Indian Tax Solution
In view of the answers to the Question 1 and 2, ACHL is not obliged to withhold tax under S.195 of I.T.Act. When the income is not chargeable to tax as per the findings recorded above, the question of withholding the tax does not arise.
The Assignment Agreement only relates to manufacture and supply of products by the applicant to Nokia India. The rights and obligations under the Agreement centered round that aspect only and going by the terms of the Agreement, it is clear that the consideration has been paid as a quid pro quo for the assignment of rights and obligations under the PPA in relation to the business in India. Even if a part of the consideration was paid for the services of Laird USA in facilitating the sub-lease of land or for giving up the claims if any under the LOI, it cannot be said that any ‘assets’ situated in India were transferred.
On the point whether the criteria laid down in Art.5.7 is satisfied (even assuming that the distributor is an agent), clause (c) of Art..5.7, if at all, is relevant. But, having regard to the fact that indisputably, the VARs deal with other software products of different types and their business activities are not confined to the enterprises of the applicant or its group concerns, there is hardly any scope to apply cl.(c ) of Art.5.7. Viewed from any angle, it is not possible to reach the conclusion that the VARs/distributors are the agents much less dependent agents of the applicant and therefore the applicant must be deemed to have a permanent establishment in India.
The payment received by the sub-contractor from the client on the basis of certification made by the applicant cannot be tagged on to the applicant’s income. In fact, tax is allowed to be deducted only on the amounts received by the applicant from the Government as per the order passed by the concerned income-tax authority.
Whether any consideration has passed between the present share holders (Mauritius Companies) and the new share holders of the amalgamated Indian company for this transfer is not known. It is possible that this transaction might attract tax liability for the transfer of 49.91% of the shares (vide para 10.3). This suggestion is based on a surmise that has been emphatically denied by the applicant. Moreover, the doubt expressed has no bearing on the question which we are called upon to decide.
As there was no advance ruling on the question specified in the previous application as contemplated by sub-section (4) of section 245R, it is submitted that the present application may be treated as continuation of the previous application/proceedings and this Authority may exercise its discretion and proceed to rehear the application on merits on the basis of the additional facts/material now adduced and to give a ruling on merits. In other words, it is contended that in the absence of the question not having been decided either way, the proceedings must be deemed to be pending and this Authority is not powerless to look into the additional material now furnished and give a decision on merits in terms of section 245R(4) of the Income-tax Act, 1961.
Revenue’s representative argued that the CBDT Circular referred to in the above ruling is in the context of different facts and the services were drilling operations which were held to be part of mining project. The Circular, therefore, clarified that Section 44BB was applicable. We cannot accept the contention of the departmental representative in view of the discussion at paragraphs 7.4 and 7.5 of the above ruling and the background in which the Circular was issued was also explained. No case has been made out for reconsideration on this aspect. Moreover the conclusion was reached irrespective of the circular and on the interpretation of Section 44BB for which elaborate reasons were given.
As the amounts falling under Section 44BB of I.T.Act have been excluded from the purview of the royalty definition, this question has to be answered in the negative. Once Section 44BB is attracted, it is common ground that the computation has to be made in accordance with that provision and no other special provision, viz., Section 44DA or Section 115-A would come into play in view of the fact that the payment is being made by a non-resident to another non-resident.
Does it mean that what all is excluded from the definition of f.t.s will enter the domain of Section 44BB? We do not think so because any such view would be ex facie contrary to the relevant statutory provision i.e, Section 44BB. In any case we are not bound to give effect to a passing observation made in a different context. Lastly, it is not our view that Section 44BB will become otiose or altogether redundant, but it is our view that its scope and content will be unduly curtailed by adopting the interpretation sought to be placed by the Revenue and we have given sufficient reasons for adopting that view.
Though there were some arguments on the point that there was no transfer of shares in the eye of law in the background of re-organization of entire business, that argument was not seriously pursued at the subsequent hearing, probably for the reason that there is a specific Share Transfer Agreement here. Hence, this contention is not being dealt with.
Services/activities provided by UT(IC2) to DRDO pursuant to the Agreement entered into between FICCI and UT(IC2) do not fall within the purview of Art.12(4)(b) of the DTAA and the payments received under the Agreement are not liable to be taxed as fees for technical services under the domestic law. They cannot be subjected to tax as business profits in view of the undisputed and undeniable fact that UT has no permanent establishment in India and the services were not carried out through a PE in India.
It is clear from the wording of clause (ii) or para 2(b) of Article V that the amended rate of tax of 10 % will be applicable for the previous year beginning on or after 1st April 2007 (relevant to the assessment year 2008-09). There is no doubt nor any dispute on the point that the payments received by the applicant from the SMCI are in the nature of royalties within the meaning of Article 12(3) of the DTAA.
Under part II of the First Schedule to the Finance Act, 2009, the rates for deduction of tax at source in certain cases are specified. In regard to royalty and fees for technical services payable by an Indian concern in pursuance of an Agreement made by a foreign Company with the Indian concern on or after 1st June 2005, 10% rate is prescribed, where it relates to a matter included in the Industrial Policy, for the time being in force, of the Government of India and the Agreement is in accordance with that Policy. The tax deduction follows the same pattern as that envisaged in S.115A ( 1) of I.T.Act which prescribes the tax rates on royalty and FTS . There is no doubt that the Agreement entered into between the applicant and the CEAT is in respect of a matter covered by the Industrial Policy of the Government of India. Various objectives specified in the opening part of the Industrial Policy and other specific provisions clearly point to that conclusion.
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