Understanding International payments taxation with latest case laws - V.

Now due to section 206AA and tax residency certificates along with  online Form 15CA & 15CB  international payments become more complex along with study of DTAA. Further, there are risk of PE and other transfer pricing adjustments which may also arise in case each transaction not dealt with proper care.  In this respect, based on the nature of transactions 

given below the recent decision of various courts of India, which may be useful for analyzing your international payment. 

SN	Nature	Brief of the facts	Reference	Citation
1	Offshore services	Non-resident--Income deemed to accrue or arise in India--Business connection--Apportionment of income--Agreement between Indian company and non-resident company--Design and engineering for manufacture of equipment outside India--Supply of materials outside India--Consideration for offshore supplies not taxable in India--Whether offshore services formed integral part of offshore supplies--Matter remanded	Linde AG. Linde Engineering Division v. Deputy DIT	365 ITR 1
2	Sales Promotion Services	The applicant appointed an individual resident of Sri Lanka as resident executive for promotion of sale in Sri Lanka of books published by the applicant. The applicant has paid certain remuneration to the resident executive by remitting it to her bank account in Sri Lanka . The applicant approached AAR for its ruling on the taxability of such remuneration. AAR held that payments for sales promotion services rendered by a Sri Lanka resident were not FTS under the Act and were also not taxable in terms of Article 14	Oxford University Press In re	45 taxmann.com 282
3	Commission	S. 9(1) --Business expenditure--Disallowance--Payments liable to deduction of tax at source--Non-resident--Commission--Income not in nature of interest, royalty or fee for technical services--Limit provided under Reserve Bank of India guidelines for remittance of commission not relevant for determination of allowability of expenditure--Circular No. 786 of 2000 applicable--Assessee not liable to deduct tax at source--Provisions of section 40(a)(ia) not applicable--CBDT Circular Nos. 786 of 2000 dated 7-2-2000 and 7 of 2009 dated 22-10-2009	Assistant CIT v. Rapid Pack Engg (P.) Ltd. (Mumbai)	VOL 32 PG 329
		S. 9(1)(vii) --Business expenditure--Disallowance--Payments to non-resident--Failure to deduct tax at source--Assessee’s agents had their own offices in foreign country--Agreement for procuring orders not involving any managerial services-- Explanation to section 9(2) not applicable--No disallowance of commission payments can be made--	CIT v. Model Exims	363 ITR 66
		Tribunal held that export commission paid to foreign agent for procuring order and pursuing payment from foreign buyer did not accrue or arise in India as no services were rendered in India.	Allied Nippon Ltd. .v. Dy.CIT	145 ITD 81
		Assessee paid commission/discount on export orders to non-residents who did not have any PE in India. Assessing Officer held that commission paid by assessee was chargeable to tax under section 9(1)(vii), accordingly he disallowed the same on the ground that assessee had not deducted TDS from such payment. Court held that under Circular Nos. 23 dated 23-7-1969, 163 dated 29-5-1975 and 786 dated 7-2-2000, payments made in form of a commission or discount to foreign party was not chargeable to tax in India under section 9(1)(vii).Since payment were made prior to applicability of Circular No. 7/2009 by which aforesaid circulars were subsequently withdrawn, addition made by Assessing Officer under section 40(a)(i) was to be deleted.	CIT .v. Angelique International Ltd.	219 Taxman 104
4	Sale of Hardware with software	9(1)(vi) --Non-resident--Royalty--Revenue received on account of supply of software--Receipts from supply of equipment including hardware and software to be taxed as business profits in accordance with article 7 of the Double Taxation Avoidance Agreement	Alcatel-Lucent France v. Assistant DIT	364 ITR 1
5	Management fees	The assessee company was engaged in providing software development services to its customers based in India. During relevant assessment year, assessee company claimed deduction of payment made to a US based company towards management services rendered by it. The Tribunal held that it was undisputed that assessee was making use of advice, input experience, experimentation and assistance rendered by USA based company in its decision making process of financial and risk management etc., Further apart from providing input service and advice, US based company was also providing training to employees of assessee-company. On facts services rendered by non-resident company were technical in nature as provided in clause 4(b) of article 12 of DTAA, and thus, assesse was liable to deduct tax at source while making payments in respect of said services.	US Technology Resources(P)Ltd. .v. ACIT	61 SOT 19
		Consideration paid for various services by non-resident holding company to the applicant , which relates to (a) general management (b)international operations (c) legal advisory (d) tax advisory (e) controlling and accounting and reporting (f) corporate communications (g) human resources and (h) corporate development, mergers and acquisitions constituted fees for technical services, however there is no material to suggest that the technical knowhow, skill knowledge and expertise are transferred to the applicant so as to enable the applicant to apply this technical knowhow etc, independently and therefore requirement of the 'make-available' clause is not satisfied the sum paid for technical services hall not be taxable as FTS under Article 12 of India-Netherland DTAA	Endemol India (P.) Ltd., In re	40 taxmann.com 345
		The assessee provided services related to carrying on branches of Petroleum, natural gas, coal and chemical industry under an agreement. The A.O. held that the services were in the nature of fees for technical services. On appeal, the CIT(A) confirmed the A.O.’s order. The Tribunal held that the A.O. did not examine whether commercial support, logistic support and human resources provided by assessee foreign company were in nature of make available of technical services and thus restored back to the stage of A.O.	Shell International B.V. .v. ITO	145 ITD 81
6	Hotel Marketing	The amount received by the assessee Dutch Company from an Indian company for providing marketing services outside India is not taxable as royalty u/art. 12(4) of the Indo-Netherlands DTAA. The said amount would be taxable in India u/s art. 7 if the assessee carries on business in India through a PE situated in India. Impugned order was set aside and the matter was restored to the AO for considering the facts in the light of art. 7 of the DTAA.	Marriott International Licensing Co. BV .v. DDIT	98 DTR 27
7	Liaison office	Assessee, a Hong Kong company acted as buying agent for group companies. It established a liaison office in India which acted as communication channel between the company and the manufacturers for sourcing apparels from India. Liaison office’s activities were prior to purchase of goods by the company and, therefore, Expln. 1(b) to s. 9(1)(i) was clearly applicable and no income was derived in India.	Tesco International Sourcing Ltd .v. DDIT	98 DTR 33
		Where Indian subsidiary only assisted in sale of products in India and did not have any authority to negotiate terms of sales or conclude a contract on behalf of foreign assessee company, it could not be considered as an agency Permanent Establishment in India under Article 5 of DTAA between India and USA and, therefore, no profit could be taxed in India	Lubrizol Corporation USA .v. ADIT	60 SOT 118
		In the employment contract between the assesee, a US company and its employees at liaison office, there was a sales incentive plan whereby the employees were to be provided with the remuneration based upon the achievement of the target for sale of goods of the assessee company in India. The assessee company had also got itself registered with the ROC for carrying on business in India and filed its return declaring loss under the head “Profits and gains of business or profession”. These clearly established that the liaison office was promoting sales of the assessee company in India. Therefore, the income attributable to the liaison office was taxable in India. Amount received by the liaison office from the head office over and above the reimbursement of expenses was rightly treated as income.	Brown & Sharpe Inc .v. ACIT	98 DTR 405
8	Technical fees	Assessee, tax resident of Japan, executed offshore design contract awarded by Indian companies in India. Since assessee had rendered services which were technical in nature, revenue earned by assessee was in nature of fees for technical services. On facts, fees for technical services were payable by persons who were resident in India, income of fees for technical services in question was taxable in India as per section 9. however, since lower authorities had not considered article 12 of DTAA in light of terms and conditions of contract to arrive at finding that income in question was taxable even under Indo-Japan DTAA, this issue was to be remitted to record of AO. Rendering of service is not a precondition for attracting section 9(1)(vii) when fees for technical services are payable by a person who is resident in India.	Toyo Engineering Corporation .v. DCIT	60 SOT 241
		Assessee made use of assistance rendered by foreign company in its decision making process for management. Foreign company was also giving training to assessee's employees. Held, service falls under definition of technical services and tax was deductible at source.	US Technology Resources P. Ltd. .v. ACIT	28 ITR 26
		Non-resident --Wholly owned foreign subsidiary of Indian company--Contracts procured by Indian company and subsidiary carrying out work for Indian company--Payment by Indian company to subsidiary is fees for technical services--No technical knowledge made available to Indian company--Payment not taxable in India--Income-tax Act, 1961, ss. 9(1)(i), (vii), 195--Double Taxation Avoidance Agreement between India and Australia, art. 12(3)(g)--	Infosys Technologies Ltd ., In re	350 ITR 178
		The assessee had entered into a master clinical services agreement with its Associate Enterprise for clinical trials and the assessee had arrangement with CSPL to provide information on clinical trial test. The Assessee applied for Certificate for non deduction of holding tax for remittances to CSPL. The A.O. held that the payment was in the nature of royalty and was liable to be taxed. The CIT(A) decided in the favour of the assessee and the Tribunal upheld the order of the CIT(A). The Tribunal held that the assessee is making remittance for procurement of commercial information for onward transmission to the principal, it is viewed that the remittance is not for availing technical services and does not amount to royalty and is not liable for withholding taxes as held by the A.O.	ITO .v. Kendle India (P) Ltd	145 ITD 83 (Delhi)(Trib.)
		Merely providing employees or assisting the assessee in the business and in the area of consultancy, management, etc. would not constitute making available the services of any technical or consultancy nature. Fees for technical services means payment of any kind to any person in consideration for service or services of technical nature if such services make available technical knowledge, experience, skill know-how or process which enables the person acquiring the services to apply technology contained therein. Thus, expatriation of employee under a secondment agreement without transfer of technology would not fall under the term make available under Article 13(4)(c) of the DTAA.	Addtl.DIT (IT) .v. Mark and Spencer Reliance India P. Ltd	27 ITR 448
		Non-resident--Taxability in India--Deduction of tax at source--Fees for technical services--U. K. consultant to deliver fabric designs for cotton shirting to assessee--Consultant required to make available all documents and reports and to provide detailed quantity report in writing to assessee with specific or new designs developed by consultant--Design supplied by consultant becoming property of assessee--Payment is fees for technical service--Assessee liable to deduct tax at source	Sintex Industries Ltd. v. Assistant Director of Income-tax (International Taxation)	Vol 22 Pg 182
9	Reservation fees	The assessee, a non-resident company, was engaged in the business of computerised reservation system. The assessee claimed that its receipts from its activity of providing airline reservations were neither royalty nor fees for technical services and hence not taxable in India. Following Tribunal’s order in assessee’s own case for earlier years, it was held that 15% of receipts would be attributed as income accruing or arising in India and since 25% of receipts were paid to subsidiary company of the assessee in India as marketing fees, there was no income chargeable to tax.	Abacus International P. Ltd. .v. DDIT	27 ITR 49
10	Reimbursements of secondment salary	For rendering services, the Singapore company, which was the holding company of the assessee, paid the assessee a mark-up of 21%, besides reimbursement of certain expenses like cost of salary etc. on actual basis. The AO disallowed the sums claimed to be reimbursement of salaries of the seconded employees on which the Singapore company had deducted tax u/s 192 for failure by the assessee to deduct tax thereon. Held, there was no requirement for deducting the tax at the time of reimbursement, when already tax had been deducted at the time of payment of salary	Temasek Holdings Advisors (I) P. Ltd. .v. DCIT	27 ITR 125
11	Lower rate of Tax	AO is bound to apply concessional tax rate prescribed under the Act not the higher rate under DTAA.	De Beers UK Ltd. .v. ADIT	27 ITR 1
		Favourable clauses in DTAA override provisions of Income-tax Act, in matter of ascertainment of chargeability to income-tax and ascertainment of total income, to extent of inconsistency with terms of DTAA. Where both American as well as French company did not make available or transfer any technology to assessee with respect to launching and tracking of assessee's satellites respectively, payments for same could not be taxed as fees for technical services. Assessee was not liable to deduct  tax at source.	CIT .v. ISRO Satellite Centre	218 Taxman 74
12	Training	The applicant-company, engaged in business of providing high quality executive education programmes to Indian corporate and other participants, entered into a Programme Partnership Agreement with INSEAD, a Singaporean business school. As per agreement, INSEAD was obliged to conduct teaching intervention in form of training, in-class teaching and on-line teaching during education programmes conducted by applicant and the applicant shall compensate INSEAD for cost involved in teaching. Held, on facts, INSEAD did not have a permanent establishment in India. Also, payment made by applicant to INSEAD for services rendered under terms of Agreement is not in nature of 'Fees for Technical Services' as it falls under exclusive clause of article 12(5)(c) of DTAA. Hence, the amounts were not taxable in India	Eruditus Education (P.) Ltd., In re	218 Taxman 207
13	Advertisement	Assessee company made payments to GCC Singapore and 'N', Singapore in relation to sponsorship of various sports events organized by ICC. The A.O. held that the payments were in nature of royalty as per article 12 of India-Singapore DTAA, and disallowed the amount u/s. 40(a)(i) for non-deduction of tax at source u/s. 195. The ITAT held that the payment was purely for advertisement and publicity of the brand name of the assessee and for promotion of its product during the Cricketing events of ICC, and not the payment of royalty as defined in para 3 of Article 12 of DTAA between India and Singapore. he proprietary trademark or logo of ICC is put alongside the assesssee's logo, it is only incidental to the main services obtained by the assessee. Thus, the amount in question paid to 'N' and GCC, Singapore is not royalty as the payment was not for use of any trademark, brand name. As both these organizations do not have any P/E in India, the income is not taxable in India and consequently there is no requirement of deduction of tax at source.	Hero Moto Corp Ltd. .v. Ad.CIT	60 SOT 25
14	Online subscription	The assessee company is incorporated in Ireland and it was engaged in the business of distributing research products in the form of subscription. The assessee company sold subscription to its Indian customers/subscribers by providing them access to its products over the internet from its data server which was located outside India against the subscription/access fee. Said fee was claimed to be not taxable in India because of absence of any permanent establishment in India. AO. held that the said amount was in the nature of 'Royalty' as per Article 12 of DTAA. The Tribunal following the Karnataka High Court in CIT .v. Wipro Ltd (2011) 203 Taxman 621 (Karn)(HC), held that payment to the assessee and the same has been held to be in the nature of 'royalty', liable for deduction of tax at source under section 195.	Gartner Ireland Ltd. .v. ADIT	60 SOT 43
15	Method of accounting	The assessee is a tax resident of USA deriving income mainly on royalty .The assessee was claiming benefits under India –USA ,DTAA. Paying party maintained accounts on mercantile basis and assessee on cash basis .Tribunal held the words used in Article 12(1) of DTAA between India and USA was ‘paid’ to a resident of other contracting State’ The term ‘royalties’ also means ‘payment of any kind received’. Since word used in DTAA is 'paid' or 'received', royalty amount cannot be taxed on accrual basis.	Johnson & Johnson .v. ACIT	60 SOT 109
16	Interest Income	The condition for availing of the benefit of Article 11 of the India-Singapore DTAA is that the income must have been remitted to or received in Singapore. Unless it is positively shown that the income was received in Singapore, the benefit of Article 11 cannot be made available. This burden could be discharged by showing a credit in the bank account maintained by the assessee in Singapore. Therefore, interest on income-tax refund was taxable at 20%u/s 115A.	Abacus International P. Ltd. .v. DDIT	27 ITR 49
		Deduction of tax at source--Payment to non-resident--Obligation to deduct only when sum paid is chargeable under Act--Letter of credit--Foreign bank charging interest on Indian bank in process of negotiating letter of credit on behalf of assessee--Assessee had privity of contract only with Indian bank--No obligation of assessee to make tax deduction at source	Sriram Refregeration Industries v. ITO	361 ITR 119
		The assessee company was incorporated and a tax resident of South Korea. Assessee questioned action on authorities below in bringing to tax interests earned from its bank in Chennai at Maximum Marginal Rate under Art. 12(5) of DTAA. Decision of authorities below on this issue remained that interest on deposit in said Chennai Bank was out of Surplus earned by PE and therefore, effectively connected with PE and was to be taxed at normal rate applicable to profits of business of a foreign company. The Tribunal held in favour of the revenue that in absence of rebuttal of this finding of authorities by assessee, there should be no interference.	Hyundai Heavy Industries Co. Ltd. .v. ADIT	145 ITD 158
17	Broadcasting	In view of CBDT's Circular No. 715, dated 08-08-1995, services rendered by Non resident for production of programmes for purpose of broadcasting and telecasting shall be specifically characterized as 'work' for the purpose of section 194C,the income there from would be treated as 'business income' .Therefore, payment to a non-resident for production of programmes for the purpose of broadcasting and telecasting shall not be treated as 'Fees for Technical Service'. Payment made to non-resident company is also not chargeable to tax as per the provision of section 9(1)(i) as the services are rendered and utilised outside India and the said company has no PE in India	Endemol India (P.) Ltd., In re	40 taxmann.com 340
18	Sale of Mutual  fund	The assessee, an NRI based in Switzerland received capital gain from sale of mutual fund units and he claimed that the same was not taxable in India under the Art. 13(6) of the Indo-Swiss treaty. The A.O. treated the units of mutual fund as shares of Indian Company and held the gain taxable in India. The CIT (A) deleted the order of the A.O. On appeal to the Tribunal held, in absence of any specific provision to deem the unit as shares, it could not be considered so and thus the capital gains could not be taxed in India.	ITO .v. Satish Beharilal Raheja	145 ITD 29
19	Reimbursement	The assessee received line charges, installation charges, service charges and other expenses from the subsidiary company and claimed them as reimbursement of expenses. Held, on facts, there was insufficient material to show that the receipt was reimbursement of expenses and this claim was liable to be dismissed.	Abacus International P. Ltd. .v. DDIT	27 ITR 49
		Assessee, non-resident company, entered into a contract with an Indian company, 'E', for supply of a compressor. Since compressor was found to be in damaged condition, assessee deputed two technicians from Germany to establishment of 'E'. 'E' reimbursed expenses for air tickets for travel between Germany and India to the assessee. Held, reimbursement of expenses in question could not e treated as part of taxable income of assessee.	DIT .v. Krupp Udhe GMBH	219 Taxman 138
		The tribunal held that the payment being made for the reimbursement of the permission granted to the assessee for using trade mark, such payment cannot be said to be fee for technical services. Even otherwise, such reimbursement of expenses are not subject to TDS, no disallowance is warranted	Obeetee (P) Ltd. .v. Addl.CIT	142 ITD 104
20	Lease line	S. 9(1)(vi), Expln. 2 --Non-resident--Royalty--Definition--Change of law--Amendment of definition to include payment for use of equipment--Assessee engaged in providing international connectivity services (bandwidth services or telecom services) for transmission of data and voice--Payment received by assessee for providing international private leased circuit--Amounts to use of equipment or use of process--Taxable as royalty	Verizon Communications Singapore Pte Ltd. v. ITO	361 ITR 575
21	Hiring of Vessel	Assessee-Government undertaking was engaged in transporting coal from one port to another port. For said purpose, assessee was using its own vessels as well as hiring vessels from foreign companies. Assessing Officer disallowed hire charges paid by assessee to foreign companies on ground that assessee had not deducted tax at source. Since said hire charges was income in hands of foreign shipping companies for service rendered in India and it was not shown by assessee that foreign shipping companies were exempted by DTAA from payment of tax, assessee was liable to deduct to tax at source	Poompuhar Shipping Corpn. Ltd. v. ADIT	53 SOT 451(Chennai)(Trib.)
		Provisions of sections 194C and 195 relating to tax deduction at source are not applicable where provision of section 172 relating to shipping business are applicable, assessee was not liable to deduct tax at source, as demurrage charges are liable to be taxed under section 172 in hands of shipping company	Sesa Goa Ltd. v. JCIT	60 SOT 121
		Assessee paid ocean freight expenses to non-resident shipping company.AO disallowed ocean freight expenses to non –resident shipping company.AO disallowed the expenses on ground that assessee not deducted tax at source. The Tribunal held that since income of non-resident shipping companies was separately taxed under section 172, assessee was not required to deduct tax at source. Disallowance cannot be made	Gujarat Reclaim & Rubber Products Ltd. .v. Ad.CIT	60 SOT 22
22	Overseas allowance	Overseas allowance paid by the taxpayer to deputed personal is not subject to tax witholding by the tax payer if such deputed empoyees are not the payroll of the taxpayer	CIT v Petroleum India International	ITA no 3653 of 2009 Mum HC
23	Royalty	Where agreement with regard to payment of royalty was cancelled, no royalty was payable and, therefore, no question of deducting TDS would arise.	CIT v. Wipro Healthcare IT Ltd	216 Taxman 42(Mag.) (Karn)(HC)
		The assessee was a distributor of software of Microsoft. Whenever there ware sales returns, Microsoft used to issue credit notes for royalty refund arising out of sales returns. While making payment to Microsoft, assessee deducted tax at source on amount which was net of returns. Held, even if subsequent issue of credit note by manufacturer came to knowledge of the assessee-distributor when credit entries for royalty payment were passed by assessee in its books, it was obliged to deduct tax at source based on invoices or demands raised by manufacturer	Redington (India) Ltd..v.ACIT	59 SOT 152
24	Surcharge & education cess	The assessee deducted TDS on payments of management fee and interest made to a resident of France exclusive of surcharge and education cess in view of provisions of DTAA. A.O. opined that TDS was to be deducted inclusive of surcharge and education cess and made addition to assessee's tax liability. Before the Commissioner (Appeals) the same addition has been deleted as per the rate applicable under DTAA. The Tribunal held that DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source and the considered opinion that the taxpayer may take advantage of that provision in the DTAA for deduction of tax.	ITO v. M Far Hotels Ltd	58 SOT 261 (Cochin)(Trib.)
25	Permanent Establishment	S. 195 --Non-resident--Permanent establishment--Business connection--Definitions--Scope of--General principles--Payments received or receivable by non-resident in connection with provision of services of technical and professional personnel to Indian group company--Terms and conditions governing relationship between non-resident and Indian company, global character and profile of group, interdependence amongst companies of group, nature of services rendered and exchanged and location of Indian company’s office indicating Indian company a permanent establishment of non-resident--Essential features of business connection also satisfied--Incomes received by non-resident from Indian company taxable as business profits--Payments subject to withholding of tax	Booz and Company (Australia) P. Ltd., In re	362 ITR 134
		Assessee made payment for legal consultancy services to the non-resident who had no fixed base available to her for performing her duty or any PE in India and who was in India for 22 days only   Such payment is not taxable in India either u/art. 14 or 15 of the India-Portugal DTAA. The assessee was under no obligation to deduct TDS u/s. 195.Order passed under section 201(1) and 201(IA) was  quashed.	Cedrick Jordan Da Silva v. ITO	98 DTR 314

You can also read the earlier articles on payment of international taxation by clicking the given below link.

http://taxbymanish.blogspot.com/2013/06/understanding-international-payments.html