S.2(14) : Capital asset – Non-resident – Shares – Non-resident not having permanent establishment in India – Transaction not for avoidance of tax – Shares to be treated as capital asset not stock-in-trade – Profits not business income but capital gains – Not taxable in India – Even if treated as business income not taxable in absence of permanent establishment – Provisions relating to minimum alternate tax, transfer pricing and TDS not applicable – Non-resident not bound to file return in India – DTAA-India-Mauritius
The applicant company which had been operating for more than 10 years in Mauritius could not be said to be a shell company. The shares were acquired years ago for a substantial cost. After more than 5 years old from the date of the last acquisition of the shares, the shares were transferred as a part of group reorganisation after approval of the Department of Industrial Policy and Promotion and the Reserve Bank of India. Hence, it could not be said to be a colourable device. Thus, it could not be said that the proposed transfer of shares was a scheme to avoid payment of taxes in India. It was clearly for business considerations.
That the shares in the Indian company held by the applicant had to be treated as capital asset as defined u/s. 2(14) of the Act and not as stock-in-trade. Article 13 of the DTAA would not be applicable for the simple reason that the applicant did not have a permanent establishment in India.
That there would be no applicability of section 115JB to the applicant.
That section 92 is not an independent charging section and unless the transaction is taxable in India, there would be no application of sections 92 to 92F. In the present case even though the proposed transfer of shares could result in income/capital gains from the international transaction since this income was not chargeable to tax in India, there would be no question of the applicability of sections 92 to 92F.
That since the capital gains earned out of the proposed transaction were not taxable there was no question of the applicability of section 195 of the Act.
That the applicant would not be required to file a return of income u/s. 139 of the Act.
Dow Agro Sciences Agricultural Products Ltd., In re (2016) 380 ITR 668 / 131 DTR 177 / 65 taxmann.com 245 (AAR)
S.4 : Charge of income-tax – Settlement amount received in pursuance for surrender right to sue is a capital receipt and not a business income, hence not chargeable to tax in India
The Applicant, a foreign institutional investor (‘FII’) along with its affiliates purchased shares of Satyam Computer Services Limited (‘Satyam’) and Satyam’s American Depository Shares (‘ADRs’). Subsequently, in January 2009, the CEO confessed that the accounts of the company were manipulated, pursuant to which, the Appellant and its affiliates disposed of the shares of Satyam and ADRs.
Thereafter, the Appellant filed claims against Satyam for fraudulent misrepresentation. Finally, a Settlement agreement was entered with Satyam whereby for an agreed amount, the Appellant on behalf of the Aberdeen Investors would forever waive, release, discharge and dismiss all legal claims against Satyam.
An application was filed with Authority of Advance Ruling (‘AAR’), to seek a ruling in respect of the taxability of the agreed amount received from Satyam under the Settlement Agreement under the Income-tax Act, 1961.
The AAR held that the nature of settlement amount is of a capital receipt and the amount has been received against surrender of right to sue cannot be considered for the purpose of capital gains u/s. 45, relying on the AAR decision in the case Qualified Settlement Fund (QSF), In re (2016) 130 DTR (AAR) 367. In the said case, under similar situation, AAR held that if right to sue is considered as a capital asset, its cost of acquisition cannot be determined and in the absence of such cost of acquisition, the computation provisions fails. Therefore, right to sue cannot be subjected to income tax under the head ‘Capital gains’.
Further, it was held that the settlement amount have been received not as part of business profit or to compensate the future income but as a result of surrender of the claim. Thus, even in accordance with the principle of surrogatum such amount is not assessable as income because it does not replace any business income.
Aberdeen Asset Management Plc., In re (2016) 131 DTR 1 (AAR)]
Aberdeen Claims Administration Inc., In re (2016) 131 DTR 1 (AAR)]
S.6 : Residence in India –Installation project continuing only for 178 days in fiscal year, less than 183 days – No permanent establishment of applicant in India-Business profits from execution of project taxable only in country where applicant was resident –DTAA-India-Singapore
Since the project executed by the applicant in India continued only for 178 days in a fiscal year, less than 183 days in a fiscal year, there was no permanent establishment of the applicant in India and that the business profits accruing or arising to the applicant by way of the execution of the project under reference were taxable only in the country where the applicant was a resident in terms of Article 7(1) of the Double Taxation Avoidance Agreement between India and Singapore.(AAR No 1602/14 dt. 10-11-2015)(AY. 2013-14)
Tiong Woon Project and Contracting (Pte) Ltd. In (2016) 380 ITR 187 (AAR)
S.9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical services – Supply management service fees received by Applicant – Not liable to deduct tax at source- DTAA-India-UK
The Applicant is a company incorporated in UK. The Indian affiliate is engaged in the business of manufacture and sale of turbochargers and purchases turbocharger components directly from third party in UK and US and in relation to such purchases, the applicant provides supply management services vide material suppliers management service agreement. AAR ruling was sought on question whether the supply management service fees received by Applicant from Indian affiliate is in the nature of “fees for technical services” (FTS) or “royalties” within the meaning of the term Article 13 of the India-UK DTAA.
The AAR held that, the Applicant is not imparting its technical knowledge and expertise to the Indian Company based on which the Indian company will acquire such skills and will be able to make use of it in future. Therefore, the ‘Make available’ clause under India–UK, DTAA is not satisfied and hence such fee is not FTS under the Article 13 of the India-UK Treaty.
AAR further held that, the nature of services related to the identification of products and competitive pricing cannot qualify as royalties under the provisions of Article 13 under India-UK DTAA because it is not related with the use of, or the right to use any copyright, patent, trademark, design, or modal, plan secret formula or process etc. Thus, Indian affiliate is not required to withhold tax under section 195 of the Act.
Cummins Ltd., In re (2016) 237 Taxman 693 (AAR)
S.44BB : Mineral oils – Assessee entered into a contract with RIL to provide facilities in connection with extracting, prospecting or production of mineral oil – Assessee signed a change order’ with RIL to facilitate certain amendments in scope of work of Original contract – original contract and ‘change order’ were inextricably linked with each other – Entire consideration received for scope of work was taxable in India under section 44BB
The applicant, a company incorporated in and a tax resident of Norway, was engaged in the business of providing floating production storage and offloading facilities, a type of floating production system used in offshore oil and gas industry. It entered into a contract on May 9, 2007 with an Indian company under which for a consideration on a day rate lease rental basis, the applicant was required to provide floating production storage and offloading facilities at the assigned site in connection with extraction, prospecting or production of mineral oil. The contract specified the fee towards mobilisation of the vessel from Singapore to India to the offshore location in India. The consideration for floating production storage and offloading facility and fees towards mobilisation of the vessel under contract were offered to tax from assessment year 2009-10 onwards, accepting that they had accrued in India for supplying plant and machinery on hire used or to be used in the prospecting, extracting or production of mineral oil and the income was computed in terms of section 44BB of the Act. Similarly, the mobilisation revenue was also offered to tax on the same basis.
On July 27, 2008, the applicant signed a “change order” with the Indian company to facilitate amendments in the scope of work under the original contract. The amendments involved fabrication and installation of new living quarters on board the floating production storage and offloading facilities, procurement and installation of heating, ventilation air conditioning systems on board the living quarters, mobilising the commissioning team of the applicant four months prior to the floating production storage facilities sailing to India instead of six weeks prior, extending the dry docking as envisaged, expediting the deliveries of the topside modules and increasing the productivity of the Singapore shipyard and timely installation of buoy and moorings in India. The consideration received in terms of the change order was not offered to tax on the premises that a substantial portion of the work was performed outside India. However the Indian company withheld tax based on a withholding order of the department in respect of the original contract.
The applicant sought an advance ruling on (1) Whether consideration received by the applicant under the ‘Change Order’ for undertaking the various activities is in the nature of business profits or in the nature of ‘fees for technical services’ as defined in the Explanation 2 of section 9(1)(vii). (2) If the scope of work is in nature of business profits, would the consideration for the scope of work, as mentioned in question 1 above, be taxable in India even though it pertains to work performed wholly outside India. (3) Whether on the stated facts and in the circumstances of the case, the consideration received by the Applicant for installation of the buoy and moorings in India is in the nature of business profits on fees for technical services under section 9 of the Act. Whether the income chargeable to tax ought to be computed having regard to the computational mechanism under section 44BB of the Act. (4) If for any reason the amount as received by the Applicant for performing the scope of work as mentioned in Question No. 1 is taxable in India, whether the income chargeable to tax ought to be computed having regard to the computational under section 44BB of the Act. (5) Whether consideration received by the Applicant is attributable to mobilisation of the FPSO to the extent of the distance travelled by the FPSO outside India is taxable in India.
The AAR observed that, it was apparent from facts that the applicant was giving different treatment to considerations received as per the original contract and as per the change order. Not only that, it was giving different treatment to considerations received pursuant to change order also as its offering consideration for installation of buoys and moorings for tax under section 44BB and for other amount it is taking the stand that the same is not taxable. The AAR further observed that an analysis of original contract and of the change order done showed that the change order is nothing but amendments in their original contract. It is mentioned upfront in clear terms in the change order. The original contract already had clauses pertaining to provisioning of 104 living quarters and for HVSC systems. As per the change order the applicant has made 104 living quarters livable and installed new HVAC system by dismantling the existing one. In paragraph 9(IX) it is apparent that the entire scope of work in the change order is nothing but modifications/amendments in the original contract. The AAR held that it was beyond doubt that the consideration received as per change order was similar to consideration received as per original contract and that it was also established that both original contract and amendments therein by way of change order are inextricably linked with extraction, processing, production, storing & offloading of crude oil and natural gas for which RIL had floated tender and granted the contract to the applicant. Hence, the applicant would be governed by provisions of section 44BB of the Act.
The AAR further held that, section 44BB does not make any distinction between amount paid in India or outside India and, therefore, the entire amount has to be considered for the purpose of computation under this section. Accordingly there was no reason to give a different treatment to the consideration received pursuant to the change order. The AAR rejected the applicant’s contention that the consideration received as per change order is not taxable under the DTAA between India and Norway. The AAR observed that the scope of work as per change order has not changed as compared to that in the original contract and that the applicant’s arguments is based on the stand that it, being a resident of Norway, does not carry on any activity offshore in India while performing its obligations under the change order and, therefore, provisions of Article 23 are not applicable. This stand was based on the distinction between original contract and change order and was different from the stand taken in respect of original contract in the returns filed by the applicant from assessment year 2009-10 onwards. Further, the scope of work is to prepare the FPSO for chartering to provide the same on lease rental basis to extract, receive, process, produce, store & offload crude oil and natural gas from development area in India and all activities and works connected with this including its preparation for chartering are inextricably linked with the main work. Accordingly, the entire consideration received for the scope of work as mentioned in question No. 1 is taxable in India under the provisions of section 44BB.
Aker Contracting FP ASA, In re (2016) 381 ITR 489 / 237 Taxman 427 / 283 CTR 250 (AAR)
S.195 : Deduction at source – Non-resident – Settlement amount payable by Applicant to QSF –Pursuant to the final judgment of the US Court – Not regarded as sum chargeable to tax in hands of QSF
The applicant is an Indian company whose shares are listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Its American Depository Shares (ADS) were listed in the New York Stock Exchange (NYSE).
A number of suits were filed against the Indian company as well as its auditors in various jurisdictions in the US, for claiming damages. The suits were consolidated and a consolidated ‘Class Action Complaint’ was filed for alleged violation of the Securities Exchange Act of US.
The US court passed a preliminary order approving the settlement and later the US court passed a final judgment in this regard. Under the terms of the settlement, Indian Company had first to deposit the agreed amounts in a segregated account in India. Thereafter, the amount deposited by would be transferred to an initial escrow account in New York. After the approval of the settlement, the amount had to be transferred from the initial escrow account to the final escrow account to be treated as Qualified Settlement Fund (QSF). Thereafter, it had to be distributed to the qualified claimants in the class action, after deducting the expenses including legal fees incurred and meeting the tax liability, if any.
Before actual transfer of the funds, the applicant approached the AAR for a ruling on whether the settlement amount payable under the Stipulation to the QSF was liable to TDS under section 195 of the Act.
Ruling in favour of the Revenue, AAR held that the settlement amount constituted ‘income from other sources’ in the hands of QSF, under Article 23(3) of the Indo-US DTAA. Thus, the 3 applicants were required to withhold tax under section 195 of the Act, before the fund was distributed. Having held that the income arose in India and observing that the Lead Counsel was a resident of the USA, the AAR held that the receipts under class action suit were
squarely covered by Article 23(3) of the Indo-US DTAA.
Against the aforesaid AAR, a writ was filed before Delhi HC. HC had set-side the above AAR ruling and remanded matter back to AAR to firstly examine whether the afore-mentioned receipts were in nature of revenue or capital and then determine chargeability under the Act.
Further AAR rejected Revenue’s stand that amount was taxable under the head ‘Income from other sources’. AAR noted that Sec. 56(1) contemplates only such source which does not specifically fall under any one of other four heads of income. AAR held that the income in the nature of settlement amount in lieu of surrender of ‘right to sue’ was not covered in this section.
Thus AAR disagreed with earlier AAR ruling in applicant’s case and held that amount was not taxable under section 56 of the Act. However, as TDS under section 195 of the Act was already deducted pursuant to co-ordinate bench order, AAR clarified that the remedy for this was available in Income-tax Act for the payee to claim refund and for that appropriate action will have to be taken.
Lead Counsel of Qualified Settlement Fund (QSF). In RE (2016) 237 Taxman 667 (AAR)
S.195 : Deduction source – Penalty paid to Government of USA Pursuant to order of court in USA for violations of securities law in that country – No tax liability – No tax required to be deducted at source
That unless the payment made attracts tax under the law in India, there would be no liability to deduct tax u/s. 195 of the Act. A penalty ordered by the US. court can never attract any tax nor would such a payment made by the applicant attract any tax liability. The payment being penalty as ordered by the court of competent jurisdiction could never attract any such tax liability. Hence, the applicant would not be required to deduct any such amount u/s. 195.
Satyam Computer Services Ltd., In re (2016) 380 ITR 180 / 236 Taxman 199/ 282 CTR 41 (AAR)