Routers and switches should be classified as part of computers and be eligible for 60% depreciation

Routers and switches should be classified as part of computers and be eligible for 60% depreciation

In a recent decision Special Bench (SB) of the Mumbai Income Tax Appellate Tribunal in the case of Datacraft India Ltd. (Taxpayer) [ITA No.7462 & 754/ Mum/ 2007]on the issue of whether routers and switches can be classified as computer entitled to depreciation at 60% or have to be classified as general plant and machinery entitled to depreciation at 25%, under the provisions of the Indian Tax Laws (ITL) held that the definition of computer should not be restricted to the central processing unit (CPU) of computer, but should also extend to all the input and output devices which support computer in the receipt of input and outflow of output to and from computer. In view of the broader definition given to computers, routers and switches, which form part and parcel of computer, also qualify for depreciation at 60%.

Background and facts

The Taxpayer is engaged in the business of data communication, design, development, purchase and sale of networking products, their maintenance and installation etc.

For tax years 2001-2002 and 2002-2003, the Taxpayer claimed depreciation on routers and switches at the rate of 60% by classifying them as ‘computers’.

The Tax Authority rejected Taxpayer’s contention and held that routers and switches, being equipments which are used as networking tools, would fall under the general category of ‘plant and machinery’ and the rate of depreciation applicable would be 25%.

On appeal by the Taxpayer against the Tax Authority’s order, the first appellate authority ruled in favor of the Taxpayer and held that routers and switches, being an indispensable part of computer just like keyboard or mouse or printer, should form part of computer.

The Tax Authority preferred further appeal before the second appellate authority (Tribunal). Special Bench (SB) was constituted to decide on the issue of classification of routers and switches as ‘computer’ or ‘plant and machinery’ for the purposes of depreciation allowance.

Tax Authority’s contentions

Routers are nothing but telecommunication device meant for transmitting data from one computer to another or from one network to another and, hence, are not computers.

Definition of computer, given in the Information Technology Act, 2000 (Info Tech Act), cannot be considered for the purpose of granting depreciation under the ITL, as the scheme of both the laws is entirely different.

Oxford dictionary defines computer functions to mean performance of logic, arithmetic, data storage, communication and control functions. Since routers do not perform such processing functions, they cannot be treated as computer.

Taxpayer’s contentions

Meaning of computer should not be restricted to processing device alone. It should also mean the essential input/output devices which facilitate the operation of computer.

Routers and switches are input/output devices and are attached to computer. They have no independent utility and have to work necessarily with computer and are considered as integral part of computer.

SB decision

Upholding the contentions of the Taxpayer, the SB held as follows:

In the absence of specific definition of the term in the ITL, it is understood as per common parlance and commercial parlance tests. Test of predominant function and usage is applied in understanding such undefined terms. In common sense, computer is popularly understood to mean any electronic or other high speed data processing device which performs ‘logical, arithmetic and memory functions on data’ and includes all input and output devices which are connected to it.

The scope, purpose and substance of Info Tech Act are quite different from the context of the provisions of the ITL. However, the meaning of the term ‘computer’ as given in Info Tech Act matches with common parlance meanings. Such a meaning can, hence, be considered as an aid in understanding the term ‘computer’ for ITL purposes.

Routers can best be equated with a hardware device that routes data from a local area network to another network connection. A router acts like a coin sorting machine, allowing only authorized machines to connect to other computer systems.

The main function of routers is to receive data from one computer and make it available to another computer for further processing and viewing. As a result, routers have an essential function of supporting commercial organization to facilitate the flow of data from one computer to another for processing or storage.

Switches are shorter version of routers and perform functions which are similar to routers within a limited sphere.

Like computer hardware, a router in itself is not a computer as it neither performs any logical, arithmetic or intermediary functions on data nor does it manipulate or process data. However, routers and switches can be classified as computer hardware when they are used along with a computer and their functions are integrated with a computer.

The SB compared the CPU of computer akin to the human brain and observed that as the brain alone is not considered as the body; the CPU alone cannot be described as a computer. All devices such as keyboard, mouse etc. would also form part of computer.

[2] The SB also commented on the decisions of the Kolkata Tribunal in the case of Samiran Majumdar [280 ITR 74] , relied by the Taxpayer, and the Mumbai Tribunal in the case of Routermania Technologies (P) Ltd. [3] [16 SOT 384], relied by the Tax Authority. The SB observed that the decision of the Kolkata Tribunal, holding printer and scanner are depreciable as ‘computers’, was a better view of the matter than the view of the Mumbai Tribunal. The Mumbai Tribunal had taken a narrower view and held that routers which did not perform logical, arithmetical or memory functions by manipulation of electronic impulses etc. are not computers.

The SB, however, clarified that machines or equipments such as television set, mobile phones etc., which take assistance of computer functions, are not computers.

Comments

A Special Bench is generally constituted when there are conflicting decisions of the Tribunals or the matter pending for adjudication is of considerable importance. It is also a well-settled convention to consider the Special Bench’s decision as binding on the division benches of the Tribunal.

The present decision should assist in addressing the principle that predominant function of the routers and switches determines its classification. On application of functional test, any ancillary and supplemental components of a computer which is essential in the working of computer would form part of computer.

Maintenance of stock of goods by the foreign enterprise at the customer’s location for standby use may not give rise to PEMaintenance of stock of goods by the foreign enterprise at the customer’s location for standby use may not give rise to PE

Maintenance of stock of goods by the foreign enterprise at the customer’s location for standby use may not give rise to PE


Facts


Airlines Rotables Ltd. (“assessee”) is a company incorporated under the laws of United Kingdom (“UK”). The assessee is engaged in the business of providing spares and component support for aircraft operators.

The assessee has entered into an agreement with Jet Airways Limited (“Airline”), for rendering certain support services.

As per the terms of the agreement,

– When a part! component of the aircraft is not in a condition to be used, the assessee is required to repair and overhaul the component! part. The repair and overhauling of defective part! components is to be done outside India.

– In addition, the assessee is to provide replacement components on exchange basis till the original components are repaired and overhauled.

– To ensure that the replacement for the defective part! components is readily available, a consignment stock of the replacement parts! components is kept at the warehouse of Airline.

– The consignment stock lying in India would remain the property of the assessee at all times.

Issues before the Tribunal

Whether the assessee had a Permanent Establishment (“PE”) in India on account of maintenance of consignment stock of goods at the warehouse of the Airline.

Ruling of the Tribunal

Fixed Place PE

Under Article 5(1) of the double taxation avoidance agreement between India and UK („Tax Treaty”), a fixed place PE is said to exist in India when the assessee is said to have a fixed place of business through which the business is carried out – wholly or partly. There are three criterions embedded in this definition:

– Physical criterion: Existence of physical location;

– Subjective criterion: Right to use that place. i.e. the physical location should be at the disposal of the assessee; and

– Functionality criterion: Carrying out of business through that place

It is only when the three conditions are satisfied that a fixed place PE can be said to have come into existence.

The Tribunal held that mere existence of a physical location is not enough. The location should also be at the disposal of the assessee and it must be used for the business of the assessee as well. Although the consignment stock of the assessee was stored at a specific physical location, the storage facility was under the control of the Airline and the assessee did not have any place at its disposal enabling it to carry out its business from that location.

The Tribunal held that the business of the assessee cannot be said to have been carried on at the location of Airline as the business with regard to the consignment of replacement stock was over when the consignment is given for standby purposes to the Airline.

When the physical location at which consignment stock is kept does not project the business of the assessee, it cannot be said that such a location constitutes a PE of the assessee in India.

Agency PE

There is no material to establish that the Airline or its staff constituted a dependent agent of the assessee. Airline will at best be an independent agent and custodian of the consignment stock.

The consignment stock is not maintained by the Airline for delivery for or on behalf of the assessee. The delivery in the present case is for standby use and not for sale.

Hence the assessee did not have an agency PE in India.

The tribunal held that the onus is on the revenue to demonstrate that a PE of the foreign enterprise exists in India.

Royalties for use of equipment in India

The Tribunal held that merely because an amount is not taxable in India as business profits, it is not the end of the road so far as taxability of the consideration for use of replacement components in India is concerned. Since the revenue authorities have failed to consider as to whether the consideration for use of the replacement components could be considered as royalty income i.e. „for use of industrial, commercial or scientific equipment? under Article 1 3(3)(b) of the Tax Treaty, the matter was remanded back to the Commissioner of Income Tax (Appeals) for that purpose.

Conclusion

The Tribunal has held that a simple maintenance of stock of goods by the foreign enterprise at the customer?s location for standby use may not constitute a PE, while keeping the issue open with regard to royalty on use of equipment.

Source: Airlines Rotables Limited, UK Vs JDIT (Appeal No. 3254 / Mumbai / 2006)

Royalty on software

Payment received on account of supply of software products to independent third party re-sellers in India not royalties but business income

The applicant is a company incorporated in Japan and is engaged in the business of providing Products Lifecycle Management software solutions, applications and services. These software products are standardized and not customized or tailor-made. It markets its products in India through a distribution channel of third party resellers comprising Value Added Resellers (VAR) who resells the software to end-users. The product is sold by the applicant to VAR at standard list price less discount. The VAR sells the product to the end-users at an independent price determined by them. The end-user enters into an End User License Agreement („EULA?) with the applicant and the VAR for the product supplied. VAR gets the order from end-users and places a back-to-back order to the applicant. On acceptance of the order by the applicant, the applicant provides the license key via e-mail to the customer so that the customer will directly download the product through the web-link. The applicant has no presence in India whether through any employee or in the form of any office or place of business.

Question before AAR

Whether the payment received by the applicant from the sale of software products to independent third party resellers will be taxable in India as business profits under article 7 of Indo-Japan Double Taxation Avoidance Agreement (DTAA) and will not constitute „royalties and fees for technical services? per article 12 of DTAA?

Contentions of the applicant

• The transaction is in the nature of purchase of intangible copyrighted products by VAR for re-sale to end users and such sale and purchase is on a principal to principal basis.

• The copyrighted software containing computer program gets transferred to the end user and not the copyright therein. The copyright continues to be vested in its entirety with the applicant and none of the rights therein are made available to VAR or end-user. Only a limited right to use a copyrighted product is transferred.

• The rights associated with the copyright are those which enable the recipient to commercially exploit the product. VAR has not been given any such right.

• A non-exclusive license to the end-user to have access to the licensed program for the licensee?s internal use, does not amount to the use of copyright or the right to use the same.

• The consideration received by the applicant from VAR with reference to the transaction entered into with end-users is not a consideration for the use of any of the copyrights in the software.

• VAR cannot be treated as an agency Permanent Establishment („PE?) of the applicant for the following reason:

– It is a non-exclusive distributor transacting with the applicant on a principal to principal basis.

– It is a distinct legal entity neither related to the applicant nor under the same / common management.

– Economic risks of the products are borne by VAR only.

– VAR is not concluding any contracts or securing orders wholly or almost wholly on behalf of the applicant.

• The income representing the payment received from VAR cannot be treated as „royalties? within the meaning of article 12.3 of DTAA but as business profits. As the applicant has no PE in India, the income is not taxable in India per provisions of DTAA.

Contentions of the revenue

• The license fee paid by the customer in India is for the transfer of rights in respect of copyrights in the software or for the use of computer program embedded in it.

• The payment is made for obtaining a right to copy the program on to the hard disc and to use it and therefore falls within the scope of the Indian Copyright Act, 1957 („CR Act?). Alternatively, the right of sale is also recognized as part of copyright in relation to computer program and such right is given under a license to reseller, so CR Act is again attracted.

• It is clear from EULA that the product is licensed and not sold and the consideration received is license fees.

• VAR is acting on behalf of the applicant for securing the customers to whom the products and services of the applicant are to be licensed. VAR is acting as a dependent agent of the applicant and therefore, the applicant has an agency PE in India.

Observations of the AAR

Royalty income

• The term royalties has been defined both under the provisions of Income-tax Act, 1961 („ITA?) and under the provisions of article 12 (3) of the DTAA. Both the definitions mandate either the use of or right to use or transfer of „copyright of literary or scientific work?. In order to characterize the income as royalties, the applicant must have a right to use the copyright contained in the software.

• The term „copyright? is not defined under the provisions of the ITA and therefore, it would be appropriate to refer to the provision of CR Act. An exclusive licensee is recognized as an owner of the copyright under the CR Act as he is entitled to all the remedies by way of injunction, damages etc. for the infringement of a right.

• The copyright is an intellectual property right that belongs to the owner or its assignees. The ownership of copyright carries with it a bundle of rights which by and large are directed towards exploitation of this intangible property right. If any of the rights are parted with in favour of another so that the other person can enjoy that right in the same manner in which the owner can, it can be said that those specific rights concerning the use of copyright have been conferred on him.

• Adaptation of computer program to ensure its utilization for the purpose for which it was supplied does not constitute an „infringement? under the CR Act. If there is no infringement, it cannot be held that there is a transfer of „copyright? as defined in CR Act.

• A non-exclusive and non-transferable license enabling the use of license product cannot be construed as an authority to enjoy any or all rights ingrained in a copy right. It is so in the present case at hand.

• The use of the word „including the granting of a license? in the definition of „royalty? does not mean that each and every license is contemplated to be included therein. A non-exclusive license permitting use for in-house purpose would not be covered therein.

• The definition of royalty under the ITA for use of process is also not attracted in the present case.

Agency PE

• The existence of agency PE can not be sustained on the grounds that VAR i) is not confined to the dealing only with the applicant, ii) its business is not controlled by the applicant except to the extent necessary to promote its own business, iii) it does not negotiate or conclude contracts with the end-users on behalf of the applicant, and iv) it determines its own price, does not notify or render account to the applicant for the amount collected from the end use.

Ruling of AAR:-

• Neither any right in relation to copyright has been transferred, nor any right to use the copyright has been conferred on the licensee. Therefore, the payment received by the applicant from VAR on account of supplies of software products to the end customers does not result in any income in the nature of royalties to the applicant.

• Per article 7 of the DTAA, the applicant does not have any PE in India and therefore the payments received by the applicant cannot be taxed as business profits in India.

Source: AAR No. 821/2009 in the case of M/s Dassault Systems K.K.

Transfer Pricing-Marketing Intangibles

Maruti Suzuki India vs. ACIT (Delhi High Court)

Transfer Pricing Law for user of foreign trademarks & advertisement expenditure laid down

The assessee manufactured cars using the brand name “Maruti”. It entered into an agreement with Suzuki, Japan, pursuant to which it began manufacturing cars using the brand name “Suzuki”. The TPO issued a show-cause notice in which he alleged that the substitution of the brand name “Maruti” for the name “Suzuki” meant that the assessee had sold the “Maruti” brand to Suzuki. On that basis, he determined the “arms length” sale proceeds at Rs. 4,420 crores. The assessee filed a writ in which the TPO was allowed to pass an order subject to the outcome of the Petition. In the order, the TPO abandoned the theory of “sale” to Suzuki but instead held (without giving the assessee a show-cause notice in this behalf) that as the assessee was using the trademark “Maruti-Suzuki”, the “Suzuki” trademark had “piggybacked” on the “Maruti” trademark without payment of any compensation by Suzuki to the assessee. He alleged that “Maruti” was a “super-brand” while “Suzuki” was a “weak-brand”. He held that the assessee was not liable to pay Suzuki for the trademark “Suzuki” but instead Suzuki was liable to pay the assessee for “piggybacking” on the trademark “Maruti”. He also held that the advertisement expenses incurred by the assessee had gone to benefit Suzuki. He accordingly directed that an adjustment of Rs. 206 crores be made in the hands of the assessee. HELD remanding the matter to the TPO:

(i) While the onus is on the assessee to satisfy the AO/TPO that the arm‘s length price computed by it is in consonance with s.92, the AO/TPO can reject the price computed by the assessee only if he finds that the data used by the assessee is unreliable, incorrect or inappropriate or he finds evidence, which discredits the data used and/or the methodology applied by the assessee;

(ii) The TPO/AO is obliged to give the assessee an opportunity to produce evidence in support of the arm‘s length price and before making adjustments, he is obliged to convey to the assessee the grounds on which the adjustment is proposed to be made and give the assessee an opportunity to controvert the grounds on which the adjustment is proposed;

(iii) Re user of trademark by the domestic entity on discretionary / mandatory basis: If a domestic Associate Enterprise uses a foreign trademark, no payment to the foreign entity on account of such user is necessary in case the user of the trademark is discretionary. However, the “income” arising from such transaction is required to be determined at arm‘s length price;

(iv) If a domestic Associate Enterprise is mandatorily required to use the foreign trademark on its products, the foreign entity should make payment to the domestic entity on account of the benefit the foreign entity derives in the form of marketing intangibles from such mandatory use of the trademark. Even where payment is made by the foreign entity, the arm‘s length price in respect of the international transaction needs to be determined taking into consideration all the rights obtained and obligations incurred by the parties under the international transaction including the value of marketing intangibles obtained by the foreign entity on account of compulsory use of its trademark by the domestic entity. Suitable adjustments in this regards will have to be made considering the individual profiles of these entities and other facts and circumstances justifying such adjustments.

(v) Re advertisement expenditure incurred for the trademark: The expenditure incurred by a domestic Associate Enterprise on advertising of its products using a foreign trademark does not require any payment or compensation by the owner of the foreign trademark/logo to the domestic entity on account of use of the foreign trademark/logo in the advertising undertaken by it, so long as the expenses incurred by the domestic entity do not exceed the expenses which a similarly situated and comparable independent domestic entity would have incurred.

(vi) If the expenses incurred by the domestic Associate Enterprise are more than what a comparable independent domestic entity would have incurred, the foreign entity needs to suitably compensate the domestic entity in respect of the advantage obtained by it in the form of brand building and increased awareness of its brand in the domestic market. The said “arms length price” should be determined by taking into consideration all the rights obtained and obligations incurred by the two entities, including the advantage obtained by the foreign entity.

(vii) In determining whether the advertisement expenses incurred by the domestic Associate Enterprise on advertising the brand trademark/logo of the foreign entity are more than what an independent domestic entity would have incurred, the TPO has to identify appropriate comparables and make suitable adjustments considering the individual profiles of these entities and other facts and circumstances justifying such adjustments.

Sec 195

Obligation to withhold tax attracted only when the payment to a non-resident is wholly or partially chargeable to tax in India

Prasad Production Ltd. (Taxpayer) was awarded a contract by the Government of the State of Andhra Pradesh to establish IMAX Theatre at Hyderabad. The Taxpayer entered into an agreement with IMAX Ltd., Canada for purchase of the system (which included supply of equipment, installation, testing and initial training) as well as transfer of technology. As per the agreement, the total consideration for purchase of the system was US$ 1,365,000 and US$ 950,000 was towards technology transfer fee. During the year under consideration, the Taxpayer remitted US$ 902,500 to IMAX Ltd. on account of system cost without withholding tax thereon.

The Assessing Officer (AO) was of the view that the amount remitted by the Taxpayer was for provision of technical services1 by IMAX and was chargeable to tax in the hands of IMAX. The AO relied on the judgment of Supreme Court in the case of Transmission Corporation of AP Ltd. (239 ITR 587) to conclude that since the Taxpayer has not obtained any order for lower or Nil tax withholding, the gross sum remitted by the Taxpayer was liable to tax and accordingly raised the tax demand against the Taxpayer. The Commissioner (Appeals) cancelled the order of the AO holding that the amount of remittance represents a part of sales consideration of the equipment and hence not chargeable to tax at all. Aggrieved by the said order of the Commissioner (Appeals), the Revenue filed an appeal before the Income Tax Appellate Tribunal (“ITAT”).

Issues before ITAT

• Is it obligatory for the Taxpayer to withhold tax on the entire payment to a non-resident where no application for lower or Nil rate of tax withholding is made to the AO?

• Whether the Taxpayer has the discretion to determine chargeability to tax in respect of the remittance to the non-resident?

Contentions of the appellant [Revenue]

• Relying on the judgment in the case of Transmission Corporation (supra) and the decision of Karnataka High

Court in the case of Samsung Electronics (320 ITR 209), Revenue contended that the Taxpayer has no discretion to decide whether to withhold or not to withhold tax. If such discretion is given, the Taxpayer would sit in the chair of the AO and section 195 will become inoperative.

• Where according to the Taxpayer the entire sum was not chargeable to tax, the Taxpayer has to approach the AO for determination of rate of withholding. The Taxpayer cannot decide the taxability of the payment on his own, it has to be decided by the AO or a Chartered Accountant (“CA”) issuing the certificate on tax withholding.

• Tax withholding is only a tentative determination of tax and subject to assessment in the hands of the payee.

Contentions of the respondent [Taxpayer]

• Installation assistance and initial training were auxiliary to the sale of original equipment and were inextricably and essentially linked to the sale of equipment. Fees for installation assistance and initial training were not in the nature of fees for technical services and the amount of remittance represented a part of sale consideration of equipment, hence not chargeable to tax.

• In the case of Transmission Corporation (supra), it was held that tax is to be withheld only on that portion of the remittance which forms part of taxable income. The Karnataka High Court in the case of Samsung (supra) has extended the applicability of the decision in the case of Transmission Corporation (supra) to cases where the entire income may not be chargeable to tax. In the case of Samsung (supra), the Supreme Court decision in the case of Eli Lily (312 ITR 225) was not considered wherein it was held that where a particular income is not chargeable to tax, then the withholding tax provisions cannot come in.

• Tax is to be withheld only if income is chargeable to tax under the ITA. Income is chargeable to tax if it is a part of the total income of the payee and not otherwise. Where income is not chargeable to tax, there would be no withholding tax liability under the ITA.

• The revenue has through various circulars given a choice to the Taxpayer to either apply to AO under section 195(2) or to obtain a certificate from a CA in lieu thereof. This aspect has not been considered by Karnataka High Court in Samsung decision.

• Section 195(2) is not mandatory. Application for lower or „Nil? tax withholding under section 195(2) is supplementary to section 195(1) and if the Taxpayer has a bona fide belief that the amount is not chargeable to tax, then the Taxpayer need not undergo the procedure under section 195(2).

• It was contended that the Samsung decision is contrary to various Supreme Court and High Court decisions including earlier decisions of the Karnataka High Court as well as the circulars issued by the Revenue and thus the same is not binding.

Observations and Ruling of the ITAT

• In the case of Transmission Corporation (supra), the argument of the Taxpayer was that section 195 is applicable only if the whole of the payment constitutes income chargeable to tax which was rejected by the Supreme Court.

• As per the decision in the case of Transmission Corporation (supra), the person making payment to the non resident would be liable to deduct tax at source if the payment so made is chargeable to tax under the ITA. Impliedly, if the payment is not so chargeable, the payer would not be liable to withhold tax. This is again clarified by the Supreme Court in the case of Eli Lily (supra).

• Where the Taxpayer has a bona fide belief that no part of the payment bears income character, section 195(1) would be inapplicable and hence there is no question in going into the procedure prescribed under section 195(2).

• The ITAT rejected the argument of the Revenue that the Taxpayer cannot decide the taxability of payment on its own and it has to be decided by the AO or the CA from whom the certificate of tax withholding is obtained. The ITAT observed that where the Taxpayer is expected to know what income is taxable in his own case, the Taxpayer can certainly consider the chargeability in respect of payment made to the payee. Here the Taxpayer is only considering the chargeability of a particular income for withholding tax and not determining the tax liability of the total income of the payee. Thus, it is the Taxpayer who is the first person to decide whether the payment he is making bears any income character or not.

• The payer is an assessee and liable to the assessed for withholding tax. The payer has the right to defend the proceedings against him in respect of withholding tax, despite the entire exercise being tentative in nature. The ultimate result would depend on what is determined in the assessment of the recipient. The result in the case of the recipient will determine whether the payer can be treated as assessee in default or not.

• If the payer is under bona fide belief that no part of the payment is chargeable to tax, he is neither required to approach the AO under section 195(2) nor is he required to furnish the CA certificate. CA certificate is to be obtained by the payer for complying with the manual of Reserve Bank of India for the purpose of making remittance as mandated by the circulars of the Revenue.

• If the bona fides of the payer are doubtful, the payer will have to face all the consequences under the ITA. Ultimate liability of the payer as well as consequence of disallowance of expenses on account of non-deduction of tax at source would depend on the assessment in the case of the payee.

• In the present case, the agreement between the Taxpayer and IMAX is very clear to point out that IMAX is to install the equipment, test it and also provide training for up to four projectionists. The AO has mistaken these services to be as payment of technology transfer whereas they are auxiliary to the sale of the equipment. The Revenue has not been able to show cause that these services are independent of the equipment. Thus, US$ 902,500 being part of equipment price is not chargeable to tax in India and Taxpayer was justified in not withholding tax thereon.

Key takeaways

The obligation to withhold tax does not arise if the payment is not chargeable to tax. The payer can decide whether the payment to be made is chargeable to tax or not. Where the payer has a bona fide belief that no part of the payment bears income character, payer would not have any liability to withhold tax thereon. As the tax is not deductible in such a case, payer is not obligated to seek a withholding tax determination from the AO as prescribed under the ITA.

Source: ITO vs. M/s Prasad Production (ITA T Chennai Special Bench) ITA No. 663/Mds/2003, Decision dated 9 April 2010

No PE arises on deputation on hire basis

Mumbai Tribunal rules that no Permanent Establishment arises on deputation on hire basis. Further, no income arises to recipient on reimbursement of salary costs

• Tekmark Global Solutions LLC (“Tekmark?), a tax resident of the USA, deputed its personnel to Lucent Technologies Hindustan Private Limited („Lucent India?)

• As per the agreement between Tekmark and Lucent India, Tekmark to make arrangements to depute personnel based on specific requirements from Lucent India.

• Deputed personnel remain on the payroll of Tekmark and related costs to be charged to Lucent India.

• Such deputed personnel work under the direction, supervision and control of Lucent India

• Tekmark is not responsible for the work done / action performed by such deputed personnel.

• Lucent India has a right to send the deputed personnel back to Tekmark if not found suitable.

Issues before the Tribunal

• Whether the deputation of personnel by Tekmark to Lucent India could result in a Permanent Establishment (PE) for Tekmark in India.

• If a PE is held to exist in India, whether any profits could be attributed to Tekmark in India.

Ruling of the Tribunal

• When the services rendered are independent of and not under the control of Tekmark, the deputed persons cannot be considered as constituting permanent establishment of Tekmark in India. The tribunal based this ruling on the following facts:

• Tekmark is only providing personnel to work under the control and supervision of Lucent India and is not rendering any technical services to Lucent India.

• The deputed personnel are for all practical purposes employees of Lucent India and carry out the work alloted by Lucent India.

• Tekmark has no control over the activities or work to be performed by the deputed personnel and Lucent India has the right to remove the deputed personnel from services.

• The actual salary of the deputed personnal reimbursed by the Indian company is only reimbursement of salary payable by the Indian company, advanced by Tekmark.

• Even assuming that there is a PE in India, no income arises as only the actual salary of the deputed personnel is reimbursed by Lucent India. The Tribunal placed reliance on the following decisions in concluding that there is no income in reimbursement of expenses.

o CIT vs Industrial Engineering Projects (P) Ltd – 202 ITR 1014 Del

o CIT vs Siemens – 310 ITR 320 Bom

Comments:-This is yet another decision on the issue of whether the deputation of personnel by an overseas entity results in Permanent Establishment in India and the related attribution of profit and withholding tax issues.