Payments received for leasing of transponder capacity

Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Intelsat Corporation (ITA No.5443/D/2010) (Judgment Date: 4 March 2011, Assessment Year: 2007-08) held that income received by the non-resident taxpayer from leasing of transponder capacity and bandwidth cannot be taxed as ‘royalty’ under the provisions of Income-tax Act, 1961 (the Act).

Facts of the Case

The taxpayer, a tax resident of USA, was owner and operator of global network of telecommunication satellites located in outer space. It was engaged in the business of transmitting telecommunication signals to and from the earth stations. The taxpayer entered into contracts with TV Channels, NICNET and Internet Service providers to lease its transponder capacity and bandwidth to various customers in India and outside India, who used the transponders for their business in India.

For the assessment years 1996-97 to 2004-05, the assessment of the taxpayer was completed based on the Mutual Agreement Procedure. However, the taxpayer for the year under consideration filed nil return of income after claiming its income not taxable in India. The Assessing Officer (AO), based on the terms of the MAP, completed the assessment and raised demand of INR 112.34 million.

The taxpayer relied on the decision of the Delhi High Court in the case of Asia Satellite Communication Co. Ltd. v. DIT (201 1-TII-05-HC-DEL-INTL) (Judgement Date: 31 January 2011) where it was held that the payments made for using capacity in a transponder for uplinking/downlinking data do not constitute ‘royalty’ under the provisions of the Act.

Tribunal’s ruling

The Tribunal relied on the decision of the Delhi High Court in the case of Asia Satellite Communication Co. Ltd. and held that the payments received by the taxpayer cannot be considered as ‘royalty’ under the provisions of Section 9(1)(vi) of the Act. The Tribunal also held that since the receipts are not taxable under the Act, in view of the provisions of Section 90(2) of the Act there is not need to apply the provisions of the India-USA tax treaty.

TDS On Software -Microsoft Ruling Delhi ITAT

Tax is payable on import of all software , even if the sale does not involve exercise of copyright, according to a Delhi tax tribunal order in a case relating to Microsoft .

 

While the order, passed on October 28, is significant in terms of the liability to withold tax from payments made while importing software, the Delhi Income-Tax Appellate Order (ITAT) attracted the attention of tax professionals on account of its observation that questioned the sanctity of tax treaties.

 

In the order, which may spark multiple litigations , the division bench of ITAT observed that it is not necessary that provisions of tax treaties always override the provisions of domestic tax laws. In a situation, where a provision in the domestic tax law is incorporated after the signing of a Double Taxation Avoidance Agreement (DTAA), it is the domestic law that will override DTAA. According to the existing position, if there is a conflict between domestic tax laws and treaty provisions, the latter is supreme.

This is the first time that a judicial body or quasi judicial body has observed that domestic law can override treaty provisions. This observation was made while holding that royalty is payable by Microsoft. The ITAT has for the first time challenged the superiority of DTAAs India has signed with many countries.

The order says, “Assuming there was a conflict between the Act and the DTAA, the proposition that DTAA will prevail over the Act is not infallible. Later domestic tax legislation can override treaty provisions if there is an irreconcilable conflict (Gramophone India case).”

While the judgement assumes importance because of its offbeat approach on the sanctity of tax treaties, the order has a direct bearing on the software industry in India which now has to pay tax on all imports of software, irrespective of whether the purchase is a copyright or not.

Currently, there are some judgements in favour of the assessee, if the software is a single user licence for use by oneself. In such cases, the licence was tantamount to a copyrighted product and, hence, should not suffer withholding tax because there is no exploitation of copyright in the licence. The Delhi ITAT order changes this.

Vispi Patel of Vispi T Patel & Associates said, ”The Delhi bench has quoted Supreme Court order in the case of Gramophone India. The context in both the cases are different and, therefore, it is not right in applying the same yardstick in the case of Microsoft.”

“The order is a significant departure from how payments for purchase of off-the-shelf software have been viewed by the appellate authorities earlier. It holds that such payments would be for use of a copyright (and not for use of copyrighted article) and would be taxable on a gross basis. The far reaching implications of this proposition apart, the judgement speaks of a treaty override by a subsequent domestic legislation if there is an ‘irreconcilable conflict’ .

 

Delhi ITAT order questions the sanctity of tax treaties

 

Tribunal rules that provisions of tax treaties need not always over ride domestic tax laws

Against current practices, if a domestic tax law is incorporated in a DTAA, the former will override the latter

Software industry will have to pay tax on all software imports , whether the purchase is a copyright or not.

Transfer of shares to wholly owned Indian subsidiary not taxable in India

Transfer of shares to wholly owned Indian subsidiary not taxable in India

Court : Authority for Advance Rulings (AAR)

Brief : Authority for Advance Rulings (AAR) concluded that gains derived from the transfer of shares by a Mauritius company to its wholly owned subsidiary in India would not be taxable in India under the Indian Income Tax Act (ITA), nor would such gains be subject to the Minimum Alternate Tax (MAT) (Praxair Pacific Limited (A.A.R. No. 855/2009)). The AAR further clarified that benefits under the India-Mauritius tax treaty would be available to the Mauritius Company.

Citation : Praxair Pacific Limited (A.A.R. No. 855/2009)

Background:-Praxair Pacific Limited (“PPL”), a company incorporated in Mauritius, proposes to transfer its 74% equity stake in Jindal Praxair Oxygen Company Private Limited (“JPOCPL”) to its wholly owned subsidiary in India, Praxair India Private Limited (“Praxair India”). The consideration for the proposed transfer is stated to be determined on the basis of cost, unless a higher consideration is required under the pricing guidelines prescribed by the Reserve Bank of India as applicable for transfer of shares.

Issues before the AAR

• Whether the investment held by PPL in equity shares of JPOCPL would be considered as “capital asset” under section 2(14) of the Income-tax Act, 1961 (“ITA”)?

• Whether transfer of JPOCPL from PPL to its wholly owned subsidiary Praxair India would be liable to tax in India in view of the exemption under section 47(iv) of the ITA?

Please note Exemption under section 47(iv) of the ITA is available if the capital asset is transferred by a holding company to its wholly owned Indian subsidiary.

• Whether PPL would be entitled to the benefits of the India – Mauritius Tax Treaty (“Treaty”) and whether the gain arising to PPL would be liable to tax in India having regard to the provisions of Article 13 of the Treaty?

•Whether the gains arising to PPL from the sale of equity shares of JPOCPL would be taxable in India in the absence of Permanent Establishment (“PE”) of PPL in India in light of the provisions of Article 7 read with Article 5 of the Treaty?

•Whether PPL would be liable to Minimum Alternate tax under the ITA?

•Where the gains arising to PPL on account of the proposed transfer is not taxable in India under the Act or the Treaty, whether Praxair India, the transferee company, is required to withhold tax in accordance with the provisions of section 195 of the ITA?

•If the gains are not taxable in India, whether PPL is required to file any return of income of income under section 139 of the ITA? This question was not pressed by PPL.

•Whether the proposed transfer of equity shares by PPL to Praxair India attracts the transfer pricing provisions of section 92 to 92F of the ITA?

Contention of the applicant

• The shares held by PPL in JPOCPL are not held as stock-in-trade but represent investments and thus should be classified as a capital asset.

• As PPL proposes to transfer its equity shareholding in JPOCPL to Praxair India, its wholly owned subsidiary in India, the provisions of section 47(iv) of the ITA are fulfilled. Gains, if any, on the transfer of equity shares in JPOCPL would not be taxable in India.

• PPL would not be liable to tax book profits or Minimum Alternate tax under the ITA as the provisions of section 11 5JB would be applicable only to domestic companies and not to foreign companies.

• The gains from the proposed transfer of shares in JPOCPL by the Applicant would not be taxable in India as capital gains or business income in the light of the treaty.

• In case the proposed gains are not considered as capital gains but as business income, such business income will not be taxable in India since PPL does not have a PE in India.

Observations / Rulings of the AAR

• The shares in JPOCPL have been held as “Non-current assets – investment in subsidiaries” since 1995 and were never a subject matter of any transaction till date. As the shares were not held as stock in trade, the nature of the investment in these shares is held to be a “capital asset” as defined in section 2(14) of the ITA.

• As PPL proposes to transfer its equity share holding in JPOCPL to Praxair India which is its wholly owned subsidiary in India, the conditions under section 47(iv) of the ITA are fulfilled and hence the gains if any arising on transfer would not be taxable in India.

• As PPL is tax resident of Mauritius and has been issued Tax Residency Certificate by the Mauritius Revenue Authority, it would not be subjected to tax in India on the capital gains arising from the proposed transaction in India under the Treaty.

• The annual accounts of the applicant cannot be prepared in accordance with Schedule VI of the Companies Act 1956. The provision under the ITA relating to Book Profits Tax is not designed to be applicable to a foreign company which has no presence or PE in India. The AAR relied on its ruling in the case of Timken USA (AAR 836 of 2009) where it was held that under the Companies Act 1956 only such foreign companies who have established a place of business within India are required to make out a Balance Sheet and Profit and Loss account as required under the said Act.

• Sections 11 5JB of the ITA is not attracted in the case of PPL.

• The transfer pricing provisions of section 92 to 92F of the ITA would not be attracted in the absence of liability to pay tax on the capital gain.

Conclusion: - Gains from the transfer of shares by a Mauritius company to its wholly owned subsidiary in India would not be taxable in India either under the ITA. The AAR has also reiterated the benefit of the India- Mauritius tax treaty would be available to PPL as it had adequate tax residency certificate issued by the Mauritius Revenue Authority. Further, the gains from such transfer would not be subject to Minimum Alternate Tax as the provisions under the ITA governing such tax do not apply to a foreign company that has no presence or PE in India

Income earned abroad can’t be taxed, if the same is not chargeable to tax under the general provisions of the I-T Act

In a recent ruling Mumbai Income Tax Appellate Tribunal (ITAT) [2010- T11-41-ITAT-MUM-INTL] in the case of J Ray McDermott Eastern Hemisphere Ltd. (Taxpayer) held that receipts pertaining to transportation and installation contract executed by the Taxpayer outside India cannot be taxed under the special provisions, which provide for taxation of certain income of a non-resident on presumptive basis, if the income is not chargeable to tax under the general provisions of the Income Tax Act, 1961.

Background and facts of the case

The Taxpayer, a company tax resident of Mauritius, was engaged in the business of designing, fabrication, construction and installation of platforms, docks, pipelines, jackets and other similar activities which are used in the exploration and production of mineral oil.

The Taxpayer undertook and executed a contract for transportation and installation work under certain well platforms projects to be used in mineral oil exploration viz. N-11 and N­12.

While filing its tax return, the Taxpayer did not offer the receipts pertaining to activities carried on outside India for tax.

The Income Tax Act contains special provisions for taxation of income arising to a non-resident for providing services used in mineral oil exploration. Under this provision, 10% of the gross receipts of the non-resident is deemed to be income chargeable to tax.

The Tax Authority ruled that as the source of income is related to an agreement for work to be carried on in India, the whole of the receipts would be taxable under the Income Tax Act. Further, as income is computed on presumptive basis under the Income Tax Act, the distinction between activities carried on in India and those outside India is not relevant and the gross receipts would be taxable.

The first appellate authority reversed the decision of the Tax Authority.

Aggrieved, the Tax Authority appealed against the decision of the first appellate authority.

Contentions of the Taxpayer

Income pertaining to installation and transportation activities carried on outside India is not taxable under the Income Tax Act.

Alternatively, income pertaining to the above activities or work carried on outside India cannot be attributable to a permanent establishment (PE) in India.

Contentions of the Tax Authority:-The entire receipt arising on execution of the contract for installation and transportation is attributable to the PE of the Taxpayer in India.

Ruling of the ITAT

The ITAT upheld the decision of the first appellate authority. The ITAT held that only income which is reasonably attributable to operations carried on in India is taxable in India. Income computed on presumptive basis can be taxed in India only if such income is chargeable to tax under the general provisions of the Income Tax Act.

The ITAT placed reliance on rulings in the case of Saipem SPA v. DCIT [88 ITD 213] (Delhi ITAT) and McDermott ETPM Inc. v. DCIT [92 ITD 385] (Mumbai ITAT) , rendered in a similar context wherein it had been held that before computing income on presumptive basis, it needs to be ensured that such income falls within the scope of total income as envisaged under the Income Tax Act.

Comments

In the case of a non-resident, the Income Tax Act provides for computation of income on a deemed basis as a percentage of the amount paid to a taxpayer on account of provision of services and facilities, supply of plant and machinery etc. to be used in prospecting for mineral oil in India. Generally, in such cases, a portion of the income from the execution of contracts could arise outside India and may not be taxable under the general provisions of the Income Tax Act.

The basis for taxation of the entire receipts pertaining to portions of the contract executed in and outside India has been a subject matter of litigation. In the case of CIT v. Halliburton Offshore Services Inc., the Uttarakhand High Court (HC) had ruled that the provision of the Income Tax Act envisaging computation of income on presumptive basis is a complete code in itself. The HC further ruled that the amount of income computed thereunder would be taxable in India, irrespective of such income falling within the scope of total income as envisaged under the Income Tax Act. However, in the present ruling, the Mumbai ITAT has relied on rulings by other benches of the ITAT and has held that the special provisions relating to presumptive basis of taxation do not override the general provisions that determine scope of total income of a non-resident.

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