Mahesh P. Sarda

25 June 2010

Withholding Tax – Select Issues

Withdrawal of Circulars 23/ 1969 and 786/2000

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Withdrawal of Circular Nos. 23/1969 and 786/2000

• Circulars withdrawn w.e.f. 22-10-2009

• Circular 23/1969 : Clarification on taxability of income of non-resident -‒ Non resident exporter selling goods from abroad to Importer‒ Non Resident Company selling goods from abroad to Indian subsidiary‒ Foreign Agents of Indian exporters‒ Non Resident persons purchasing goods in India‒ Sale by Non residents either directly or indirectly through agents

• Circular 786/2000 : Further clarification in case of export commission

• Objective of withdrawal (as claimed by CBDT): ‒ Circular was being interpreted by some taxpayers to claim relief which was not in

accordance with the provisions of Section 9 of the Income Tax Act

• Extensive use of Circular by assessee & reliance by judiciary in case of Dependent Agent Permanent Establishment (DAPE) to claim no tax liability of Non-resident seem to have triggered withdrawal

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Effect of Withdrawal

• On positions taken before withdrawal (i.e. 22/10/2009)

‒ Withdrawal is prospective [DDIT v. Siemens Aktiengesellschaft (Mum ITAT)]

‒ Later withdrawal cannot be the ground to read down the circular in earlier years when it was operational

• On earlier decisions of court

‒ A circular which is contrary to the statutory provisions of the law has no existence in law [CCE vs. M/s Ratan Melting and Wires Industries 220 CTR 98]

‒ A circular is binding upon the revenue authorities. It is not binding on the courts.

‒ The court decisions represent court’s interpretations of provisions of the statute• Withdrawal would not render court decisions ineffective

‒ Unless they are solely based on circular without independent interpretation of law

• Withdrawal does not mean that the positions were incorrect

‒ Principles applied in the Circular may still remain valid• The only difference is that now they need to be argued

• Same conclusions may still be drawn

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Impact of withdrawal of Circular 23 on Foreign commission Agents • Prior to withdrawal foreign agents not liable to tax in India

• Post withdrawal

• Indian exporter may be regarded as business connection

• Only income attributable to operations carried out in India to be taxable in India [Explanation 1(a) to Section 9(1)(i).]

• If all the activities by the agent are performed outside India – No profits accrue in India

• Whether services of foreign agent be termed as technical services?

‒ Expression ‘technical’ not defined under the Act

‒ As per dictionary meaning ‘Technical’ includes services rendered by expert of respective field.

‒ If the services include expert services of any field, it may be treated as technical services

• Consequently may be treated as deemed accrued in India

‒ Question to be answered based on facts & circumstances of each case.

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Retrospective Amendment to Explanation to Section 9(1)

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Judicial Position on Section 9(1)(vii)

Judicial opinion before Amendment by Finance

Act, 2007

Judicial Opinion after Amendment by Finance

Act, 2007

Judicial Opinion after Amendment by Finance

Act, 2010

In absence of explanation to Section 9(1), it was held in Ishikawajima-Harima Heavy Industries Ltd. 288 ITR 408 in order to be taxable in india, the technical services must be utilized in India as well as rendered in India.

The Explanation inserted by Finance Act, 2007 to Section 9(1) does not eliminate the requirement of rendering services in India and hence the law laid down in Ishikawajima’s case prevails even after the said retrospective amendment. (Jindal Thermal power co.)

It has been held in Ashapura Minechem Ltd. v. ACIT (Int. tax) that it is no longer necessary that, in order to invite taxability under section 9(1)(vii) of the Act, the services must be rendered in the Indian tax jurisdiction.

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Decision of Karnataka High court in samsung case – After effects

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Samsung – A word in limelight

• Increased focus by tax authorities on transactions involving import of software‒ Tax authorities held that payment in respect of shrink-wrapped software

chargeable to tax in India as ‘royalties’‒ Upheld at first level appellate authorities‒ At the second appellate level, Samsung was one of the first of landmark

decisions to hold that shrink wrapped software was a ‘copyrighted article’, hence business profits and not royalty

• Appeal by tax authorities before the Karnataka High Court‒ Withholding tax on import of shrink wrapped software‒ Withholding tax on distribution arrangement

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What the Karnataka High Court Held

• Judgement delivered on 24th September 2009• Principles emerging from this ruling

‒ If resident payer is making payment to non resident for the supply of any goods / services which are used in its business, obligation to withhold tax arises

‒ Withholding tax provisions for non-resident - not a provision for determination of tax liability of the non resident or accrual of any income to non-resident

‒ Should the payer feel that taxes are not to be withheld or are to be withheld at a lower rate – only recourse is to obtain an appropriate upfront ruling from the tax authorities

• In absence of the ruling ‒ Payer does not have liberty to say no part of the payment resulted in any

income to non-resident‒ Even appellate authorities cannot answer the question of determining the

liability of non-resident• Matter pending before Supreme Court – Next hearing on 18 August, 2010

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Van Oorz ACZ India 323 ITR 130 (Del)

• Differing views from Karnataka HC giving its interpretation of AP Transmission

• Summary of Section 195‒ Sec. 195 deals with TDS from non-residents‒ TDS needs to be done at the rates in force

• Sec. 2(37A) defines ‘rates in force’ to include DTAA rates where applicable‒ Liability to withhold tax at source arises only when the sum payable to the

non-resident is chargeable to tax‒ If parties feel that tax should still be lower than tax applicable at rates in force,

application to AO should be made‒ Assessee duty bound to follow directions of AO if application is made‒ If tax is deducted at lower rates than ‘rates in force’ without application to AO,

payer is treated as ‘assessee in default’

• M/s Prasad Production – 129 TTJ 641 – (ITAT SB, Chennai) followed Van Oorz ACZ India

• Anchor Health & Beauty Products (Mum ITAT) followed Samsung [prior to Del HC decision]

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Potential way forward……

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Nature of Payment Position

Completely taxable Withhold taxes and remit

Not Taxable •A position could be taken not to withhold taxes•Remittance based on a certificate from a chartered Accountant•Could be litigative in Karnataka – jurisdictional HC has held against

Partly Taxable •CA can certify the rate of tax (which could be ‘Nil’ if the amount is not taxable) but cannot determine what is net income of the recipient•If the amount is taxable, only AO can determine net income on which tax is to be deducted•Approach the tax authorities for a ruling for the amount on which taxes have to be applied

Section 206AA – Implications for Non Residents

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Section 206AA for Foreign Companies

• Payer to be liable to deduct TDS at higher rate when:

‒ No PAN furnished or PAN furnished is incorrect

‒ Rate to be applied is higher of• Lower of DTAA or Income Tax Rate

• 20%

• Applicable only where tax is deductible u/s. 195

• Significantly impacts Indian payers where tax is to be borne by them

‒ As there is no incentive for foreign companies to apply for PAN

• No surcharge / education cess to be applied where tax is deducted at 20% applying provisions of Section 206AA

• Consequences of non-compliance

‒ Expenditure would be disallowed

‒ Foreign Tax Credit in foreign country would generally be restricted to DTAA rates• Any taxes withheld in excess of DTAA rate would need to be claimed as refund in India only by filing Return

‒ For that also, Foreign company would need PAN, why not apply upfront?

‒ If no refund to be claimed, it would be additional cost

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PAN – How to obtain in case of Non Residents

• Application to be filled in Form No. 49A

• Relevant fields in Form 49A

‒ AO code: Code pertaining to International Taxation Directorate may be used

‒ Address: Foreign address is admissible

‒ Application to be signed by self in case of individuals and by authorized signatory in other cases

‒ Proof of Identity:

• Individual

‒ Indian citizen / Foreign citizen (in India when making application):- Copy of Passport

‒ Foreign citizen (outside India at time of making application):- Copy of passport attested by Indian Embassy of the country where applicant located.

• Any other person : Copy of registration certificate attested by Indian Embassy of the country where applicant located.

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(Cont…d)

• Proof of Address:

• Individual

‒ Indian citizen / Foreign citizen (in India when making application):- Copy of Passport / bank statement

‒ Foreign citizen (outside India at time of making application):- Copy of passport/ bank statement attested by Indian Embassy of the country where applicant located.

• Any other person : Copy of registration certificate attested by Indian Embassy of the country where applicant located

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Purchase of Software from out of India – Whether taxable in India

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Illustrative Types of Software

• Canned Software / shrink wrapped software

‒ Off-the-shelf or packaged software available to all the customers in the same form without any customisation e.g. Microsoft office.

• Embedded Software

‒ Embedded software is ‘built-in’ to hardware it is supplied with

‒ Generally no seprate value is allocable towards software

• Customized off-the-shelf software

‒ An off-the-shelf software modified and customised according to needs of the customer e.g. customization of ERP software, say SAP

‒ No new software is developed but an already marketable software is mapped according to the specified needs of the customer

• Software Development

‒ Specifically coded/developed for a specific user and for a specific purpose as per the requirements e.g. specialised billing software for a company, inventory software, etc.

‒ Generally rights in copyright of software are with the customer18

Income Characterization of Software

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Income Characterization India Income tax treatment

Royalty Gross base withholding – limited by Treaty

Fees For Technical Services Gross base withholding – limited by Treaty

Business Profits Absence of Permanent Establishment

Shrink Wrapped Software (2)

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• Case 1

• Software is transferred to end user on a CD

• Case 2

• Would it make a difference if software is made available by the owner on a website and the end user downloads the same onto hard drive of the computer?

• Case 3

• What if the software is made available to the end user for a week, to be returned or deactivated thereafter?

Shrink Wrapped Software (1)

• Shrink Wrapped Software

‒ Shrink wrapped used for internal purposes

‒ Licensee acquires copyrighted article. No right to use copyright.

‒ It is license to use copyrighted article and not copyright

• Licensee cannot copy / reproduce / sell (which are inherent rights covered by copyright)

‒ Its in the nature of purchase of goods

• Comparison with ‘Books’ which are also copyrighted article providing you the intense knowledge

• Transaction treated as sales

‒ Not royalty

‒ Taxable as business profits

• Different mode of delivery / limited period should not make difference in characterization

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Embedded Software

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• The treatment remains same as in case of shrink wrapped software

• The purchaser of the computer acquires a copyrighted article and not right to use any copyright in embedded software

• Copyright remains with the owner of the software and the same is not transferred or licensed to the purchaser

• Accordingly, payment not royalty

Customized off-the-shelf software (1)

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• Off-the-shelf software customized as per the requirements of the user

• Copyright owner retains copyright in the software

• Right to copy the software generally not granted to end user

• Degree of customization is relevant

Customized off-the-shelf software (2)

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Software Development

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• Generally, all the rights in the software are transferred to the user and no rights are retained by the programmer

• Where the software is customized to the requirement of the user, such software has often no value unless the supplier shares the technical knowledge etc. with the users and suitably equips them to handle the system themselves

• Payment for customized software falls within the ambit of ‘fees for technical services’

Fees for Technical Services (FTS)

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Definition of FTS– Section 9(1)(vii)

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Does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”

Consideration including any lump sum consideration

What is FTS? – What does it generally include?

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Managerial Services

The expression “management” should be interpreted as per its normal business meaning or ordinary meaning.

It means handling manpower and their affairs.

A “Managerial service” is towards the adoption and carrying out the policies of an organization.

Managerial services must necessarily be non-technical service.

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List of case laws – Managerial Services

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Instances – Managerial Services Yes/No

Hiring and training commercial agents - (OECD Report (2002) Yes

Overall management and direction – P No. 28 of 1999 In re (2000) 242 ITR 208 (AAR)

Yes

Development and administration of dealer network, sales and marketing, service, etc. - P No. 28 of 1999 In re (2000) 242 ITR 208 (AAR)

Yes

Managing financial operations - P No. 28 of 1999 In re (2000) 242 ITR 208 (AAR)

Yes

Supplier development and materials management, including development of local suppliers - P No. 28 of 1999 In re (2000) 242 ITR 208 (AAR)

Yes

Services rendered by an overseas lead manager for managing a GDR issue. - P No. 28 of 1999 In re (2000) 242 ITR 208 (AAR)

Yes

Procurement services that involve making stray purchases.- Linde AG vs. ITO (1997) 62 ITD 330 (Mum.)

No

Technical Services

The expression “technical” has very wide amplitude and does not restrict its applicability only to engineering or scientific areas of knowledge.

The meaning associated with “technical” is “involving or concerning applied and industrial science”.

Services are of a “technical” nature when special skills or knowledge relate to a technical field.

A “technical service” means a service requiring expertise in technology.

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List of case laws – Technical Services

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Instances – Technical Services Yes/No

Provision of tailor made drawings or designs and ready made or off the shelf. - ITO vs. SMS Schloemann Siemag Aktiengesellschaft Dusseldorf (1996) 57 ITD 254 (Hyd.)

Yes

Engineering services necessary for adoption of modified designs.- Hindustan Electro Graphites Ltd. vs. IAC (1984) 145 ITR 84 (MP)

Yes

Conducting preliminary studies, collection and assimilation of data and preparing a feasibility report. Christiani & Nielson Copenhagan vs. First ITO (1991) 39 ITD 355 (Mum.)

Yes

Rendering technical assistance in preparation of project reports. – Central Mine, Planning & Design Institute Ltd. vs. DCIT (1998) 67 ITD 195 (Pat.)

Yes

Testing of samples – Cochin Refineries vs. CIT (2001) 222 ITR 354 (Ker.) Yes

Undertaking trails - Hindustan Electro Graphites Ltd. vs. IAC (1984) 145 ITR 84 (MP)

Yes

Consultancy Services

The expression “consultancy” service involves giving of an advice or advisory service by a professional.

Expertise in a technology is not essential while providing consultancy services

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List of case laws – Technical Services

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Instances – Consultancy Services Yes/No

Supplies of data and information which is commercial and industrial in nature. – Mc Kinsey & Co. Inc (Philippines) & Ors v. ACIT (2006) 99 TTJ 857 (Mum.)

Yes

Devising marketing and sales strategy, business strategy and portfolio strategy. – DCIT v. Boston Consulting Group Pte Ltd (2005) 93 TTJ 293 (Mum.)

Yes

Services for registration and enforcement of intellectual property. – ADIT v. Ess Vee Intellectual Property Bureau (2006) 7 SOT 38 (Mum.)

Yes

Specialized data processing services by using computers. – Kotak Mahindra Primus Ltd v. DDIT (2006) 105 TTJ 578 (Mum.)

No

Allowing customers to access and download business information reports. – Dun & Bradstreet Espana S A In Re (2005) 272 ITR 99 (AAR)

No

List of case laws – Fees for Technical Services

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Instances – FTS Yes/No

Supply of skilled labour by an employment agency. – Tekniskil (Sendirian) Berhard v. CIT (1996) 222 ITR 551 (AAR).

Yes

Marketing and business promotion activities . – International Hotel Licensing Co. In Re (2007) 158 Taxman 231 (AAR)

Yes

Project management services. – Haldor Topsoe v. DCIT (1996) 59 ITD 313 (Mum.)

Yes

Services rendered by an overseas lead manager for managing a GDR issue. – Raymonds Ltd v. DCIT (2003) 86 ITD 791 (Mum.)

Yes

Advise by a financial advisor to procure loan. – GVK Industries Ltd v. ITO (1997) 228 ITR 564 (AP)

Yes

Advise on production related problems. - Union Carbide Corpn. v. IAC (1994) 50 ITD 437 (Kol.)

Yes

Training services. – MOU to India-USA Tax Treaty Yes

Scope under the Act – Section 9(1)(vii)

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Government All payments

Resident

All payments, but excludes FTS payable

(i) for the purposes of a business or profession carried on by the payer outside India - in respect of services utilized; or

(ii) for the purposes of making or earning any income from any source outside India

Non-resident

Covers only payments

(i) for the purposes of a business or profession carried on by the payer in India - in respect of services utilized; or

(ii) for the purposes of making or earning any income from any source in India

The Finance Act 2010 has amended that income by way of technical services shall be taxable irrespective of whether such services are rendered in India or not.

FTS under the Treaty

• Most Indian treaties have a separate article for FTS though it is absent in some treaties (for example: India Mauritius)

• If beneficial owner of the FTS carries on business in the other contracting state in which the FTS arises through a PE, such fees would form part of the business profits under the Article

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No separate article for FTS Australia, Bangladesh, Brazil, Greece, Indonesia, Libya, Mauritius, Nepal,

Philippines, Sri Lanka, Syria, Thailand, UAE and UAR

Covered only if it make available technology USA, UK, Australia, Canada, Finland, Netherlands, Portugal, and Singapore

Payments for teaching in or by educational institutions excluded in treaties with

USA, UK and Switzerland

Fees for Included Services (FIS) – India-USA tax treaty

• ‘FIS’ means payments of any kind to any person in consideration for technical and consultancy services (including provision of services of technical or other personnel) if such services are

• are ancillary and subsidiary to the application or enjoyment of the right, property or

information or

• make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design

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FIS – India-USA tax treaty

Meaning of ‘ancillary and subsidiary’ • The service must be related to the application or enjoyment of the right, property or

information

• Predominant purpose of the arrangement must be the application or enjoyment of the right, property or information

Meaning of ‘make available’ - MOU to the India-USA tax treaty

• Makes the definition of FIS narrower because it excludes any service that does not make technology available to the person acquiring the service.

• Technology will be considered ‘made available’ when the person acquiring the service is enabled to apply the technology.

• The fact that the provision of the service may require technical input by the person providing the service does not per se means that technical knowledge, skills, etc, are made available to the person purchasing the service

• The use of a product which embodies technology shall not per se be considered to make the technology available

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FIS – India-USA tax treaty

Exclusions

• for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph (3) (a);

• for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;

• for teaching in or by educational institutions;

• for services for the personal use of the individual or individuals making the payment; or

• to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services)

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FIS - ‘Make available’ concept

Raymond Limited v DOT (80 TTJ 120) (AT – Mum)

• A mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge etc, by himself in his business or for his own benefit and without recourse to the performer of the services in future

CESC Ltd v DCIT (80 TTJ 806) (AT-Cal)

• The mere fact that the technical skill was required by the performer of the service in order to perform the service does not make the service as ‘fee for included service’ within the meaning of Article 12(4)(b) of India-USA tax treaty. The services would have to make available the technical skill / knowledge also.

• India-USA tax treaty being ‘pari materia’ to the India-UK tax treaty provision in the context of ‘fees for technical services’, it is to be given the same meaning

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‘Make available’ concept

Jindal Tractabel Power Co Ltd v. DCIT 106 TTJ 1011 (Blr)

• Consideration does not fall within the ambit of exclusion from FTS under the Act (consideration for construction, assembly, mining or like project)

• Rendering of services not inextricably linked to supply of equipment (which equipment supplier Raytheon-Ebasco had to choose)

• Services relate not only to supply of equipment but also extend to setting up of the power plant

• Services involve making available technical knowledge, experience, know-how, processes

• Services fall within the ambit of FIS under the India US Tax Treaty

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FIS - ‘Make available’ concept

DCIT v Boston Consulting Group Pte Ltd (94 ITD 31) (AT – Mum)

• ‘Fees for technical services’ under Article 12(4)(b) of the India-Singapore tax treaty does not cover consultancy services unless these services are made available to the recipient of services

DIT v Sheraton International Inc, USA (178 Taxman 84) (Del)• Indo-USA tax treaty

• Sheraton International Inc. (SI) signs service contract with ITC hotels

• SI receives payments for advertising, publicity and sales promotion worldwide

• Such payments are neither royalty nor fee for included services as no technical knowledge is made available

• Income to be treated as business income but not taxable in India as assessee has no PE under Article 7 of DTAA

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FIS - ‘Make available’ concept

Cepha Imaging Pvt. Ltd. (ITA No. 1180/Bang/2008)

•The assessee, a 100% export oriented undertaking, entered into an agreement with a UK company to arrange client relationships and systems to promote publishing related services in UK and US market for a consideration.

•The Honourable Tribunal held that the payments made by an Indian exporter to the non-resident cannot be brought to tax because no technical knowledge, expertise, skill, know-how or process consisting of the development of transfer of technical plan or technical design has been transferred to the assessee so that the assessee could use that knowledge, expertise and skill in future.

Anapharm Inc., In re [305 ITR 394]•The AAR has held that the Clinical procedure, analytical methods, etc., which are proprietary items of the applicant are not transferred, assigned or handed over any of their clients. Thus, these did not make available any technical knowledge to the recipient.

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FIS - ‘Make available’ concept

De Beers India Private Limited, Bang Tribunal •The tribunal held that income received by a resident of Netherlands for conducting airborne surveys in India is not fee for technical services as such payments are not in consideration for the development and transfer of technical plan or technical design.

DDIT v/s TATA Iron & Steel Co. Ltd•The issue in the appeal relates to issues under India UK DTAA. The tribunal in this decision has held that no TDS is applicable as no technical knowledge or skills or service is 'made available' to the Indian company which can be used over a period of time. However, payments made to Hong Kong-based solicitors' firm is liable to TDS as the legal services provided are very much technical service as held by the Special Bench in Mahindra & Mahindra Ltd case and there is no substance in the assessee's argument that legal services are not technical services.

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‘Make available’ concept

Services regarded as “make available”• Providing technical plan, design and information to enable recipient to execute and

install the water features [Gentex Merchants (P) Ltd. 94 ITD 211 (Kol)]• Technical assistance to enable recipient to design, construct and operate a plant to

manufacture aluminum and training for application of technical know how [Hindalco Industries Ltd. v. ACIT 94 ITD 242 (Mum)]

• Preparing a bankable project report with complete details and vetting a project report to enable the service recipient to raise a foreign loan for its project [ITO v. Sinar Mas Pulp & Paper (India) Ltd. 85 TTJ 794 (Del)]

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Dell International Services India (P) Ltd. vs. CIT

Issue Whether payment towards two way transmission of voice and data through telecomm, bandwidth is fees for included services / royalty as per DTAA and whether fees for technical services / royalty as per the Act?

Whether the amounts paid are for the purposes of making or earning any income from any source outside India and hence covered within the exception to section 9(1)(vii)(b) or 9(1)(vi)(b)?

Findings:• No “make available” hence not FTS or FIS• Use of secret process is alien to the minds of • contracting parties, hence not royalty.• Entire business activities and operations triggering exports take place within India – Income is

sourced from India• Non-resident customer does not mean that Income is sourced from outside India

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Cost sharing

CIT v Dunlop Rubber Co Ltd (142 ITR 493) (Cal)• In a cost sharing agreement, each party shares the incurred costs and obtains economic

ownership of the results for the use in its business. Accordingly, each party to the cost sharing agreement is allowed to make continuous and unlimited use of the research results without any additional payments.

• The cost sharing arrangement is not payment of royalty for the use of research results after the completion of research activities, but sharing of the costs incurred in carrying out the research activities. Accordingly, that costs incurred for shared research should not be considered as royalty or income

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Decta Limited

• Ducat is a company incorporated in U.K.

• Sponsored by ODA of British govt. to provide information and advisory services for companies in third world countries.

• Performs advisory services to various Indian companies to develop expertise.

• Indian Companies shall meet part of the cost of services by contributing to Decta.

• Held by AAR that no fees is charged and Indian Companies are meeting cost.

• Hence it is not Fees for Technical services

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Secondment of Employees

IDS Software Solutions (India) Pvt Ltd v ITO (AT – Bang)

• Reimbursement of salary costs of a seconded employee by an Indian subsidiary is not FTS

• Contract of employment need not specify employer-employee relationship; it is sufficient that the relationship is documented in a contract between connected and relevant parties

• There was nothing on warranty or quality of seconded employee in the agreement. IDS India had the power to terminate employment of the seconded employee

• Since salary received by the employee was offered to tax in India, there was no liability on IDS India to withhold tax

AT&S India Private Limited v CIT (287 ITR 421) (AAR)

• Reimbursement of salaries of seconded employees was in the nature of FTS

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Secondment of Employees

AT&S India Private Limited v CIT (287 ITR 421) (AAR)

• The assessee had executed a Foreign Collaboration Agreement (‘FCA’) [for complete support of its expertise, technology and other services required] and Secondment Agreement (‘SA’) with its Head Office (‘HO’)

• As per the SA, the HO had the authority to remove any seconded personnel from the applicant and substitute another person with similar capabilities

• HO and not the applicant was the real employer of the seconded employees

• The actual recipient of the compensation was not the employees but the HO

• The fact that the employees had received salary from the applicant and tax had been paid under the head salaries was of no consequence

• That the HO was not in the business of providing technical services is not of consequence

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Referral fees

Cushman and wakefield AAR•Cushman & Wakefield (S) Pte. Ltd. (CWS or Applicant), a Singapore based company, was engaged in the business of rendering services in connection with acquisition, sales and dealings in real estate and other services such as advisory & research facilities management, project management etc. in the field of real estate.•It had also developed certain international client relationships and in accordance with the global policy, it provided referral services to other Cushman and Wakefield (C&W) offices.•AAR held that since no expertise, or know-how has been ‘made available' to Cushman and wakefield India by reason of rendering service, referral fees cannot be taxed as fees for technical services under the Indo-Singapore tax treaty.

Real Resourcing Limited – AAR No. 828/ 2009

•It is held that the receipts in the nature of referral fees do not constitute “fee for technical services”.

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Most favored Nation Clause (MFN)

53

MFN Principle

• Binds the contracting country (‘A’) to offer to the other contracting country (‘B’) the same benefits which A may offer to a third country

• MFN is actually result of compromise made by one of the party while signing DTAA and then seeks favourable treatment if treaty partner offers such treatment to other countries

• India has MFN clauses in tax treaties with Netherlands, Belgium, France, Sweden, Norway, Switzerland, Spain, Kazakhstan, Philippines and Hungary

• MFN may –• Directly amend the treaty or may trigger re-negotiation for the amendment• With respect to scope or rate or both• May cover taxation of some of the items of income

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India - Netherlands Tax Treaty

• Protocol IV:“If after signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.”

• MFN triggered only if other OECD country favoured• Applied immediately• MFN for scope as well as rate of taxation

• Changes later on incorporated in the DTAA through amendment in DTAA notified vide SO 693(E) dated 30-8-1991

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India - Israel Tax Treaty

• Protocol – Para 2:“The competent authorities of the Contracting States shall initiate the proper procedure to review the provisions of Articles 12 and 13 (Royalties and fees for technical services, respectively) after a period of five years from the date of entry into force of this Convention. However, if under any Convention or Agreement between India and any third State which enters into force after 1-1-1995, India limits its taxation at source or Royalties or Fees for Technical Services or Interest or Dividends to a rate lower or a scope more restricted than the rate or scope provided for in this Convention, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention or Agreement, whichever enters into force later.

• MFN triggered only if any other country favoured after 1-1-1995• Applied immediately• Based on DTAA with Finland, Malta, Portugal, restricted scope applies – taxable only if

it make available technology• MFN for scope as well as rate of taxation• No notification but still valid to claim benefit as Protocol automatically provides the

same

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India – Swiss Confederation Tax Treaty

• Protocol – Para 4: If after the signature of the Protocol of 16th February, 2000 under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interest, royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Agreement on the said items of income, then, Switzerland and India shall enter into negotiations without undue delay in order to provide the same treatment to Switzerland as that provided to the third State.

• MFN triggered only for re-negotiation• Cannot be applied without formal amendment to DTAA and notification thereof• No notification yet

• Similar provision in case of India - Philippines DTAA as well

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India – Norway Tax Treaty

• Article 13(2):However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State. But insofar as fees for technical services are considered, to the extent such fees are paid in respect of a contract which is signed after the date of entry into force of this Convention, the tax so charged shall not exceed 10 per cent of such fees. For the purposes of this paragraph, if a lower rate of Indian tax is agreed upon with any other State than Norway after the entry into force of this Convention, such rate shall be applied.

• Clause in DTAA itself (not in protocol)• Applicable only for lower rate (not for scope) • Lower rate yet not agreed by India with any country• Immediately applied

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Thank U

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