicable to incomes other than 9(1)(v)/(vi)/(vii). E.g. Commission Income of non resident for services rendered outside India and paid outside India can not be deemed to accrue or arise in India where there is no PE in India
Taxation of Royalty and FTS (where PE not in India) s. 115A
Where NR/FC enters into agreement with
-Govt or
-India Concern and agreement is approved by govt or where agreement is as per Industrial policy, then automatic approval is assumed
Where royalty/FTS is from agreement entered
Between 1-6-76 to 31-5-97 tax @ 30%
Between 1-6-97 to 31-5-2005 tax @ 20%
After 31-5-2005 tax @ 10%
Conditions and relaxations
No deduction u/s 28 to 44C (incl unabsorbed depreciation) and %&
Deduction under Chapter VI-A is available. In case of royalty /FTS this is exception to general rule of foreign taxation of not allowing deduction under CH VI-A
Chapter VI deduction for losses are available
No exemption for filing return of Income even if no other Income or TDS deducted fully. (perhaps because royalty and FTS constitutes substantial income of NR/FC which govt does not want to go unscrutinised.)
Historical Background of 44DA
s. 44DA came into existence by Finance Act 2003 w.e.f. 01-04-2004
Before s. 44DA , s. 44D was there which reiterated provisions of s. 115A saying that notwithstanding anything contained in 28 to 44C no deduction of any expenditure shall be allowed against royalty and FTS in respect of agreements after 01-06-1976.
Now NR/FC having PE had to pay tax @ 10% even if they incurred huge establishment expenses in initial years.
On the other hand Art 12 of DTAA provided for taxation of royalty and FTS as per Art 7 of DTAA
Art 7 Para 3 permitted deduction of expenses incurred for PE according to domestic law
Held in various following judgments that 44D can not be ignored for purposes of DTAA :
Pipeline Engg 28 SOT 121
Steel Authority 105 ITD 679
Erricsson Telephone 224 ITR 203
AAR Ruling 228 ITR 487
Hence s. 44DA brought to book by FA 2003 w.e.f. 1-4-2004. Circular 7 of 2003 said:
“With a view to harmonize the provisions relating to income from royalty and FTS attributable to PE in India with similar provisions in DTAA, act inserted new s.44DA”
As per SC ruling in Gold Coin Health Food 304 ITR 308 and Allied Motors in 224 ITR 677, clarificatory provisions are to be applied retrospectively.
But held in Pipeline Engg,Steel Authority, Erricsson Telephone that s.44DA not applicable retrospectively because it is substantive in application and is applicable to agreements entered after 31-03-2003.
s. 44DA
NR/FC having royalty /FTS income from govt or Indian concern according to agreement after 31-03-2003
And having PE in India for B/P (including fixed place from where business is carried on wholly or partly) e.g. 5 rooms in Taj taken by technicians
And royalty /FTS is effectively connected to PE in India only
PGBP provisions to apply. Tax rate for foreign Co.40% + 3% cess (2% S/C if TI> 1 cr.)
Deduction for exp of PE only
No deduction for HO/other office expense except reimbursement for actual expense incurred by HO/other office on behalf of PE in India
Books to be maintained u/s 44AA
Audit report in Form 3CE. No penalty prescribed under 271(1)(b)
s. 44DA vs. 44BB
44DA applies to royalty & FTS and royalty includes rental income from plant also.
44BB applies to Hire Income from oil machinery used for oil extraction
Where income received for seismic survey and data acquisition services in oil exploration (in nature of FTS) it was held by AAR in Geofizyka Torun and SeaBird Exploration that since 44BB is more specific it shall prevail over 44DA.
Hence amendment by Finance Act 2010 w.e.f. AY 2011-12 that 44BB shall not apply to income in nature of royalty and FTS.
Samsung Electronics (Karnataka High Court)
Held by HC that packaged software results in royalty because it involves granting of license to copy the software . This view upheld even for distributors reselling software. Hence TDS u/s 195 deductible.
Confirmed by Sunray Computers
Contrary view in Erricsson AB 16taxmann.com 37
Already held in Motorola case that distinction should be made between copyright and copyright article 95 ITD 269
Held by SC in Tata Consultacy Service that canned software is goods 2004 271 ITR 40
SLP against Samsung Electronics is pending.
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