BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME...
Transcript of BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME...
BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI ==========
P R E S E N T
Hon’ble Mr. Justice Syed Shah Mohammed Quadri (Chairman)
Mr. A.S. Narang (Member)
Monday, the Twenty-first August Two Thousand Six
A.A.R. NO. 667 OF 2005
Name & address of ABC LTD. the applicant
Commissioner concerned CIT-I Pune
Present for the Department Mr. T.N. Ch opra, Advocate
Present for the Applicant Mr. Porus Kaka, Advocate Mr. Rajesh Kadakia, CA Mr. Vinesh Kriplani, CA
R U L I N G
(By Mr. Justice Syed Shah Mohammed Quadri)
In this application under section 245Q(1) of the Income-tax
Act, 1961 (for short “the Act”), the applicant is a company
incorporated in Switzerland and is a tax resident of that country. It
is a part of the D Group of companies. E Ltd. is a one of the D
Group of companies . It was incorporated in U.K. and it is a tax
resident of U.K. The said company was engaged in the business of
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manufacturing of turbochargers and providing engineering services.
XYZ Ltd issued a letter of intent (‘LOI’) duly specifying the key
terms and conditions for the supply of turbochargers in favour of E.
Ltd. for the purchase of turbochargers for L litres diesel engines in
September, 2003. The D Group took up a restructuring exercise
with the objective of centralizing key functions in Switzerland
whereunder E. Ltd. transferred its business of manufacturing
turbochargers on a going concern basis to the applicant w.e.f. 1st
January, 2004. Thereafter the applicant is engaged in the business
of manufacture of turbochargers for passenger and commercial
vehicles. Under the arrangement the LOI issued by XYZ Ltd to E
Ltd. for the purchase of turbochargers was transferred by it ( E Ltd.)
to the applicant as a successor. The applicant entered into a
turbocharger development and supply (TDS) agreement with XYZ
Ltd for manufacturing and supply of turbochargers for vehicles
manufactured by XYZ Ltd using L litres diesel engines. The
applicant proposes to establish an Indian subsidiary named “ J Pvt.
Ltd. to be incorporated under the Indian Companies Act, which
would be engaged in the business of supplying of turbochargers to
customers including XYZ Ltd as per the TDS agreement. J Pvt.
Ltd. would manufacture locally and supply turbochargers to XYZ
Ltd. For that purpose the applicant would assign its rights, interests
and obligations in the TDS agreement to J Pvt. Ltd. on agreed
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consideration to be paid to the applicant in installments. As part of
the agreement the applicant proposes to provide a volume
guarantee to J Pvt. Ltd. to the effect, should the volumes under
the TDS agreement fail to materialize from XYZ Ltd. at the prices
indicated thereunder, the applicant would source additional
turbochargers from J Pvt.Ltd. to make good such deficiency. In
this backdrop the applicant has set forth the following questions to
seek advance rulings of the Authority:-
1. On the facts and in the circumstances of the case, whether the receipt arising to the Applicant, from the proposed assignment of the Turbocharger Development and Supply Agreements in accordance with the assignment deeds be taxable in India having regard to the provisions of the Income-tax Act, 1961 (“the Act”) and the Double Taxation Avoidance Agreement between India and Switzerland (“the DTAA”) ?
2. If the answer to (1) above is in affirmative, then, to
what extent and in which year/s would the receipt be taxable in India having regard to the provisions of the Act and the DTAA?
3. If in the facts and circumstances of the case, the
receipt is not taxable in India, then, whether the assignee of the Turbocharger Development and Supply Agreement is required to withhold any tax under section 195 of the Act while making remittance to the Applicant?
2. The Commissioner of Income tax-I, Pune (for short “the
Commissioner”) has sent the following comments:-
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XYZ Ltd will be using the technology and the product supplied
by the applicant directly or indirectly through the subsidiary for
being used and utilized in India and payments made by the
subsidiary to the applicant will be out of the profits earned by
the Indian subsidiary. Because such remittances would
include element of taxable profits (of which no details are
available at present) the same are taxable. It is a matter of
record that the applicant had taken steps to register its
subsidiary J Pvt. Ltd. on 18.7.2005 even before completion of
one year from the date of execution of TDS agreement dated
6.8.2004. Though the applicant had made every attempt to
show that no income would be deemed to accrue or arise in
India as it has no business connection, source of income or
assets or transfer of any capital asset situate in India. It has
not given any reason as to how the assignment of the
agreement would not be taxable under the provisions of the
Act. Even under the Double Taxation Avoidance Agreement
between the Government of the Republic of India and the
Government of the Swiss Confederation dated 29th December,
1994 (for short the “Treaty’), article 7 would be attracted and if
it has a permanent establishment (PE) in India it would be
taxable. Every person designated to carry on any function on
behalf of the foreign company would be treated as a PE.
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Having regard to the sequence of events, namely, the
applicant executed an agreement in August, 2004 and
thereafter proposes to assign the same to subsidiary to be
incorporated would disclose well thought over arrangement,
therefore, receipt arising to the applicant out of proposed
assignment of TDS agreement are taxable in India under the
Act as well as under the Treaty. In regard to question no.2, it
is stated that the financial year in which the assignment of the
TDS agreement takes place, will be the year in which the
consideration would be taxable. In regard to question No. 3, it
is stated that since receipts by the applicant are taxable in
India the provisions of section 195 of the Act will be attracted.
3. Mr. Porus Kaka, learned counsel appearing for the applicant,
has submitted that the subject matter of assignment between the
applicant and the J Pvt. Ltd. is the TDS agreement dated 6.8.2004
which would be executed outside India and the consideration for
the assignment would also be received by the applicant outside
India, therefore, the applicant, being a non-resident, would not be
taxable. He argued that under section 9(1) of the Act no income
would be deemed to accrue or arise in India to the applicant under
any of the limbs of the Section 9(1)(i) of the Act. The applicant, it is
submitted, has no business connection in India; the activities of J
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Pvt. Ltd. consequent upon the assignment of the TDS agreement
for manufacture and supply of turbochargers to XYZ Ltd would be
in discharge of its own obligations under the agreement and could
not be treated as for and on behalf of the applicant. Refuting the
contention of Mr. T.N. Chopra, learned counsel appearing for the
Commissioner, that the consideration paid to the applicant under
the assignment agreement is in the nature of royalty, Mr. Kaka has
submitted that the TDS agreement contemplates only supply of
products – turbochargers- to XYZ Ltd, no technical know-how,
patents or license of any technology is involved therein, therefore,
they are not the subject matter of transfer under the assignment
agreement and J Pvt. Ltd. will have to procure separately the
technology required for manufacturing turbochargers from a
different D Group entity holding intellectual property rights. For
these reasons, the consideration for assignment of TDS agreement
cannot be regarded as royalty. Under the treaty also the
consideration is not taxable. Article 7 of the treaty provides for
taxation of business profits only when the applicant has a PE in
India. As the applicant is not carrying out any business in India and
it has no PE in India the consideration payable to the applicant will
not be taxable.
4. Mr. T.N. Chopra, learned counsel appearing for the
Commissioner, has contended that the assignment fee has nexus
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with the running of business and therefore, is in the nature of
revenue profits in the hands of the applicant and is taxable. It is not
a case of simpliciter assignment without carrying on any activity in
India. The Indian subsidiary set up by the applicant is merely a
projection of foreign enterprise on the soil of India and the
assignment fee is , therefore, liable to tax under section 9(1)(i) of
the Act as well as article 7 of the treaty. What is purportedly
labeled as assignment fee is in the nature of royalty liable to tax
under section 9(1)(vi) of the Act as well as article 12 of the treaty.
Since deduction of tax at source under section 195 of the Act is
tentative and provisional subject to final determination at the time of
regular assessment. Section 195 of the Act is attracted at the time
of payment of so called assignment fee.
5. The rival contentions of the parties give rise to the following
points for determination:-
(i) Whether amounts payable under the assignment
agreement, either in the nature of business receipts or
royalty, are taxable under the Act.
(ii) If the answer of the first point is that they are taxable
as “business receipts”, whether the applicant has a
PE in India?
(iii) Whether the amounts payable under the TDS
Agreement attract section 195 of the Act?
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(i) To comprehend the real nature of payments to be made by
the J Pvt. Ltd. to the applicant under the assignment
agreement, it is necessary to read both the TDS
agreement dated 6.8.2004 (Exhibit-2) as well as draft
assignment agreement (Exhibit -4) because the subject
matter of Exhibit-4 is the same as the subject matter of
Exhibit-2. Exhibit-2 is between the XYZ Ltd and the
applicant. We have carefully gone through it. It will be
apposite to refer to the following clauses of the agreement
Exhibit-2 which are relevant for the present discussion:-
(1) The preamble of the agreement recites, inter alia,
that as a result of long experience in the business
of design, development and manufacture of trucks
and passenger vehicles for the Indian and overseas
markets, XYZ Ltd. has developed and has acquired
and/or possesses technical knowledge in these
fields and has industrial and intellectual property
rights consisting of designs, product engineering,
technological and other information with respect to
those vehicles and related parts and components.
(2) In regard to D Group, it is mentioned that PQR
belongs to that group and as a result of long
experience in the business of design, development
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and manufacture of engine boosting systems for the
worldwide market has developed and acquired
and/or possesses specific knowledge, know-how,
patents and technical information in the fields, inter
alia, of engineering, design, development and
manufacture of various types of turbochargers for
various types of engines, which it manufactures at
its factories worldwide.
(3) XYZ Ltd wishes to use the products as defined
therein in the engines being manufactured by it at its
factories and therefore, it approached PQR to
supply the products and PQR has agreed to supply
the products developed for that purpose to XYZ Ltd
on the terms and conditions.
(4) Para 2.2.3 of the Agreement which deals with
Supply, Price and Payment, reads that XYZ Ltd
agrees to purchase products from PQR as the sole
supplier, subject to PQR meeting system
specifications, quality, reliability, performance,
delivery and price requirements of XYZ Ltd. as set
out in this agreement and PQR agrees to supply on
the terms and conditions set forth in the agreement.
XYZ’s Ltd. requirements for products for vehicles
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manufactured by XYZ Ltd using L litres DICR TCIC
Diesel engines.
(5) If a new proven technology is developed that, when
substituted for the products significantly improves
the performance and price of the XYZ Ltd vehicles
then XYZ Ltd. will provide PQR the first choice of
offering the new proven technology and it is only
when PQR unable or unwilling so to do then XYZ
Ltd will be free to source the new proven technology
from alternate sources.
(6) It is also necessary to notice the following clause in
para 2.2.4 under the caption ‘Prices’:-
“Notwithstanding anything contained in this agreement, risk, title, ownership and property in the products shall pass to XYZ Ltd. once the products are handed over to the freight forwarder designated by XYZ Ltd. at the relevant PQR factory gate”.
(7) Para 2.3 – Local facility and customer support – is
also worth noticing.
“In its endeavour to remain price competitive, PQR shall aggressively explore possibility of localization of Imported Products in India. In view of this, PQR will provide the following support.
Local Support and Manufacture. PQR intends to localize/ manufacture its’ Products in India in two discrete phases. (A) Phase 1
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(1) Supply base: PQR has positioned two person supply base team in India during Quarter 1, 2004 to develop local suppliers. This team will be responsible for local sourcing.
(2) Engineering: PQR will provide XYZ Ltd.
with engineering support in India as soon as reasonably required (assuming first part of the development of the engine will be led in Europe). PQR plans to place 2 engineers in India for support purposes OR earlier as per actual requirement of XYZ Ltd..
(3) Service network: PQR turbochargers are
serviced through an established service network in Europe today. This existing network will accommodate the service needs of PQR turbochargers in the XYZ Ltd.’ European vehicles. PQR will establish a service organization to cover service requirements for PQR turbos in the XYZ Ltd.’ vehicles in India. PQR would set up service organization within a timeframe to be mutually agreed upon. In addition, PQR will evaluate the business case for setting up a Repair & Overhaul facility in India.
(B) Phase 2
(1) Local assembly: PQR will set up a local assembly facility in India within 18 months of start of serial production at XYZ Ltd.. A plan to accomplish this will be provided to Customer within 3 months of signing this Agreement.
(C) PQR will support the Products and supply
spares for a period of 10 years from the end of serial production of the Products.
(D) In the event significant changes occur within the Indian business environment, such as, but not limited to, political instability, or significant reductions in the volumes projected in Appendix I, PQR reserves the right to re-assess the timing and business case for setting up a local assembly facility in India. PQR and XYZ Ltd. will agree how to proceed to best ensure
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the continued supply of Product to XYZ Ltd.. In addition, the local facility is subject to PQR obtaining all necessary approvals from the Government of India.
(8) In regard to the delivery of the products, para 2.9 of
the agreement reads thus:-
“PQR shall supply Products as per XYZ Ltd. schedules as indicated in Purchase Order or as communicated from time to time. PQR and XYZ Ltd. shall mutually agree on a logistics protocol prior to commencement of production”.
(9) Para 2.18 of the agreement has undertaken to
assure continuity in supply of products recognizing
the XYZ Ltd would be sourcing its requirements of
products from them. It is also important to notice
para 6 of the agreement which is in following terms:-
Assignability
“This Agreement and the rights and obligations of any of the Parties hereto shall not be transferable or assignable by such Party without the prior written consent of the other Party hereto which consent shall not be unreasonably withheld. Notwithstanding the above, D will be allowed to assign this Agreement to any of their respective affiliate company and/or subsidiary, or in the event of a sale of all or substantially all of the assets required to manufacture the items that are the subject of this Agreement”.
From the above excerpt of the (Exhibit-2) agreement, it is
evident that XYZ Ltd intended to offer and PQR has accepted to
supply products (defined in 2.1.1 of the agreement) which mean
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imported products as well as local products, which, in combination,
constitute a turbocharger at the agreed prices. The products would
be handed over to the designated carrier of XYZ Ltd. at the PQR
factory gate. PQR has also undertaken to explore the possibility of
localization of imported products in India in two phases which have
been noted above. It was specifically agreed upon between the
parties that the rights and obligations of the parties shall not be
transferable or assignable by such party without the prior written
consent of the other party thereto and an exception to that clause
provides that the applicant will be allowed to assign that agreement
to any of their respective affiliate company and/or subsidiary on an
event of sale or substantially all of the assets required to
manufacture the items that are subject to that agreement.
6. This being the substance of Exhibit-2 - the TDS agreement,
we shall now turn to the material clauses of Exhibit-4 - draft
assignment agreement, as noted above. Exhibit-4 is between the
applicant and the J Pvt. Ltd. The preamble of the Exhibit-4 states
that the assignor (applicant) is engaged in the business of design,
development and manufacture of engine boosting systems for the
worldwide market and has acquired and/or possesses specific
knowledge, know-how, patents and technical information in the
fields, inter alia, of engineering, design, development and
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manufacture of various types of turbochargers for various types of
engines which it manufactures at its factories worldwide. In regard
to assignee ( J Pvt. Ltd.), it is stated that it is a subsidiary of the
assignor (applicant) in India and is also engaged in the business of
manufacture and supply of turbochargers. Para (C) of the
preamble mentions that the assignor has executed a TDS
agreement with XYZ Ltd on 6.8.2004 pursuant to which XYZ Ltd.
has effectively granted to the assignor a sole right to supply the
products, as defined therein, in relation to the vehicles
manufactured by XYZ Ltd using 1.4 litre DICR TCIC Diesel
engines. The usual formal clause expressing the offer and
acceptance is contained in para (E) and which runs thus:-
“The Assignor is desirous of assigning its rights and obligations under the TDS Agreement in favour of the Assignee and the Assignee is desirous of acquiring all the rights and obligations of the Assignor under the TDS Agreement on and subject to the terms and conditions hereinafter appearing”.
Para 2 of the draft assignment agreement is a substantive
clause which provides that subject to the terms and conditions
stated therein and in consideration of the payments of the
consideration by the assignee, the assignor thereby irrevocably
assigns all its legal and beneficial rights, title and interest including
without limitation, all obligations and duties in and in relation to the
TDS agreement in favour of the assignee, absolutely which the
assignee thereby accepts. Para 2.2 provides that the assignee
shall pay the consideration in installments in accordance with the
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schedule to the agreement. The agreement, further, provides that
the consideration shall be paid by the assignee by wire transfer to
the accounts of the assignor scheduled bank i.e. F Bank. Para 2.5
of Exhibit-4 provides for payment of additional consideration being
a percentage of additional sales from XYZ Ltd.. All the terms of
payment of additional consideration would be mutually agreed upon
between the parties separately. The agreement guarantees that in
the event of failure of XYZ Ltd. to procure the products as per the
volumes indicated in Appendix 1 to the TDS agreement (for any
reason other than manufacturing defect and quality in
workmanship), the assignor has agreed to procure from the
assignee the necessary products (which may be of different
capacities and makes) to compensate the deficiency in
procurement by XYZ Ltd. from the assignee. Para 4 of Exhbit-4
also postulates that except to the extent stated in the assignment
agreement, all the terms and conditions of TDS agreement shall
apply mutatis mutandis to the assignor as is set out herein
extenso.
We have referred to some clauses of Exhbit-4 (the draft
assignment agreement), which are material for the present
discussion. It is seen that what is proposed to be assigned under
the draft assignment agreement is the rights and obligations of the
assignor under Exhibit-2 (TDS agreement). Exhibit–4 - agreement
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is proposed to be signed outside India and the consideration is
agreed to be paid by crediting in the accounts of the assignor in F
Bank. Two clauses – clause 2.5 and clause 3.2 –, which provide
for payment of additional consideration and undertaking by the
assignor to make good the shortfall demand special consideration.
We shall advert to this aspect presently. Individual as well as
conjoint reading of these two agreements leave us in no doubt that
the subject matter of the assignment agreement is the rights and
obligations of the applicant under Exhibit-2, which are culled out
above. We are unable to find any clause indicative of transfer of
secret formula, know-how or patents or license to manufacture
turbochargers.
7. On these conclusions of facts, we shall turn to the relevant
provisions of the Act. Section 5 of the Act deals with the concept
of total income. As sub-section (1) of Section 5 of the Act relates
to total income of a resident we shall skip it and advert to sub-
section(2) of Section 5 of the Act which deals with the total income
of a non-resident of any previous year.
Section 5(2) of the Act is in the following terms:-
(2) subject to the provisions of Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in
such year by or on behalf of such person ; or
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(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
It contains two clauses – (a) and (b) - and two explanations.
Clause (a) says that the total income of a non-resident shall include
all income from whatever source derived, which is received or is
deemed to be received in India in any previous year by or on behalf
of such person. The import of clause (b) is that the total income of
a non-resident includes all income, from whatever source derived
which accrues or arises or is deemed to accrue or arise to him in
India during any previous year. In short it says that subject to the
provisions of the Act the total income of any previous year of non-
resident includes of income from whatever source derived which is
(i) received or is deemed to be received in India in such year by or
on behalf of such person (ii) accrues or arises or is deemed to
accrues or arises to him in India during such year. This takes us to
Section 9 of the Act, which elucidates the expression “income
deemed to accrue or arise in India”.
8. On the contentions of the parties, provisions of clauses (i)
and (vi) of sub-section(1) of Section 9 of the Act would be relevant
which read as follows:-
Income deemed to accrue or arise in India
9. (1) The following incomes shall be deemed to accrue or arise in India:-
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in
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India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
(ii) to (v) x x x x x x x x
(vi) income by way of royalty payable by –
(a) the Government; or
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the
royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by, such person in India or for the purposes of making or earning any income from any source in India.
Explanation 1 - x x x x x Explanation 2 – For the purposes of this clause “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for –
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning
the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention, model,
design, secret formula or process or trade mark or similar property;
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(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
[(iva) the use or right to use any industrial,
commercial or scientific equipment but not including the amounts referred to in Section 44BB;]
(v) the transfer of all or any rights (including the
granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
(vi) the rendering of any services in connection
with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v).
Explanation 3 x x x x x x
It may be noticed that clause (i) speaks of the income which
shall be deemed to accrue or arise in India to mean income
accruing or arising whether directly or indirectly (1) through or from
any business connection in India or (2) through or from any
property in India, or (3) through or from any asset or (4) source of
income in India, or (5) through the transfer of a capital asset situate
in India. Out of the five categories, we are concerned with
category (1) only.
Explanation –2 of sub-section (i) of Section-9(1) of the Act
defines the expression “business connection” which is in the
following terms:-
[Explanation 2 – For the removal of doubts, it is hereby declared that “business connection” shall include any business activity
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carried out through a person who, acting on behalf of the non-resident,-
(a) has and habitually exercises in India, an authority to
conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or
(b) has no such authority, but habitually maintains in India a
stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the
non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:
Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business: Provided further that where such broker, general commission agent or any other agent works mainly on behalf of a non-resident (hereinafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.
We may point out that the explanation is declaratory in
nature; it is inclusive and not exhaustive. It is, therefore, necessary
to have a clear idea as to what does the expression “business
connection”, denote? This expression has been subject matter of
consideration by Courts. We may with advantage note here the
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following decisions of the Hon’ble Supreme Court to comprehend
the full import of the expression “business connection”: -
In CIT, Punjab, v. R.D. Aggarwal & Co1, the essence of the
expression is brought out in the following observation of the
Supreme Court:
“The expression “business connection” postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activities within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity”.
Hon’ble Mr. Justice Shah (as he then was), for the purpose
of Section 42 of the Income-tax Act, 1922, laid down- “ ’business connection’ contemplated by section 42 involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection.”
The requirement of continuity of transactions to form
‘business connection’ between a non-resident and a resident was
laid down by the Supreme Court as long back in 1952 in Anglo-
French Textile Company Limited2. Hon’ble Mr. Justice Mahajan (as
he then was) speaking for the Court, observed,
“an isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business
1 56 ITR 20 2 23 ITR 101
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connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection”.
In the light of above discussion, the essential features of
“business connection” may be summed up as follows: -
(a) a real and intimate relation must exist between the
trading activities carried on outside India by a non-
resident and the activities within India;
(b) such relation, shall contribute, directly or indirectly, to
the earning of income by the non-resident in his
business;
(c) a course of dealing or continuity of relationship and not
a mere isolated or stray nexus between the business of
the non-resident outside India and the activity in India,
would furnish a strong indication of ‘business
connection’ in India.
9. We shall now turn to the explanation-2 of sub-section (i) of
Section 9(1)of the Act, quoted above. It says that business
connection shall include any business activity carried out through a
person who acting on behalf of the non-resident commits anyone of
the activities outlined in clauses (a) to (c) of explanation-2 of sub-
section (i) of Section 9(1) of the Act. Clause (a) relates to
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concluding contracts on behalf of the non-resident except the
activity of purchase of merchandise for the non-resident, clause (b)
speaks of habitually maintaining in India a stock of goods or
merchandise from which such a person regularly delivers goods or
merchandise on behalf of the non-resident though he has no such
authority and clause (c) takes in habitually securing orders in India
mainly or wholly for the non-resident or for that non-resident and
other non-residents controlling or controlled by, or subject to the
same common control as that of the non-resident. Obviously none
of these activities are involved in this case.
10. Mr. Chopra has forcefully contended that the applicant has
business connection in India but Mr. Porus Kaka with equal
vehemence refutes it. We shall now advert to the contentions of
the revenue, which are also reiterated by Mr. Chopra in his written
submissions. It is stated that the D presence in India dates back to
many decades and currently the business of D are headquarters
across four locations in India - at Pune, Bangalore, Chennai &
Gurgaon employing more than 5500 employees. The business of
D in India is approximately worth US $ 300 million and is growing at
an impressive rate. The Superbrands Council of India has
recognized D as a super brand. The K. Pvt. Ltd. established in
1995, another wholly owned subsidiary of D has its registered office
in Delhi and a 15 acre industrial park in Gurgaon. Corporate and
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business development teams of India are a part of K. Pvt. Ltd.
which has actively carried out survey and sales promotion for turbo
chargers on behalf of E Ltd. which is a predecessor company of
the applicant. Exhibit-3 (LOI) for development and supply of turbo
chargers is the result of efforts made by K. Pvt. Ltd. in India. It was
that company which worked for the applicant for obtaining the
orders for supply of turbochargers. The LOI (exhibit-3), ultimately
culminated in the TDS agreement dated 6.8.2004 (exhibit-2) Mr.
Chopra has enumerated the following four factors which would
show close business connection of the applicant with business
operations in India:-
(i) The Applicant would have close interaction with XYZ Ltd. so as to integrate the PQR i.e. PQR turbocharger with the diesel engine of Tata transport vehicles. For this purpose prototype, drawings, CAD data as well as participation in tests and interaction with AVL Austria, who have supplied the diesel engine to the XYZ Ltd would be required.
(ii) Within three months of the letter of intent, Applicant would
provide complete details regarding setting up of manufacturing and assembly facility in India such indigenous manufacturing facilities are to be set up in India within a period of eighteen months. Similar stipulations have been made in the TDS agreement dated 6.8.2004 (article 2.3 of the TDS agreement).
(iii) Article 2.2.7 of the TDS agreement is regarding the funding of toolings and Appendix 1 to the agreement speaks of initial expenditure of about 7 lacs euro to be incurred by the Applicant.
(iv) TDS agreement also speaks of setting up of supply base
as well as service network. In fact it is stated that supply base team has already been stationed in India during first
24
quarter of 2004 which would develop local suppliers of raw materials for the Applicant.
11. It may be pointed out that the requirements of business
connection for the purpose of Section 9(1)(i) of the Act have to be
examined with reference to the income in question. There must be
nexus between the income in question and the business
connection, which is responsible for accruing or arising of the
deemed income. General business operations, which have no
nexus to the income under consideration, would not satisfy the
requirements of section 9(1)(i) of the Act. From that point of view
factor (i), noted above, is wholly irrelevant. Factors (ii) to (iv) are
the obligations arising under TDS agreement (exhibit-2) and we are
not concerned here with the income that might have accrued or
arisen to the applicant on working out the rights and obligations
thereunder. Even assuming that what all is stated in the above
para establishes business connection it could only be for the
purpose of TDS agreement and has no relevance to the income
accruing or arising under the assignment agreement to J Pvt. Ltd.
Therefore, these factors would not, in our view, establish any
business connection of the applicant within the meaning of section
9(1)(i) of the Act for the purpose of assignment agreement.
Mr. Chopra has also emphasized that if an agreement has
been entered into between the applicant and the XYZ Ltd. it is
25
incumbent upon the applicant to disclose before the Authority as to
what extent the TDS agreement has been modified, rescinded or
what is the status thereof on the date of the application and
submitted that Section 245Q of the Act has been violated. We are
unable to appreciate the submission in the context of the case of
the applicant that pursuant to LOI (Exhibit-3), TDS (Exhibit-2) was
executed and the rights and obligations under exhibit-2 are
assigned in favour of J Pvt. Ltd. for consideration. The next
submission of Mr. Chopra is that the assignee – J Pvt. Ltd. - is a
mere agent of the applicant and is carrying out activities of
manufacture and supply of PQR brand turbo chargers to XYZ Ltd.
for and on behalf of the applicant is untenable as it is not born out
by any fact brought on record.
Yet another complaint of Mr. Chopra is that the article of
association of J Pvt. Ltd. have not been supplied and it is not
stated when this subsidiary has been incorporated. This grievance
does not survive after hearing of the case on 28.7.2006 because on
that day a copy of article of association has been supplied and a
copy of certificate of registration is placed on record. It is then
submitted that during the hearing Mr. Kaka has stated that the
subsidiary has been though incorporated but it is not mentioned as
to when the business activities have commenced, therefore it is not
possible to say whether J Pvt. Ltd. is carrying out business for and
26
on behalf of the applicant and that unless the constitution of J
Pvt. Ltd. is given and details of the activities are known, it cannot be
said that the applicant has no business connection in India under
article 9(1)(i) of the Act and article – 5 of the treaty is not
applicable.
11. In our view to determine the business activities of a limited
company it is not necessary to wait and watch the commencement
of actual business activities. They can be ascertained from the
articles of association and the attending circumstances. On the
facts stated by the applicant, on the basis of the articles of
association of J Pvt. Ltd. and the deed of assignment it is not
possible to conclude that J Pvt. Ltd. is carrying out business for
and on behalf of the applicant. Indeed what appears to us is that it
would be carrying on business in its own rights and that it has also
acquired business under the deed of assignment. It cannot be lost
sight of that in view of section 245S of the Act, the advance ruling
pronounced by the Authority shall be binding in respect of the
transaction in relation to which the ruling has been sought and if
there is really a change in law or facts on the basis of which the
ruling has been pronounced, the ruling will lose the efficacy of its
binding nature on the revenue. On the facts stated above and
from the discussion of the above contentions, it is clear that neither
the requirements of business connection culled out from the
27
decision of the courts nor the ingredients of the expression within
the meaning of explanation-2, are satisfied.
Before parting with the discussion on this question it is
pertinent to notice the argument of Mr. Chopra. The nature of receipt
of the consideration under the deed of assignment is revenue receipt
and for this proportion he relied on Gammon India Pvt. Ltd. v. CIT3.
There is no controversy on this aspect and in our view nothing turns
on this hypothesis. The real question centres round the situs of the
assignment. We have noted above the specific averment in the
application that the deed of the assignment would be executed in
Switzerland and the consideration for the assignment would be
payable in F Bank Nonetheless, Mr. Chopra has contended that all
preliminary works to obtain the Letter of Intents (Exhibit-3) and
execution of TDS agreement was with active assistance of D Group
and Mr. B, Business Director, Turbo Technologies, K. Pvt. Ltd. K.
Pvt. Ltd. therefore the applicant has business connection and that
the same would be relevant in considering the deed of assignment.
At the initial stage of arguments of this case only Exhibit-2 – the draft
TDS agreement -was available but on the last date of hearing a copy
of deed of assignment which was executed on 23rd February, 2006
was also made available. It is necessary to point that the deed is
between the applicant and the J Pvt. Ltd. The factors, which have a
3 202 ITR 986
28
bearing on execution of TDS, are irrelevant in regard to the deed of
assignment with which alone we are concerned here. There is
nothing on record to conclude that any person or company played
any role in execution of the deed of assignment so as to establish a
business connection between the applicant and J Pvt. Ltd. A
perusal of the deed of assignment shows it is signed on behalf of
Indian subsidiary by Mr. N. and on behalf of the applicant by Mr. S.
The preamble to the deed of assignment says that it was executed at
Switzerland on 23rd February, 2006. The consideration payable for
the assignment of the rights and obligations under TDS agreement is
the amount equivalent to Amount-M,. The liability to pay taxes in
relation to the assignment is that of the assignor though the stamp
duty has to be borne by the assignee. Clause – 6 of deed provides
that it would be governed in all respects by the laws of Switzerland
and that in case any dispute arises between the Parties during the
subsistence or thereafter, in connection with the validity,
interpretation, implementation or alleged material breach of any
provision of this Agreement or regarding any question, the courts of
Lausanne, Switzerland shall have exclusive jurisdiction in the matter.
Therefore, it cannot but be concluded that the deed of assignment
was executed outside India and the consideration for the assignment
is payable outside India. The situs of the deed being of Switzerland
(outside India), the income or profit if any, accruing or arising to the
29
applicant on account of deed of assignment cannot therefore be said
to arise in India.
The fact that the agreement is stamped in India would, in our
view, make no difference to the situs of the execution of the
agreement. Admittedly the provisions of the Bombay Stamp Act,
1958, which apply to the whole of the State of Maharashtra, would
govern the chargeability of stamp duty on the assignment deed. It is
useful to point out that article 5(h)(A)(iv) of the Bombay Stamp
Act,1958, any agreement relating to creation of any obligation, right
or interest and having monetary value is required to be stamped
subject to minimum of Rs. 100/- and maximum of Rs. 10,00,000/-. In
this connection Section 18 of the said Act cannot be lost sight of.
This provision requires that every instrument chargeable to stamp
duty and executed outside the State of Maharashtra should be
stamped within 3 months after it has been first received in the State
of Maharashtra. It has already been mentioned above that the
obligation to pay the stamp duty on the assignment deed is on the
assignee. Accordingly, the J Pvt. Ltd. (Indian subsidiary ) got the
assignment deed stamped in India. Merely because the deed is
stamped in India after its execution outside India would not change
the situs of the assignment.
30
However, Mr. Chopra invited our attention to clauses 2.5 and
3.2 of deed of assignment, which are in the following terms, and
strenuously contended that under the deed the business connection
was established.
Clause 2.5
In the event of the volumes of the Products procured by XYZ Ltd. from the Assignee pursuant to the TDS Agreement and this Agreement exceed the volumes indicated in Appendix 1 of the TDS Agreement, then the Assignee shall pay the Assignor an additional consideration to be mutually agreed upon by the Parties. The parties will also mutually agree upon the terms of payment of such additional consideration separately. Clause 3.2
The Assignor hereby convenants that XYZ Ltd. shall procure the volumes of the Products from the Assignee, as set out in the Appendix 1 to the TDS Agreement. In the event of failure of XYZ Ltd. to procure the Products as per the volumes indicated in Appendix 1 to the TDS Agreement (for any reason other than manufacturing defect and quality in workmanship), the Assignor agrees and undertakes that the volume risk vis-à-vis the Products shall be borne by the Assignor exclusively. In addition to the Assignment contemplated herein, in the even of a shortfall in the procurement of the Products by the XYZ Ltd. from the Assignee for the reasons stated above, compared with the volumes as indicated in Appendix 1 to the TDS Agreement, the Assignor agrees to procure from the Assignee, the necessary Products (which may be of different capacities and makes) to compensate the deficiency in procurement by XYZ Ltd. from the Assignee. It is hereby expressly clarified that such procurement shall make good the deficiency in relation to the gross margins that the Assignee would have earned in supplying the Products to XYZ Ltd. as per the volumes indicated in Appendix 1 to the TDS Agreement.
We are afraid we cannot accede to the contention of the
learned counsel. A plain reading of TDS agreement shows that a
particular volume of the products was to be supplied by the applicant
to XYZ Ltd.. It is that volume of products which is a subject matter of
31
assignment. Parties have provided the eventuality in the case of
increase in the supply of volume of products as well as decrease in
the volume of products. In neither case it can be accepted that the
business connection is established. The rights and obligations under
the agreement cannot be taken as proof of existence of business
connection. The business connection must exist between a non-
resident and an Indian resident, who is responsible for giving rise to
the activities which yield income or profit to the non-resident. No
such connection is shown to exist here.
On the aspect of situs of the assignment we are supported in
our view by the ruling of the Authority in Pfizer Corporation, In re4 .
In that case the applicant a non-resident company owned the
technology information pertaining to manufacture of certain nutritional
supplement products, which an Indian company produced under a
licence. Under a separate agreement, a non-resident company of
Denmark agreed with the Indian company for termination of its
licence and paid a sum of US dollars 7 million as consideration for
the extinguishment of the licence. Under another agreement
between the applicant and the said non-resident company of
Denmark, the applicant sold the technology information to it for a
consideration of US dollars 5 million and made available the
technology information in the form of a dossier in Bangkok outside
India. It appears that the foreign company withheld tax at 21 per cent 4 271 ITR 101
32
from out of the consideration and deposited the same with the
Government of India. On approaching the Authority for Advance
rulings by the applicant on the question whether the applicant was
liable to tax in India on the transfer of the dossier containing the
know-how and technical information, it was held that the transfer of
technology information in the form a dossier was transfer of a capital
asset and that on the Indian company entering into agreement with
the foreign company of Denmark for early termination of the licence
to manufacture the products, technical information reverted to the
applicant and that those facts showed that the situs of the technical
information which was the subject matter of sale agreement was not
in India. The amount of consideration for transfer of technical
information in Bangkok represented receipt on transfer of a capital
asset and was not chargeable to tax in India under section 5(2)(ii)
read with section 9(1) (i) of the Act.
In Ishikawajima-Harima Heavy Industries Co. Ltd, In re5 the
applicant was a non-resident company incorporated in Japan. The
applicant formed a consortium, which was awarded by Petronet a
turnkey project for setting up a liquefied natural gas (LNG) receiving,
storage and regasification facility in Gujarat. Among other things
supplying of materials and equipment was the responsibility of the
applicant. The price of offshore supply and offshore services was
5 271 ITR 193
33
paid in US dollars and for onshore supply of services, construction
and erection partly in US dollars and partly in Indian rupees. The
consideration for offshore supply of equipment and materials
supplied from outside India was received by the applicant by credit to
a bank account in Tokyo and the property in the goods passed to
Petronet on high seas outside India. On these facts the Authority has
ruled, inter alia, the consideration represents only the price of the
goods and the transaction of sale is completed outside India and not
by or through a business connection in India, so on the sale of goods
profits cannot be deemed to accrue or arise in India.
From the above discussion it follows that the applicant has
no business connection in India, therefore, Section 9(1)(i) of the Act
is not attracted. In as much as the preconditions of deemed
income under section 9(1)(i) read with explanation-2 of the Act are
not satisfied, it is superfluous to refer to articles-7 and 5 of the
treaty because it is well settled that if no obligation exists under the
Act the treaty does not create any additional charge for taxation of
the income in question. In a case of an enterprise of a contracting
state with which India has treaty, the provisions of the treaty will
determine the rights and obligations provided the enterprise is
entitled to invoke the provisions of the treaty and the provisions of
the Act will apply to non-resident only when they are more
beneficial to it than the terms of the treaty. For this reason no
34
discussion is warranted as to whether the applicant has a
permanent establishment in India and whether a corporate body
can be a permanent establishment of an enterprise of a non-
resident. This position is well settled by the ruling of the Authority
in re UPS Jetair Express Pvt.Ltd6 wherein the judgement of
Supreme Court Cassasione (Italy) in the case of Ministry of Finance
(Tax Office) v. Philip Morris GmBH has been considered.
12. Now, we shall turn to the definition of ‘royalty’ embodied in
Explanation 2 to section 9(1)(vi) of the Act, quoted above.
Explanation-2 defines the term ‘royalty’ for the purpose of that
clause to mean consideration including any lump sum
consideration. It must be noted that from the definition of royalty
the income of the recipient chargeable under the head capital gains
is excluded. The consideration, which falls within the meaning of
royalty, is the consideration for the: (i) transfer of all or any rights in
respect of patent, invention, model, design, secret formula or
process or trademark or similar property including granting license;
(ii) imparting of any information concerning the working of, or use
of, a patent, invention, model, design, secret formula or process or
trade mark or similar property; (iii) use of any patent, invention,
model, design, secret formula or process or trade mark or similar
property; (iv) the imparting of any information concerning technical, 6 274 ITR 501
35
industrial, commercial or scientific knowledge, experience or skill;
(v) use or right to use any industrial, commercial or scientific
equipment but not including the amounts referred to in section
44BB; (vi) transfer of all or any rights in respect of any copyright,
literary, artistic or scientific work including films or video tapes for
use in connection with television or tapes for use in connection with
radio broadcasting, but not including consideration for the sale,
distribution or exhibition of cinematographic films; or (vii) rendering
of any services in connection with the activities referred to above.
We have discussed above in detail the subject matter of the TDS
agreement as well as assignment agreement. From a close
reading of the said agreements, it is amply clear that none of the
clauses of explanation-2 is attracted to the draft assignment
agreement/deed of assignment. Therefore, the consideration for
the assignment payable under the deed of assignment does not
answer the description of the meaning of ‘royalty’ under
explanation-2 to clause (vi) of Section- 9(1) of the Act. In as much
as the payments do not satisfy the requirement of the definition of
‘royalty’ within the meaning of section 9(1)(vi) of the Act, it will be
otiose to delve on the definition of the royalty under the treaty.
(ii) In view of the above finding, it is idle to discuss point (ii).
36
(iii) The third point relates to deduction of tax at source under
section 195 of the Act The applicant’s contention is that if the
consideration payable under the proposed assignment deed is not
chargeable to tax under the Act no deduction of tax can be made
under section 195 of the Act. Mr. Chopra on the other hand
contends that since the determination of the nature of payment for
the purpose of section 195 of the Act is tentative and provisional
which is liable to final determination at the time of regular
assessment, section 195 of the Act would apply and has relied on
the following cases:-
(1) Transmission Corporation of AP Limited7
(2) Danfoss Industries8
(3) Timkin India Limited9
To appreciate the contentions of the learned counsel it would be
apt to refer to section 195 of the Act, which is in the following
terms:-
Section 195 (1) of the Act “Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:
7 239 ITR 587 (SC) 8 268 ITR 1 (AAR) 9 273 ITR 67 (AAR)
37
It may be noticed that the germane condition to attract Section 195
of the Act is that the amount payable must be : (i) any interest or (ii)
any other sum chargeable under the provisions of the Act (not
being income chargeable under the head “Salaries”). It is in
respect of such income that the person responsible for paying the
sum to a non-resident, not being a company, or to a foreign
company is required to deduct income-tax thereon at the rates in
force and at the time of credit of such income to the account of the
payee or at the time of payment thereof in cash or by the issue of a
cheque or draft or by any other mode. It is thus obvious that the
obligation to deduct income-tax at source arises when the income
is either interest or any other sums chargeable under the provisions
of the Act. Admittedly the amount payable is not interest. We have
held above on question no. (1) that the amount of consideration
payable under the deed of assignment transferring rights and
obligations under the Turbocharger Development and Supply
Agreement is not chargeable to tax under the provisions of the Act.
If that be so, section 195 of the Act will not be attracted. However,
Mr. Chopra relied on the decision of the Supreme Court in (1)
Transmission Corporation of AP Limited and rulings of this
Authority in (2) Danfoss Industries and (3) Timkin India Limited to
contend that tax is deductable at source.
Transmission Corporation of A.P. Ltd. & Another
38
In that case A.P. State Electricity Board (for short the
‘Board’) made certain payments to non-residents against the
purchase of machinery and equipment and also against the
work of erecting and commissioning the machinery and
equipment executed by them in India. In regard to payments
made by the Board without deducting tax at source u/s 195
of the Act to a non-resident company for the financial year
1966-67 to 1972-73, it was required to pay the amount of tax
in the assessment proceeding by the ITO. In appeal, the
Appellate Assistant Commissioner (AAC) took the view that
the words “any other sum chargeable under the provisions of
this Act” in section 195 apply only to the cases of pure
income profits. Thus, he allowed the appeal. Against that
order unsuccessfully the Revenue preferred appeal before
the ITAT. From the order of the Tribunal a reference was
carried to the High Court of AP. The question was whether
the Board was under an obligation to deduct tax at the time
of making payments to the non-residents. It was held that
whatever tax was deducted at source u/s. 195 of the Act
from out of gross sum, was not irretrievably lost to the
recipient; it was only a provisional payment which would be
made to the Central Government to the credit of the recipient
who could file return of income in the regular course and
prove to the satisfaction of the Income-tax Officer the actual
income chargeable under the Act. On further appeal to the
Hon’ble Supreme Court, the appeal was dismissed
upholding the view of the High Court. The Supreme Court
observed thus: “The scheme of sub-sections (1), (2) and (3) of section 195 and section 197 leaves no doubt that the expression “any other sum chargeable under the provisions of the Act” would mean “sum” on which income-tax is leviable. In other words “the said sum is chargeable to tax and could
39
be assessed to tax under the Act. The consideration would be whether payment of the sum to the non-resident is chargeable to tax under the provisions of the Act or not?. That sum may be income or income hidden or otherwise embedded therein. The scheme of tax deduction at source applies not only to the amount paid which wholly bears “income” character such as salaries, dividends, interest on securities, etc., but also to gross sums, the whole of which may not be income or profits of the recipient, such as payments to contractors and sub-contractors and the payment of insurance commission. In some cases a trading receipt may contain a fraction of the sum as taxable income, but in other cases such as interest, commission, transfer of rights of patents, goodwill or drawings for plant and machinery and such other transactions, it may contain a large sum as taxable income under the provisions of the Act. Whatever may be the position, if the income is from profits and gains of business, it would be computed under the Act as provided at the time of regular assessment.”
From the above observations, it is clear that normally
deduction of the income-tax from payments in question is tentative
subject to determination by the ITO at the time of regular assessment
deciding whether and to what extent the sum is chargeable under the
provisions of the Act. In the present case on point No. 1, we have
held that payments are not chargeable to income-tax under the Act.
For purposes of advance ruling this is a final determination and is
not subject to any conclusion of the ITO. In view of this finding, the
decision of the Hon’ble Supreme Court has no application to the facts
of this case.
(ii) Danfoss Industries
In the above case the applicant, an Indian company has
proposed to enter into an agreement with DS, a foreign
company which provided services to a group of companies
40
including the Indian company. The consideration for availing
of those services was a service fee based on the portion of the
services it received in relation to the total costs of DS in
providing such services. The question set forth before the
Authority, was whether the payment to be made to the foreign
company as fee for services would be subject to withholding
tax under section 195 of the Act. The Authority held, inter
alia, that in the absence of break-up of the cost incurred by DS
in providing services and the fees payable by each individual
company, the only possible conclusion was that there was no
direct nexus between the actual cost incurred by the foreign
company in providing the services to a company of the group
of companies and the fees payable by each individual
company which availed of the services. Therefore, it could not
be said that the fee payable by the Indian company was
nothing but reimbursement of costs incurred by the DS in
providing services to the applicant. It was further ruled that
the payment of fees by the applicant should be only after
withholding tax under section 195 of the Act. It may be seen
that the claim of the foreign company that the payments to be
made by the Indian company were reimbursement of
expenses was negatived. In view of this position the ruling in
Danfoss Industries P. Ltd. case does not help the Revenue.
(iii) Timkin India Limited
The facts of that case were similar to the case in Danfoss
Industries P. Ltd. The applicant, an Indian company, was
engaged in the business of manufacture and sale of bearings
and other ancillary products. It was a subsidiary of Timken-
USA, a foreign company. Under the agreement, the foreign
company was to render services in USA which included
41
management services, system development and computer
usage, communication services, engineering services process
in tool design services, and manufacturing services, etc. The
agreement further provided that the compensation payable by
the applicant to the foreign company for services would cover
only the cost actually incurred by it and that no profit element
or mark-up on the cost would be added to it. It was ruled by
the Authority that irrespective of there being a profit or income
in the hands of the foreign company, the amounts payable by
the Indian company would be subjected to tax in India and it
was obliged to withhold tax at the appropriate rate under the
Act or the Treaty, whichever was lower, under sec. 195 of the
Act. Here also, the plea that the payment was nothing but
reimbursement of expenditure was not accepted. There relying
upon Danfoss case, the plea of the applicant that there was
absence of profit element and that payments represented the
reimbursement of actual expenditure, was rejected. Thus,
this ruling also does not advance the case of the Revenue.
In light of the above discussion, we rule on questions as under:
(1) That on the facts and in the circumstances of
the case, the receipt arising to the applicant
from the proposed assignment of the
Turbocharger Development and Supply
Agreement dated 6.8.2004 in accordance
with the assignment deeds would not be
taxable in India having regard to the
provisions of the Act. In view of this position,
it is unnecessary to examine the position
42
under the Treaty between India and
Switzerland.
(2) That in view of our ruling on question no. (1),
this question does not survive, as it is
consequential to question no. (1).
(3) On the facts and in the circumstances of the
case and in view of ruling on question no. (1)
the assignee of the TDS agreement is not
required to withhold any tax u/s 195 of the
Act while making remittance to the applicant.
Pronounced in the open Court of the Authority on this 21st day of August, 2006.
Sd/- (JUSTICE S.S.M. QUADRI)
CHAIRMAN
Sd/- (A.S. NARANG)
MEMBER
F.No.AAR/667/2005/328-332 New Delhi, dated 25.8.2006
(A) This copy is certified to be a true copy of the advance ruling and is sent to : 1. The applicant. 2. The Commissioner of Income-tax-I, Pune, 3. The Jt. Secretary (FT & TR)-I, M/Finance, CBDT, New Delhi. 4. The Jt. Secretary (FT & TR)-II, M/Finance, CBDT, New Delhi. 5. Guard File.
(B) In view of the provisions contained in Section 245S of the Act, this ruling should not be given for publication without obtaining prior permission of the Authority.
Sd/- (A.K. Pandey)
Addl.Commissioner of Income-tax
43
44