Practical Aspects of Form 15CA TEXT 7x9-5

7/25/2019 Practical Aspects of Form 15CA TEXT 7x9-5

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Dedicated

tothe God,

Parents&

Teachers


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CONTENTS

No. Chapter no. Page No.

1 Overview of Internaonal Taxaon 5

2 Brief introducon on OECD model & UN model 7

3 Concept of withholding tax 11

4 Overview of secon 206AA & Grossing up 18

5 Residenal Status, Duet Residence, Concept of POEM for Companies 22

6 Business Connecon u/s 9(1)(i) 25

7 Permanent Establishment 28

8 Capital Gains 35

9 Overview of Royalty & FTS 37

10 WHT liability on some common transacons

Import of materials

Buyers credit in case of imports

Clearing & Forwarding charges

Payment of freight to shipping company

Commission agent outside India

Bandwidth charges

Reimbursement of expenses

Salary

Remuneraon to directors

Payment of college fees to university

Repatriaon of moneyPayment to conference speakers

E-commerce transacons

FTS for rendering consultancy outside India

Soware payments

41

11 Secondment of employee to India 52

12 Recent circulars & amendments 55

13 Sample Form 15 CB 57


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Chapter 1

Overview of Internaonal Taxaon

1.1 Background:Internaonal taxaon generally refers to the tax treatment of cross-naonal

transacons. Since each naon has its own tax rules and the rules of one naon are rarely

matched with those of another, it is possible that income will be taxed more than once

(somemes referred to as double taxaon) or that it will go untaxed by any jurisdicon.

The design of sensible tax policies for modern economies require that careful aenon

be paid to their internaonal ramicaons. This is a potenally daunng prospect, since

the analysis of tax design in economies entails all of the complicaons and intricacies that

appear in closed economies, with the addion of many others, since mulple, possibly

interacng, tax systems are involved.

1.2 Principles of Taxaon : There are three basic principles followed by dierent countries for

taxaon:

1.2.1 Residence Based Taxaon - The principle of residence-based taxaon asserts that natural

persons or individuals are taxable in the country or tax jurisdicon in which they establish

their residence or domicile, regardless of the source of income. In the case of non-natural

persons such as companies or rms, the place of incorporaon or the place where control

and management is exercised is deemed to be the place of residence. In the context of

income tax, the ability to pay of the residents of that country is fully measured by their

global income. Therefore, the principle of residence-based taxaon of income envisages

the taxaon of global income. Accordingly, India follows residence based taxaon in case

of residents.

1.2.2 Source Based Taxaon - There are individuals/enes whose residence is in one country

but their business is actually carried on in another country and their income is earned

in the laer country. In such cases, the principle of residence based taxaon would be

inappropriate. Therefore, there is a view that the country which provides the opportunity

and facilies to generate income or prots should also have the right to tax the same.

This forms the underlying basis of the principle of source based taxaon of income. India

follows source based taxaon in case of non-resident.

1.2.3 Cizenship Based Taxaon- Cizenship-based taxaon (CBT) means that the government

taxes the worldwide income of cizens of the country, under the idea that cizens benet

from that government, regardless of where they reside or where their income is generated.

Thus, in this method, payment of taxes is determined by cizenship rather than residency

or the source of income. Only two naons in the world have cizenship-based taxaon:

USA and Eritrea in north-eastern Africa.


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1.3 Concept of Double taxaon:The interacon of two tax systems each belonging to dierent

country, can result in double taxaon. Every country seeks to tax the income generated

within its territory on the basis of one or more connecng factors such as locaon of the

source, residence of taxable enty, maintenance of Permanent Establishment and so on.

Double Taxaon of the same income in the hands of same enty would give rise to harsh

consequences and impair economic development. Double Taxaon Avoidance Agreements(DTAA) between two countries, therefore, aims at eliminang or migang the incidence

of double taxaon. DTAAs comprise of agreements between two countries, which, by

eliminang internaonal double taxaon, promotes exchange of goods, persons, services

and investment of capital.

1.3.1 Classicaon of DTAA:

On the basis of scope:

Comprehensive DTAAs- They provide for taxes on income, capital gains, etc. Comprehensive

agreements ensure that the taxpayers in both the countries would be treated equally and

on equitable basis, in respect of the problems relang to double taxaon.

Limited DTAAs They refer only to income from shipping and air transport, or estates,

inheritance and gifts.

On the basis of pares to treaes:

Bilateral Treaes- DTAA entered between two countries.

Mullateral Treaes- DTAA entered between a group of countries e.g. convenon

between Nordic countries including Denmark, Finland, Iceland Norway and Sweden.

1.4 Dierent Models of Tax Treaes:

OECD Model-This model lays emphasis on residence based taxaon. Developed countries

adopts this model in case of treaes with other developed countries.

UN Model-This model lays emphasis on source based taxaon. Developed countries

adopts this model in case of treaes with developing countries or between two developing

naons.

US Model- This model is basically used by USA for all treaty negoaons. This model had

inuence on exisng treaty between India & US.

Chapter 2

Brief introducon on OECD model & UN model

2.1 The Organizaon for Economic Co-operaon and Development (OECD) is an internaonal

economic organizaon of 34 countries, founded in 1961 to stimulate economic progress

and world trade. It is a forum of countries describing themselves as committed to

democracyand the market economy, providing a plaorm to compare policy experiences,

seeking answers to common problems, idenfy good pracces and coordinate domesc

and internaonal policies of its members.

An accord reached between member states of the OECD that serves as a guideline for

establishing tax agreements. The convenon consists of arcles, commentaries, posion

statements & separate reports on evolving tax issues. Its primary applicability is in guiding

the negoaon of bilateral treaes between two or more countries.

2.1.1 Brief descripon of dierent arcles of OECD:

S.No. Parculars Issues covered Descripon

Arcle 1 Person covered Who can claim the benet of

DTAA

Resident of any or both the

contracng state

Arcle 2 Taxes Covered Outlines the range of taxes

covered under DTAA

Taxes on income & capital,

Trade Taxes, Prot Tax, etc.

Arcle 3 Genera l

Denions

Denions used in DTAA Meaning of India, Person,

Company etc

Arcle 4 Resident Provisions relang to

residenal status of a person

including Tie-breaker Rule

Resident means either of the

person is liable to tax as per

his domicile/residence.

Arcle 5 Permanent

Establishment

What would constute a

PE and what would not

considered as PE

PE means xed place of

business, branch, factory,

Agency PE, Installaon &

Construcon PE, Service PE,

etc...

Arcle 6 Income from

Immovable

Property

Taxaon of income of resident

from immovable property

Primary right to tax is for the

country where the property is

located.

Arcle 7 Business Prot Business income earned by

an resident enterprise of

one country from business

performed in other country

Business prot aributable to

PE in that country is taxable.

Arcle 8 Shipping, inland

airways and water

transport

Taxaon of prots and

gains from operaons of

ships in internaonal inland

waterways and aircras

Taxable in the country in

which the place of eecve

management is situated.


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Arcle 9 Associated

Enterprise

Enterprise in one country

controls other enterprises

capital management in other

country

Transfer pricing rules are

applied as per the Domesc

Law.

Arcle 10 Dividend Paid by the resident company

of one contracng state to

another contracng state


country of which the recipient

is resident.

Arcle 11 Interest Interest on Debt/securies/

arising in one contracng

state and paid to the resident

of other contracng state.


country of which the recipient

is resident.

Arcle 12 Royalty Fees for

technical services

(FTS)

Royalty means consideraons

for right to use of literary,

scienc or arsc work.

Right to tax is for the country

of which the recipient (i.e. the

licensor) is resident.

Arcle 13 Capita l Gain Gains from al ienaon ofmovable and immovable

property

Right to tax is for the countrywhere property is located

Arcle 14 IndependentPersonal

Services(IPS)

Income from professional

service such as doctor lawyer

etc


of which the recipient is

resident.

Arcle 15 Income from

employment

Income by the way of salaries

etc

Right to tax vests with the

country of the residence of

person employed

Arcle 16 Directors fees Fees derived by the member

of the board.


in which the company in

which person is director is

residence.

Arcle 17 Arstes &

Sportsmen

Income by theater arst,

entertainer and sportsmen.

The income is derived in the

source country.

Arcle 18 Pension Covers pension andother similar payment

in consideraon of past

employment.

Relates to pension and similar

payments.

Arcle 19 GovernmentServices Cizen of one countryrenders services on behalf of

government of that country in

other country e.g. salary

Salaries wages paid by thegovernment of one country to

individual resident to another

country

Arcle 20 Students Students/trainees who are

resident of host country only

for the purpose of educaon

or training.

Payment received by the

student for his maintenance

educaon for outside the

country are exempt from tax

in the host country.

Arcle 21 Other Income Residuary arcle Income taxed only in the

country of residence

Arcle 22 Capital Taxaon of capital (movable/

immovable property) owned

by resident of one state in

another state

Tax on immovable property

will be imposed by the

country in which it is located.

Arcle

23A

Exempon

method

Method for granng relief for

Doubly Tax income

Method by which the

resident state exempt the

tax resident from taxing the

income already taxed by the

contracng state.

Arcle

23B

Credit method Method for granng relief for

Doubly Tax income

Method by which the resident

state allows deducon from

the domesc income tax to

the extent of the taxes paid

in the relaon to the same

income in other contracng

state.

Arcle 24 Tax credit method Non Discriminaon of non-

resident/ non-cizens in

either of the contracng state

Naonal of one country

shall not be subject in other

country to any taxaon which

is more burdensome as

compared to the naonals of

other country.

Arcle 25 Mutual

Agreement

Procedures

Reference of case to the

competent authority

Where taxaon is not in

accordance of this convenon,

the case may be presented

to the competent authority,

where the competent

authority of the both the

states would try and resolve

the maer.

Arcle 26 Exchange of

informaon

Between two contracng

states to facilitate beer tax

administraon.

The competent authority shall

share the specic informaon

for carrying out the provision

of the DTAA or domesc laws

of contracng states.

Arcle 27 Assistance in tax

collecon

Mutual co-operaon for

enforcement of compliance

with tax laws.

The contracng state shall

lend assistance to each other

for collecon and recovery to

taxes.

Arcle 28 Members of

diplomac

mission

Privileges to members of

diplomac mission to remain.

Nothing in this convenon

shall aect the scal privileges

of the members of the

diplomac mission under the

general rules of internaonal

law.


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Arcle 29 Territorial

Extension

Scope to extend applicability

of the treaty

The applicability of the state

may be extended to any

territorial of either of the

states which has specically

been excluded or for which

either of the state shall be

responsible for internaonally

relaons.

Arcle 30 Entry in to force Eecve date of the treaty Treaty provision becomes

eecve in respecve

contracng states on the

dates specied in relevant

treaty.

2.2 UN Model: The United Naons Model of Double Taxaon Convenon between Developed

and Developing Countries (the United Naons Model Convenon) forms part of the

connuing internaonal eorts aimed at eliminang double taxaon.

The UN Model Convenon generally favors retenon of greater so called source country

taxing rights under a tax treaty - the taxaon rights of the host country of investment -as

compared to those of the residence country of the investor. This has long been regarded

as an issue of special signicance to developing countries, although it is a posion that

some developed countries also seek in their bilateral treaes.

Chapter 3

Concept of Withholding Tax

3.1 There has been a phenomenal increase in cross border transacons both for trade as well

as investment due to the aening of the world. Due to this, the importance of Secon

195 of the Income Tax Act, 1961 is increasing since it impacts every commercial venture

dealing in any cross border transacons. The objecve is to ensure, as best as possible,

that the tax liability on the income element, on the amount paid, should be deducted at

source itself so that the department is not put to the hassles of recovering it from a non-

resident whose connecons with India may be transient or whose assets in India may not

be sucient to meet the tax liability. It is very pernent to note that this secon is wider

in scope than all the other TDS secons in so far as all payers are covered and there is also

no threshold exempon.

3.2 Procedure for remiance-

Step 1 Check if payment is covered under 195

Step 2 Verify the factual and basic documents

Step 3 Make classicaon of transacon on the basis of nature of income i.e. Passive

Income or Acve Income

Step 4 Check taxability under domesc tax

Step 5 Check taxability as per DTAA along with the availability of Tax residency cercate.

Step 6 Check the rates of TDS applicable

3.3 Snapshot of Secon 195

Sec 195(1): Liability on payer to deduct tax on payments made to non-residents

Sec 195(2): Applicaon by payer for lower / Nil withholding

Sec 195(3): Applicaon by payee for Nil withholding

Sec 195(4): Validity of cercate of lower/ nil deducon

Sec 195(5): Empowers CBDT to nofy rules

Sec 195(6): Empowers CBDT the manner of furnishing informaon

Sec 195(7): CBDT to specify class of persons or cases where applicaon to AO is compulsory

Sec. 195A: Income payable net of tax


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3.3.1 Scope & Chargeability [Secon 195 (1)]

Deducon under this secon is to be made on earlier of credit or payment of sum

chargeable to tax at the rates in force on payments made.

Excepon:

Section Description

Sec 192 Salary

Sec 194LB Interest payable by an Infrastructure Debt Fund referred u/s 10(47)

Sec 194LC Interest on approved foreign currency loans obtained by an Indian

company

Sec 194LD Income by way of interest on certain bonds and Government securities

Sec 115O Dividend referred in Dividend Distribution Tax

Foreign Company means a company which is not a domesc company (domesc company

means an Indian company, or any other company which, in respect of its income liable to tax

under this Act, has made the prescribed arrangements for the declaraon and payment, within

India, of the dividends (including dividends on preference shares) payable out of such income).

As per Secon 5, Non-residents (including NRIs) are chargeable to tax only on income which is

received or deemed to be received in India or which accrues or arises or deemed to accrue or arise

to him in India.

However, scope of WHT obligaon u/s 195 extended to all persons including non-residents

irrespecve of them having a residence or place of business or business connecon or any other

presence in India. There is obligaon to withhold tax even without any territorial nexus.

Secon 9 deems the following income as accruing or arising in India:

1. Any income accruing or arising, directly or indirectly from any business connecon

in India or through any property in India or through any asset or source of income in

India or through the transfer of capital asset situated in India

2. Income under the head salary chargeable if earned in India

3. Salary paid by government to cizen of India for services rendered by him outside

India

4. Interest payable by government or resident to NR in respect of debt incurred or

money borrowed and used for the purpose of business & profession carried on by

such person in India.

5. Dividend Paid by Indian Company outside India

6. Royalty payable by government or resident to NR in respect of services ulized for the

purpose of business or profession in India or for earning any income from any source

in India

7. Fees for technical services payable by government or resident to NR in respect of

services ulized for the purpose of business or profession in India or for earning any

income from any source in India

The sum paid to a non-resident should be chargeable under the provisions of the Act, for deduconof tax at source u/s 195

The words Chargeable under the provisions of the Act used in the secon qualify both interest

as well as any other sum. Hence, if both are not chargeable to tax, then there is no requirement

to deduct tax u/s 195.

3.3.2 Payers applicaon for lower/ NIL WHT cercate [Sec 195 (2)]

Applicaon to be made to tax ocer by the payer to determine poron of payment

chargeable to tax and thereof determined tax shall be deducted under sub-secon (1)

only on proporon of sum which is so chargeable.

3.3.3 Payees applicaon for lower/NIL WHT cercate [Sec 195 (3)]

Payee may make an applicaon in the prescribed form to the AO for the grant of a

cercate authorising him to receive such interest or other sum without deducon

of tax under that sub-secon, and where any such cercate is granted, then payer

so long as the cercate is in force, may make payment of such interest or other sumwithout deducng tax thereon.

Applicaon can be made in prescribed format:

Form No 15C prescribed in case of banking company

Form No 15D in other cases

Condions for grant of license prescribed in Rule 29B


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3.3.4 Validity and rules for grant of cercate [Sec 195 (4)]

Cercate granted u/s 195(3) valid ll specied period or ll cancellaon by AO whichever

is earlier.

3.3.5 Power of CBDT to issue nocaons [Sec 195(5)]

Board may make rules specifying the cases in which, and the circumstances under which,

an applicaon may be made for the grant of a cercate under sub secon (3) with the

specied condions.

3.3.6 Furnishing informaon [Sec 195 (6)]

Requires the payer to furnish payment related informaon

Rule 37BB introduced

Informaon to department in Form 15CA

CA Cercate to be obtained before payment Form

Ref: Circular no. 4/2009 dated 29-06-2009 providing the manner for subming and

processing the details of payment.

Informaon to be furnished electronica lly.

Moreover, Secon 195(6) has been amended in the Finance Act 2015 and which states

that Form 15CA / CB needs to be necessarilyled for all remiances, whether chargeable

to tax in India or not. All the assessees requested for submission of Form 15CA/CB for all

outward cross border remiances including those against imports with eect from 1st

June 2015.

3.3.7 Power of CBDT to specify class of persons or cases where applicaon to AO u/s 195(2) is

compulsory: [Sec 195 (7)]

Board empowered to nofy class of persons (payees) required to apply to tax ocer for

determinaon of WHT, irrespecve of whether payment is taxable in India or not .

3.4 TDS Rates :

Relevant rate in force as per chapter XVII-B. In case payee not having valid PAN, then TDS

rate prescribed chapter XVII-B (Finance Act) or 20% whichever is higher will apply. While

calculang TDS rates, we need to consider the provisions under DTAA for the relevant

country if any. In case payee fullling all the condions as prescribedin the DTAA then

rates as per DTAA will apply.

Applicability of Surcharge: Rates prescribed under the Act has to be increased by

Surcharge and Educaon Cess & SHEC at the prescribed rates. However, if the payment is

as per DTAA rates, no requirement to increase by Surcharge or EC or SHEC.

3.5 Exchange rate for TDS on non-resident:

For the purpose of TDS on any income payable in foreign currency, the rate of exchange to

be used shall be telegraphic transfer buying rate of such currency as on the date on which

tax is required to be deducted at source.

Telegraphic buying rate means the exchange rate adopted by State Bank of India for buying

such currency.

3.6 Condions & procedure to avail DTAA benet by NR:

The Non Resident deductee has to submit the following documents with deductor to avail

the benet of lower TDS rates as per DTAA:

Tax Residency Cercate (TRC)

PAN card copy

Self declaraon relang to Permanent establishment

3.7 TRC Concept:

Tax Residency cercate (TRC) is the cercate duly veried and issued by the Tax

Department or Government of the country of which NR claims to be a resident for

the purpose of tax. The TRC cercate can be obtained from the Government or Tax

authories of the parcular country of Non-Resident.

A TRC should contain the following details

I. Name of the assessee

II. Status of the assessee (Individual, Firm, Company Etc.)

III. Naonality

IV. Country

V. Assessee Tax Idencaon or Unique Idencaon number of the relevant

Country

VI. Residenal status for the purpose of tax

VII. Validity Period of the cercate

VIII. Address of the applicant

If any detail is missing in TRC, the declaraon from the NR to be taken in Form 10F.


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3.8 Form 15CA and Form 15CB

I. Remier to obtain cercate of a Chartered Accountant in Form 15CB

Some focus area in issuing Form 15CB:

Nature of the income FTS, Royalty, Interest, etc.

Whether payee has a PE in India? If yes, aributable prot.

Whether TRC is sucient evidence for claiming treaty benet?

II. Remier to access the income tax e-lling website and electronically upload the

remiance details in Form 15CA. Aer lling, remier is required to take a print of the

lled undertaking (Form 15CA) with system generated acknowledgement number.

III. The duly signed paper Form 15CA (undertaking) and Form 15CB (cercate) is then

submied in duplicate to the RBI / authorized dealer

IV. RBI / authorized dealer to remit the amount

V. A copy of Form15CA & Form15CB is forwarded by RBI / Authorized Dealer to the

concerned Assessing Ocer

3.9 Consequences of Non Compliance of TDS:

Where any person, who is required to deduct any sum in accordance with Income Tax Act

but does not deduct, or does not pay or aer deducng fails to pay shall deemed to be

assesse in default and the assessee shall be liable for interest and penalty.

Applicable Section Nature of Default Consequence

40(a)

Withholding tax not deduct-

ed or not deposited within

prescribed time

Disallowance of expenses in com-

putation of taxable income of payer;

deduction in year of payment

201(1) Tax not withheld/ depositedappropriately

Recovery of tax not withheld/ de-posited or short withheld/ deposited

Interest

u/s 201(1A)

Tax not withheld/ deposited

appropriately

Interest @ 1% per month or part of

the month for non-deduction. Fur-

ther, interest @ 1.5% per month

is payable from the date of deduc-

tion till the date when tax is actually

paid.

Penalty u/s 221 Tax withheld not paidPenalty, not exceeding the amount

of tax not paid can be levied by AO.

Penalty u/s 271CTax not withheld or short

withheld

Penalty, not exceeding the amount

of tax not withheld can be withheld

by Joint Commissioner.

Penalty u/s 272A Failure to file TDS return

Penalty of INR100 per day of de-

fault subject to maximum of tax de-

ductible

Penalty u/s 271-I

Non-furnishing of informa-

tion or furnishing of incor-

rect information under sec-

tion 195(6)

Penaltyof INR 1,00,000 per trans-

action

Prosecution u/s

276BFailure to pay tax deducted

Minimum: 3 months

Maximum: 7 years


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Chapter 4

Overview of secon 206AA & Grossing up

4.1 Sec 206AA

The provisions of Secon 206AA of the Income tax Act, 1961 have been reproduced

hereunder:-

(1) Notwithstanding anything contained in any other provisions of the Act, any person

entled to receive any sum or income or amount, on which tax is deducble under Chapter

XVIIB shall furnish his Permanent Account Number (PAN) to the person responsible for

deducng such tax, failing which tax shall be deducted at the higher of the following rates,

namely:

i. at the rate specied in the relevant provision of this Act; or

ii. at the rate or rates in force; or

iii. at the rate of 20%.

4.2 Secon 195A: Concept of Grossing up/ Income to be paid Net of tax

Grossing up for compung TDS to be done in cases where the payer bears the tax liability.

The grossing up is to be done with the rates in force.

For example 1:A Ltd wantto send Rs. 1000 to a Non-resident company net of taxes. The

rate of TDS as per IT Act is 10%, eecve rate turns out to be 10.5575% aer including

surcharge & cess, then grossing up will be done at 10%.

PARTICULARS Rs.

Net payment 1,000

Rate in force as per section 2(37A) 10%

Grossed amount [Rs. 1,00,00,000 100 100 10] 1,111.11

Tax deduct ible under section 195 at rates in force i.e 10% 111.11

Issues :

Whether grossing up would be required to be done in case payment is made net of tax

to a foreign company which does not have a PAN in India, considering the provisions of

secon 206AA??

Bosch Ltd. v. ITO (2013) 141 ITD 38/155 TTJ 354 (Bang.)(Trib.)

Facts: Manufacturing company enters into a repair contract with its foreign suppliers for

which payments were made net of taxes.

Issue:

Rate applicable for grossing up in absence of PAN for Non resident

Held:

Sec 206AA applies to all income recipients whose income is taxable under Income Tax Act

Should grossing up be done at applicable rates in force or at 20%?

While grossing-up u/s 195A, rates in force should apply and not the higher rate of 20% u/s

206AA.

Other Issues:

a) Whether sec 206AA overrides the treaty rates?

In case of Non-residents covered by tax treaes following further issues may arise on

applicability of sec 206AA:

1. Whether sec 206AA applies where TDS Rates as per treaty is NIL?

2. Whether provisions of secon 206AA cannot operate to override treaty rates?

The similar maer came to be decided recently before a Pune bench of ITAT in case

of Serum Instutewherein what was to be decided was whether a resident who has to

deduct the TDS of non-resident u/s 195 whodoes not have PAN can deduct tax at the rate

prescribed in DTAA if the same is benecial applying the provisions of Secon 90(2) of the

Act or whether Sec 206AA would apply which states that TDS is to be deducted at rates in

force or rates specied in relevant provisions or 20 % whichever is higher.

Pune Bench in its order considered the decision of Bangalore tribunal which had stated

that 206AA overrides the Income Tax Act, 1961. But whether treaty was also overridden

by the provisions of 206AA was not before the Bangalore bench of tribunal.

The DTAA is entered into between 2 countries for the purpose of Avoidance of Taxaon

and whether machinery provisions of TDS under Chapter XVII-B could decide the rateof withholding as against what has been decided by the countries mutually under the

agreement. It was held that secon 206AA of the IT Act would not override provisions of

a DTAA to the extent that the laer is more benecial to a taxpayer.

4.2.1 Case Study:

For grossing up provision u/s 195A, tax chargeable shall be grossed up at the rates in

force. Rates in force is dened in Sec. 2(37A) as the Rates of income-tax specied in the

Finance Act or the rates specied in the DTAA, whichever is lower will be applicable rates

in force by virtue of Secon 90 or Secon 90A.


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Case 1: When PAN is available

Example 1:When rates of both Income tax & treaty are same but eecve tax under income tax

comes out be greater because of applicability of surcharge & cess:

Suppose rates as per ITAct is 10%, eecve rate turns out to be 10.5575% aer including

surcharge & cess and the treaty rate is 10% (rates of treaty are not to be increased by

surcharge & cess), then grossing up will be done at 10%.

PARTICULARS Rs.

Net payment 1,000

Rate in force as per section 2(37A) 10%

Grossed amount [Rs. 1,00,00,000 100 100 10] 1,111.11

Tax deduct ible under section 195 at rates in force i.e 10% 111.11

Example 2: Wheneecve rates under Income Tax is lower than rates under treaty

Suppose rates as per IT Act is 10%, eecve rate turns out to be 10.5575% aer including

surcharge & cess and treaty rate is 15% (rates of treaty are not to be increased by surcharge

or educaon cess), then grossing up will be done at 10.5575%

PARTICULARS Rs.

Net payment 1,000

Rate in force as per section 2(37A) 10.5575%

Grossed amount [Rs. 1,00,00,000 100 (100 10.5575)] 1 ,118.037

Tax deductible under section 195 at rates in force i.e. 10.5575% 118.037

Case 2: When PAN is not available

Suppose rates as per IT Act is 10%, eecve rate turns out to be 10.5575% aer including

surcharge & educaon and treaty rate is 15 %( rates of treaty are not to be increased by

surcharge or cess), then grossing up will be done at 10.5575%. Consequently, the payment

will be grossed up by applying the rate of 10.5575 %. Deducon will be at rate higher of:

(i) at the rate specied in the relevant provision of IT Act i.e.10.5575%

(ii) at the rate or rates in force; i.e. lower of 10.5575% or 15%

(iii) at the rate of twenty percent. i.e. 20%

i.e. at 20 % in this case

PARTICULARS Rs.

Net payment 1,000

Rate in force as per section 2(37A) 10.5575%

Grossed amount [Rs. 1,00,00,000 100 (100 10.5575)] 1,118.037

Tax deductible under section 195 read with section 206AA at the rate of20 per cent

223.607


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Chapter 5

Residenal Status, Duet Residence & concept of POEM for Companies

5.1 NON RESIDENT INDIVIDUAL: As per secon 6, Individual will be Non Resident if he does

not sasfy any of the two basic condions:

(i) Stay in India for 182 days or more during relevant previous year; or

(ii) Stay in India for 62 days or more during relevant previous year and 365 days or more

during 4 previous years immediately preceding relevant previous year.

However, in following cases, the 2nd basic condion will not be checked. If individual

sases 1st basic condion, then he will be resident, otherwise non-resident.

(a) Indian Cizen - going abroad for employment purposes during relevant previous year.

(b) Being a crew member of an Indian Ship - coming on a visit to India during relevant

previous year.

(c) Person of Indian Origin (Person who himself, his parents or his grandparents were

born in undivided India) - coming on a visit to India during relevant PY.

5.2 NON RESIDENT COMPANY :

A foreign company (company which is not registered in India) can be non-resident when

the place of eecve management is not situated in India.

5.3 Concept of Residence : Concept of residence can be classied into 2 parts:

5.3.1 For Individuals: An Individual is liable to tax by virtue of his domicile, residence, place of

incorporaon, place of management, etc. but excludes one who is liable to tax in respect

only of income from source in that state.

By applying above principle, one can conclude that a person has to be a resident of one orboth the contracng states and then only, provisions of treaty will apply.

But somemes a person becomes resident of two or more states under the domesc law

of that state. This creates confusion as to who will tax the global income and various issues

arises to its taxability. A person who is resident of two states by virtue of domesc law is

known as Dual Resident. The residency of such dual resident is known as Dual Residency.

This dual residency needs to be broken and the individual needs to assign residency of

one of the states. Hence, to determine residency the Tie-breaker test needs to be applied.

This is explained in below menoned chart:

Chart for Determinaon of Residency of Dual Resident by Tie Breaker Rules

5.3.2 For Legal Enes/Corporaons:

For Legal enes the test applied for its residency is place of its incorporaon or place of

eecve management.

Legal enes are resident of that state in which it has its incorporaon. Place of


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incorporaon is certain and preferable test as place of incorporaon does not change

from me to me and provides simplicity in determinaon of residency. Many countries

used this as a basis of determining the residenal status of corporaons.

Place of eecve management is less certain as now a days business is controlled from

many countries. This creates confusion and complicaons.

5.4 POEM : Place of Eecve Management

In respect of a person being a company the condions of residency are contained in clause

(3) of secon 6 of the Act. Under the said clause previously, a company was said to be

resident in India in any previous year, if

(i) It is an Indian company; or

(ii) During that year, the control and management of its aairs is situated wholly in India.

The concept of control and management is now replaced with the concept of Place of

Eecve Management (POEM) which is an internaonally accepted concept (OECD and

tax treaes use POEM for determining tax residency of a corporate enty).

Explanaon For the purposes of this clause place of eecve management means

a place where key management and commercial decisions that are necessary for the

conduct of the business of an enty as a whole are, in substance made.

OECD Denion of POEM:

OECD denes POEM as The place of eecve management is the place where the key

management and commercial decisions that are necessary for the conduct of the entys

business are in substance made.

US Model Convenon to POEM:

The UN Model Commentary in paragraph 45 on arcle 1 states POEM as follows:

the mere fact that meeng of BODs of a company take place in a country is not sucientto conclude that this is where the company is eecvely managed. Also, some countrieshave replaced para 3 of Arcle 4 (e breaker rule), which deals with the cases of dualresidence of legal persons on the basis of their place of eecve management, by a rulethat leaves such cases of dual residence to be decided under the mutual agreement

procedure.

Further UN commentary aer considering the OECD commentary provides to establish

POEM circumstances which may, interalia be taken into account as follows:

The place where the company is actually managed & controlled

The place where the decision making at the highest level on the important policiesessenal for the management of company takes place

The place that plays a leading part in the management of a company from an economic &funconal point of view

The place where most important accounng books are kept.

Chapter 6

Business Connecon u/s 9(1)(i)

6.1 BusinessConnecon:

The expression business is dened in the Act as any trade, commerce, manufacture

or any adventure or concern in the nature of trade, commerce or manufacture, but the

Act contains no denion of the expression business connecon. The expression

business connecon undoubtedly means something more than business.

A business connecon in secon 9 involves a relaon between a business

carried on by a non-resident which yields prots or gains and some acvity in

the taxable territories which contributes directly or indirectly to the earning of those

prots or gains. It predicates an element of connuity between the business of the non-

resident and the acvity in the taxable territories. An isolated transacon is normally not

to be regarded as a business connecon.A relaon to be a business connecon must be real and inmate, and through

or from which income must accrue or arise whether directly or indirectly to the non-

resident. [CIT v R.D.Aggarwal & Co. and others 56 ITR 20 (SC) and Barendra Prasad Roy

v ITO 129 ITR 295 (SC)]. The business connecon is the Indian equivalent of PE and also

broader in connotaon and is used eecvely to tax the income of N on-Residents in

India. Any prot of non-resident which can be reasonably aributable to such part of

operaons carried out by its business connecon in India are deemed to be earned in

India. [Explanaon 1 to Secon 9].

SECTION 9(1)(i):Secon 9(1)(i) provides that income is deemed to accrue or arise in India

if it accrues,directly or indirectly

through or from any business connecon in 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

The landmark judgment of the Andhra Pradesh High Court in GVK Industries Ltd. v. ITO has

laid down following principles which needs to be sased in order to constute BC:

Existence of close, real and inmate relaonship

Commonness of interest

Connuity of acvity or operaon

A stray or isolated transacon is not enough to establish a business connecon [Anglo

French Texle Co Ltd v CIT

Business connecon shall include any business acvity carried out through a person

who, acng on behalf of the non-resident,


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(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the

nonresident, unless his acvies are limited to the purchase of goods or merchandise for the

nonresident; 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 nonresident:

However, such business connecon shall not include any business acvity 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 acng in the ordinary course of his business. Further, an agent working mainly

for Non-Resident or, that Non-Resident and other Non-Residents who exercise control

over one another or are under common control is not regarded as having an independent

status.

Income not to be treated as arising from or through Business Connecon:

(a) Income reasonably aributable to the operaons carried out in India will be deemed to accrue

or arise in India in case all the operaons of a business are not carried out in India;

If the income from Indian operaons cannot be denitely ascertained, then, the same may be

computed by apporonment:

i. at such percentage of Indian turnover as determined by the Assessing Ocer;

ii. Taxable prots = Total prots Receipts accruing/ar ising in India/Total receipts of

business

iii. in any other manner as considered suitable by Assessing Ocer

(b) Income of a Non-Resident in respect of operaons conned to purchase of goods in India for

the purpose of export;

(c) Non-Resident engaged in business of running a news agency/publishing newspapers,

magazines, journals, income arising through and from acvies conned to collecon of news

and views in India for transmission out of India shall not be deemed to accrue or arise in India.

(d) Income arising through or from operaons conned to shoong of any cinematograph lms in

India to a Non-Resident being:

i. An Individual who is not an Indian cizen

ii. A rm not having a partner who is either an Indian cizen or Resident in India; and

iii. A company not having any shareholder who is either Indian cizen or Resident in

India

In the case of Blue Star Engineering Co. (Bom) Pvt. Ltd. Vs CIT,it was held that the expression

Business connecon is an expression of wide and indenite import and is dierent

from the expression business as dened under the Act. However, in each case the

queson whether there is a business connecon from or through which income arises or

accrues must be determined upon the facts and circumstances of that case.

In case of NR one needs to see that whether enre operaons is situated in India or not :

If the enre operaons are carried out in India, the enre amount will be taxable in India.

When operaons are carried out partly in India & partly outside India then, only that poron

of the income that can be aributed to the operaons carried out in India, will be taxable.

If the operaons are carried out enrely outside India, no taxability will arise in India.

From the reading of above provisions, it can be concluded that for a relaon to be treated

as business connecon, following condions needs to be sased:

a business in India

a connecon between non-reside nt and that business

a non-resident has earned an income through such connecon

connuity about the business connecon

It may be noted that Supreme Court in case of Carborandum Co. v CIT reported in 108

ITR 335 has taken a view that in order to rope in the income of a non-resident under the

deeming provision, it must be shown by the department that some of the operaons

were carried out in India in respect of which the income is sought to be assessed. Taking

into consideraon the decision of the apex court, it can be said that onus of proof is on

revenue to show that the operaons were carried out in India.


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Chapter 7

Permanent Establishment

7.1 Concept :

Permanent Establishment (PE) under DTAA is to be understood with reference to the

denion of Permanent Establishment provided in Arcle 5 in the relevant DTAA. Under

the DTAA, right of the contracng States to tax the business prots of an enterprise of

other contracng State arises only if the enterprise carries on its business in the rst

menoned State through a PE situated therein.

The PE concept is a measuring tool to determine the right of a country to tax the prots

of an enterprise which is resident of another country and is generally used in parlance of

cross border business and taxability of the income generated. PE may be dened as xed

place of business through which acvies of an organizaon are wholly or parally carried

on.

The most important issue in the treaty based internaonal scal law is the concept of

Permanent Establishment (PE). All the model convenons namely, UN Model, OECD

Model and use PE as the main instrument to establish taxing jurisdicon over a foreigners

business acvies.

According to the concept of PE, the prots of an enterprise of one Contracng State are

taxable in the other state, only if the enterprise maintains a PE in the later state and only to

the extent that prots are aributable to the PE. Thus, a legal concept, PE is a compromise

between source state and residence state for purposes of taxaon of business prots. The

term must be understood so as to arrive at that degree of economic penetraon, which

according to treaty partners, juses a naon in treang a foreign person in the same

manner as domesc persons. Prot aributable to a PE, in the State of Source are either

exempted in State of Residence or the State of Residence allows credit of taxes paid by the

PE on such prots. To this extent, the taxing jurisdicon by the State of Residence is said to

be transferred to the State of Source, where the person needs to le his return of income

and comply with domesc tax laws.

Thus, the term PE has been exhausvely dened by Arcle 5(1), a PE exists if the following

condions are sased:-

There is an enterprise carrying on a business

There is a place of business

That place of business must be at the disposal of the enterprise

This place of business must be xed

The business of the enterprise is carried on wholly or partly through this xed place of business

According to the proposed OECD amendment, the above menoned condions should

be examined at each point of me whenever the queson of determinaon of PE arises.

PE is generally classied into six categories:-

Fixed place PE ;

Deemed PE

Construcon PE (building site or construcon);

Installaon or assembly project PE (criteria duraon of each installaon project);

Service PE, i.e.;

Dependent Agency PE, i.e., the enterprise does not have any economic or funconal

independence.

7.2 Fixed Place PE:

PE under domesc tax laws is inferred from business connecon. In order to establish

business connecon, a real and inmate relaon must exist between trading acvies

carried on outside India by a non-resident and acvies within India and such relaon

shall contribute, directly or indirectly, to earning of income by non-resident in his business.

A course of dealing or connuity of relaonship and not a mere isolated or stray nexus

between business of non-resident outside India/ foreign country and acvity in India

/ foreign country, would furnish a strong indicaon of business connecon in India /

foreign country. However, mere existence of business connecon / PE does not aract tax

liability since there should be income aributable to PE acvies in the country where PE

exists.

The concept of xed place of business under the Income tax Act is not dierent from

general provisions of Arcle 5(1) of the Model Convenons and other Indian tax treaes.

Various factors have to be taken into account to decide a Fixed place PE which interalia

include right of disposal over the premises. However, no strait jacket formula can be laid

down. The taxpayer should have the element of ownership, management and authority

over the establishment. It is not necessary that the place may be owned, rented or leased

by an enterprise; factual use or exercise of such right will have a greater bearing. Even if

the place is at the disposal of the foreign enterprise for its business purposes, i.e., the

foreign enterprise has the ability to exercise some right or domain or control over the

place, it will constute a Fixed Place PE. Even illegal occupaon can constute a PE.

The concepts of xed place PE are:-

a) There must be a xed place of business (situs test);

b) The business must be carried on from that place(business test);

c) The xed place of business must be located in a certain territorial area (locus test);

All the above three tests (locus, situs and business acvity) must be sased and the


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presence should be visible in the other contracng state. Place of business covers premises

as well as tangible or intangible assets used for carrying on the business. Movable places

of business with a temporary xed locaon will meet the locus test. Acvies carried out

within a dened geographical locaon could constute a PE; e.g., a diving oshore vessel

funconing within a dened area, dealer selling merchandise from a mobile van.

A. The use of the xed place of business must last for a certain period of me;

No minimum threshold provided under the Indian law;

An isolated acvity cannot lead to establishment of a xed place PE as the ingredients of

regularity, connuity and repeveness are essenally missing;

If a non-resident is carrying its acvies through a place which is exclusively available to

its business in India, then that place will be deemed to be its xed place PE even if the

same is used for a day;

B. The taxpayer must have a certain right of use over the xed place of business;

i. Place should be at the disposal of the foreign enterprise for the purpose of its business

acvies;

ii. The foreign enterprise should have the ability to exercise some right or dominion or

control;

iii. The place may be owned, rented or leased;

iv. Legal right to use need not be the sole determinant; factua l use or exercise of such

right will have a greater bearing;

v. Even illegal occupaon could constute a PE.

C. The acvies performed through the xed place of business must be of a business

character (business acvity test)

i. The denion of PE requires that the business of the foreign enterprise, wholly or

partly, ought to be carried out through the xed place;

ii. Place of business must serve the business acvity and not be subject to it;

iii. The use of the premises by an agent for the purpose of the business of the principal

may lead to an inference that such premises are at the disposal of the principal and

therefore constute a PE (Galileo Internaonal Inc v. DCIT (2009). Similarly, in ACIT

v. DHL Operaons BV (2005) the oce of a local courier company was considered to

constute a PE for the foreign company engaged in providing courier services since

the foreign company delivered packages to the local courier company for onward

delivery to the addressee.

The following are excludedfrom the denion of PE:

i. Use of facilies solely for storage or display of merchandise ;

ii. Maintenance of stock of goods solely for the purpose of processing by another

enterprise;

iii. Maintenance of a xed place of business solely for

a) Adversing;

b) Supply of informaon;

c) Scienc research;

d) Other similar acvies which have a preparatory or auxiliary character.

Oneof sine qua non of a xed place PE is that xed place through which business is

carried on should be at the disposal of the taxpayer and, in order to sasfy the disposal

test, the taxpayer must have element of ownership, management and authority over

establishment. The place has to be owned, rented or otherwise at the disposal of the

taxpayer. No formal legal right to use that place is required. For example, a PE can existeven where an enterprise illegally occupied a certain locaon where it carried on its

business. Further, even the eecve power to use that locaon as well indicates existence

of a PE. It is also not necessary that the place of business must be aached to the ground;

even equipment can constute the PE.

The only criterion is that the place should be xed and there must be certain degree of

permanence (Nimbus Sport Internaonal Pte Ltd. v. DDIT) in the context of the nature of

the business being carried out but no me period test is prescribed for permanence.

The disposal test also gets sased if the non-resident providing services render services

through the deputaon of employees in the premises made available by the resident.

Provision of professional or personnel services can also create a xed place PE if the

professional services are exercised in the other country and the non-resident service

provider has the right to use the residents premises. The access given by the resident

company to the technical and professional personnel deployed to work in a given space

will give rise to a xed place PE. In such a case the disposal test also gets sased.

A taxpayer, who is obliged to perform independent personal services without having a PE

of his own, is deemed to have a PE where he performs his services.

7.3 Deemed PE:

Following places will be considered as deemed PE under Article 5(2):

Branch,

Oce,

Factory,

Workshop,

Warehouse,


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Sales outlet

Place of Management

7.4 Installaon PE

The OECD Model Treaty Arcle 5 includes specic provisions in paragraph 3 that a

building site or construcon or installaon project constutes a treaty permanent

establishment only where it lasts more than 12 months. Of course parcular treaes

may vary from the model in this respect and indeed dierent duraons are included

in many of the Indias treaes. And, for clarity in the model treaty, 12 months duraon

has been taken to be a sucient indicaon that the acvity is a xed place of business

permanent establishment.

If the non-resident is involved (directly or indirectly through subcontractors) in

more than one site or project, each should be considered as a potenal permanent

establishment separately from the others. The 12 months or other duraon testapplies to each site or project. A site or project should be regarded as a single

potenal permanent establishment even if it is based on several contracts provided

that it forms a coherent whole commercially and geographically. If it appears that a

single site or project has been fragmented to avoid the appearance of being a PE the

facts of the original tendering should be invesgated.

A site or project exists from when the contractor begins work, including any

preparatory work, in the country where the construcon etc. is to be established. It

connues to exist unl the work is completed or permanently abandoned. Temporary

disconnuaon, seasonal or other temporary interrupons should be ignored.

Concept of Installaon PE:

a) Building site or construcon or installaon project including the construcon of

buildings, bridges or canals, excavang and dredging and the laying of pipelines;

b) Installaon project means pung together or re-grouping of pre-fabricated elements

such as the erecon of steel scaolding or units of producon;

c) Final assembling of moveable objects (e.g., airplanes) also covered by the above term;

d) Planning and supervision covered only if carried on by the building contractor himself;

e) Delivery of materials to a construcon or assembly project is not itself a construcon

or assembly project.

The permanence element of a PE is replaced by a test of minimum length of me. The

minimum period starts when the enterprise starts to perform business in connecon with

the building or construcon or installaon project. India and its tax authories do not

agree with the words the 12 month test applies to each individual site or project. It

considers that a series of consecuve short term sites or projects operated by a contractor

would give rise to the existence of a PE in the country concerned. However, judicial has

been that the 12 month test applies to each individual site or project.

7.5 Subsidiary as PE

If the subsidiary is substanally controlled and inuenced in funconal maers by the

foreign parent, i.e., it is not independent and do not bear any signicant risk as ulmate

responsibility lay with the foreign parent, the subsidiary can be said to be a dependent

agent PE of the foreign parent company. Furthermore, where a wholly owned subsidiary

is created for purpose of aending business of a foreign parent in a parcular country, it

will be treated as PE of the foreign parent. However, the subsidiary will not be a PE of its

foreign parent merely because they have a director in common (ITO v. Pubmac India (P)

Ltd (2013).

7.6 Dependent agent or Agency PE (DAPE)

A dependent agent within Arcle 5(5) will constute a PE (even if the requirements of

Arcle 5(1) are not sased by the enterprise). A dependent agent is legally separate

from the enterprise (principal to agency relaonship) for whom it is acng. Agency PE

arises when the agent is empowered to enter into or conclude the contracts and carryout

jobs exclusively for its principal and take instrucons from me-to-me and report. The

acvies of a dependent agent may give rise to a PE for the principal. However, if the

enterprise carries on business through an independent agent such as a broker or general

commission agent such person will not constute a PE of the enterprise.

The agent who is dependent and performs the following funcons will be considered as a

PE of the foreign enterprise:

i. Exercises an authority to conclude contracts on behalf of the foreign enterprise.

ii. Secures orders wholly or almost wholly for the foreign enterprise.

iii. Maintains the stock of goods or merchandise from which the agent regularly delivers

on behalf of the foreign enterprise.

The above funconal requisites for the Agency PE can in principle be captured in the

binding test and dependency test for the agent of the foreign enterprise in India.

7.7 Service PE

Under Arcle 5(2) / (3) Service PE is aracted by the foreign enterprise in India if the employees

of foreign enterprise furnish or perform services in India, other than services covered

under Royales or Fees for Technical Services, for a specied period of me. Services may

be rendered to an associate enterprise (AE) of the service provider or a third party service

recipient. The permanence element of a PE is replaced by a test of minimum length of me

in the case of service PE as in case of installaon PE. The number of days calculaon is based

on man days. Service PE is included in the DTAAs between India and the following countries,

viz., Australia (Arcle 5(3)), Canada, Norway, Switzerland, USA (Arcle 5(2)(l)), China, UK

(Arcle 5(2)(k)), Singapore (Arcle 5(6)), Indonesia (Arcle 5(5)), Nepal (Arcle 5(2)(h)), etc.

Furnishing of Services is the most important check for aracon of Service PE. For

example in Indo-US DTAA, the specied period is 90 days within any twelve-month period. The employment lien with the foreign enterprise has to be established for the employees

providing services, to constute a Service PE.


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Chapter 8

Capital Gains

8.1 Taxability of Capital Gains under the IT Act:

As per Secon 9(1)(i) of the IT Act, the following income is deemed to accrue or arise

in India: all income accruing or arising, whether directly or indirectly, ....through the

transfer of a capital asset situated in India

8.2 Overview of Capital Gains Arcle:

Arcle 13 of OECD MC and UN MC contains the details about taxability of capital gains.

The taxability of capital gains, derived on alienaon of properes, is dependent on the

nature of asset alienated. The mode of computaon is also not provided in the DTAA.

Accordingly, provisions of IT Act, dealing with sale consideraon, cost of acquision,

period of holding, rate of tax, etc. would be applicable. Capital Gains is also not denedunder the DTAA and needs to be interpreted as per IT Act [Secon 2(14)]

As per the basic principle of Internaonal Taxaon, a country of residence always has the

right to tax. The country of source may be given full/ paral/ or no rights to tax.

8.3 Criteria for Taxaon of Capital Gains:

Taxaon of capital gains depends on the types of assets sold . Brief overview of arcles of

UN model:

Arcle 13(1) Immovable Property

Arcle 13(2) - Movable property of a PE

Arcle 13(3) Ships, aircras, boats etc

Arcle 13(4) Shares of Real Estate Companies

Arcle 13(5) Shares of Companies

Arcle 13(6) Residuary Provision

Immovable Property:

Basic rule as per Arcle 13(1) - Capital Gain earned by a resident of a Foreign Country

on sale of immovable property (situated in India), can be taxed in India. The Foreign

Country can also tax the Capital Gain. It is immaterial whether property is residenal or

commercial. It is also immaterial whether immovable property is a capital asset, or stock-

in-trade.

For example.: X, a Non- resident Indian has aproperty in India. The purchase price of

which is INR 50,00,000 and the same was purchased on 10.10.2010. Now, he sells the same

for INR 80,00,000 on 10.10.2015 resulng in the capital gain arising to him amounng to

INR 30,00,000 subject to indexaon will be taxable under the head of Capital gains as per

Secon 9(1)(i) of the IT Act & Arcle 13(1) UN MC.

Chapter 9

Overview of Royalty & FTS

9.1 Royalty & its insights:

Royales, somemes simply referred to as royalty, is typically the sum of money paid

to the proprietor or Licensor of Intellectual Property (IP) Rights for the benets derived,

or sought to be derived, by the user (the Licensee) through the exercise of such rights.

Royales may be paid for the use of copyright, patent, trademark, industrial design,

procedural knowledge or a combinaon of them. However, the term has also a much

wider applicaon and can cover mining royales, performance of art royales, etc. The

exclusivity of the right in relaon to the thing for which royalty is paid should be with the

grantor of that right. That was what Mr. Jusce Jayasimha Babu observed in a ruling in CIT

Vs. Neyveli Lignite Corporaon Ltd (2007) 243-ITR-459. Blacks Law Diconary denes [r]

oyalty as compensaon for the use of property, usually copyrighted material or natural

resource, expressed as a percentage of receipts from using the property or as an accountper unit produced . Thus, the salient feature of a royalty payment is that it is given as

a compensaon for the use of some property.

The denion of the term royalty, as provided in Explanaon 2 to secon 9(1)(vi), states

that

For the purposes of this clause, royalty means consideraon (including any

lump sum consideraon but excluding any consideraon 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 granng of a license) in respect of

a patent, invenon, model, design, secret formula or process or trade mark or

similar property ;

(ii) the imparng of any informaon concerning the working of, or the use of, a

patent, invenon, model, design, secret formula or process or trade mark or

similar property ;

(iii) the use of any patent, invenon, model, design, secret formula or process or trade

mark or similar property ;

(iv) the imparng of any informaon concerning technical, industrial, commercial orscienc knowledge, experience or skill ;

(iva) the use or right to use any industrial, commercial or scienc equipment but not

including the amounts referred to in secon 44BB ;

(v) the transfer of all or any rights (including the granng of a license) in respect

of a copyright, literary, arsc or scienc work including lms or video tapes

for use in connecon with television or tapes for use in connecon with radio

broadcasng, but not including consideraon for sale, distribuon or exhibion

of cinematographic lms ;

(vi) the rendering of any services in connecon with the acvies referred to in sub-

clauses (i) to (iv), (iva) and (v).


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Explanaon 3.For the purposes of this clause, computer soware means any

computer programme recorded on any disc, tape, perforated media or other

informaon storage device and includes any such programme or any customized

electronic data

Explanaon 4.For the removal of doubts, it is hereby claried that the transfer

of all or any rights in respect of any right, property or informaon includes and

has always included transfer of all or any right for use or right to use a computer

soware (including granng of a licence) irrespecve of the medium through

which such right is transferred.

Explanaon 5.For the removal of doubts, it is hereby claried that

the royalty includes and has always included consideraon in respect

of any right, property or informaon, whether or not

(a) the possession or control of such right, property or informaon is with the payer;

(b) such right, property or informaon is used directly by the payer;

(c) the locaon of such right, property or informaon is in India.

Explanaon 6.For the removal of doubts, it is hereby claried that

the expression process includes and shall be deemed to have always

included transmission by satellite (including up-linking, amplicaon,

conversion for down-linking of any signal), cable, opc bre or by any

other similar technology, whether or not such process is secret

Exclusions: The following shall not be treated as royalty:

(a) Any consideraon chargeable as income of recipient as Capital gains;

9.2 Fees for Technical Services & its insights:

The expression Fees for Technical Services is dened in Explanaon 2 in secon 9(1)(vii)

of the IT Act as under:

For the purposes of this clause, fees for technical services means any consideraon

(including any lump sum consideraon) for the rendering of any managerial, technical or

consultancy services (including the provision of services of technical or other personnel)

In the case of Skycell Communicaon Ltd. [(2001)251-ITR-53(Mad)], The popular

meaning associated with technical is involving or concerning applied and industrial

science.

Exclusions: Consideraon for any construcon, assembly, mining or like project undertaken

by the recipient or consideraon which would be income of the recipient chargeable

under the head Salaries, shall not be treated as FTS.

Normally, FTS is taxable at 10% plus applicable Surcharge & cess u/s 9(1)(vii) read with Sec

115A of IT Act

9.2.1 Make available clause:

FTS is taxable under the certain treaes only if services

Make available technical knowledge, experience, skill, know-how or process or consist of

the development and transfer of a technical plan or technical design.

The term make available means that the person acquiring the technical service is

enabled to independently apply the technology. The word enable is used in the sense

that the technical services should be such that they make the recipient able or wiser in

the subject maer. Thus, where the recipient of technical services does not get equipped

with the knowledge or experse and the recipient would not be able to apply it in future

independently without support from the service provider, it will not be a case of technical

service having been made available.

Examples of treaes with India having the make available clause

USA

UK

Canada

Australia

Netherlands etc

In case of CESC Ltd. v. CIT [275 ITR 15], the Kolkata Tribunal considered meaning of made

available in the context of fees for technical services as appearing in DTAA between

India- UK. It was observed that when the provisions are in pari-materia, there cannot be

dierent meanings assigned to the provisions, unless there is anything repugnant in the

context.

Similar view has been taken by the various benches of ITAT, and also by the Authority for

Advance Ruling in a large number of cases including DCIT vs. Boston Consulng Group

P Ltd. [280 ITR 681] [Mum-ITAT], McKinsey & Co. Inc. (Philippines) [99 ITD 549] [Mum],

Raymond Ltd. [80 TTJ 120] [Mum], NQA Quality Systems Registrar Ltd. vs. DCIT [2 SOT

249], CESC Ltd vs. DCIT [275 ITR 15] [Kol-ITAT] and Naonal Organic Chemical Industries

Ltd. [96 TTJ 765] [Mum].

9.3 Basis of Taxaon of Royalty/FTS for non residents :A number of foreign companies orother non-resident enes run their business in India. Their income straightway are

accrued or received in India. In some other cases, the income though not straightway

accrued or received in India, may be deemed to accrue or deemed to be received in India.

Whatever be the case , if the earning of the foreign enty is from royalty or for providing

technical services, the payer of such royalty or FTS generally enter into some agreements

with the foreign enty. The payer or the user of the royalty or recipient of the technical

service, may be the government or any other Indian concern. If the agreement is an

eligible one, such income is taxed at a lower, preferenal tax rate. Royalty/FTS for non-

residents are taxable in India if it is sourced/ulised in India. Apart from payments which

are obviously taxable, there are sll other situaons where royalty/FTS are taken to be

taxable, on the premise that is sourced in India.


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Chapter 10

WHT Liability on Some Common Transacons

10.1 This chapter aims at discussing few common transacons with non-residents and

applicability of withholding tax on the same:

10.1.1 Import of Materials:

As per Sales of Goods Act, 1930, sale is dened as under:

A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer

the property in goods to the buyer for a price. There may be a contract of sale between

one part-owner and another.

Import of material can be on:

FOB basis

CIF basis

Case 1: Import of material on FOB and there is no PE in India

A sale is deemed to be completed when the property in goods and risk & rewards of the

goods passes on to the buyer. In case of import of material or capital goods on FOB basis,

the same is not taxable in India as the property in goods and risks & rewards are deemed

to be transferred once the seller hands over the material to the port authories outside

India and no income accrues or arises in India.

Case 2: Import of material on CIF and there is no PE in India

Under this case, there are two types of transacons:-

Delivery/ Title of goods passed on to the importer before custom clearance

Delivery/ Title of goods passed on to the importer at Factory Gate

Delivery/ Title of goods passed on to the importer before custom clearance

In this case, the sale shall be treated as o-shore sale and is not taxable in India. The

relevant judicial interpretaon are discussed as under:-

Where tle to the goods passed?

As was held in case of POSCO Engineering & Construcon Company Limited wherein

reliance was placed on the previous judgement of Ishikawajma Harima (supra) and it was

held by Delhi Tribunal that tle to goods shall be considered to have passed outside India

when delivery was made on high sea and the payment was also received outside India and

hence same shall not be taxable in India.

Technip Italy Spa v. Addl CIT (2010-TII-133-ITAT-DEL-INTL) In case of oshore supplier,

since the enre transacon is completed on high seas, the prots on such sale are not

taxable in India. The fact that a contract is a turn-key contract by itself, is not of much

signicance and for the purpose of taxability, it is not necessary that the contract is to be

considered as an integrated one. Hence in view of the above, revenue earned from o-

shore supply of equipment is not chargeable to tax in India

In case of Hyosung Corporaon v. DIT (IT) 2009 -TII -14 -ARA INTL, AAR held that Since

the sale of equipment and materials took place outside the territories of India, the incomein relaon thereto cannot be said to accrue or arise in India.

Delivery/ Title of goods passed on to the importer at Factory Gate

In this case, the sale may be treated as o-shore sale or on-shore sale.

If the property in goods or tle of goods has been passed overseas but the risk passed at

the factory gate, the same is treated as o-shore sale and not taxable in India. The same

is held by Special Bench of Delhi Tribunal in case of Motorola Inc. V.DCIT (2005) 95 ITD

269 (Del)(SB). It is held in this case that it is open to the pares to agree that even where

the property in the goods has passed, the seller may undertake the risk of deterioraon in

the goods necessarily incident to the course of transit merely because the risk passed in

India, it cannot be said that the sale took place in India. Therefore, no income can be said

to have arisen in India.

If the property in or tle of goods has been passed in India i.e. at the factory gate, the

same is treated as on-shore sale and is taxable in India as Income accrue or arise in India.

Case 3: Import of material on FOB or CIF and Exporter has PE in India

Generally, foreign exporters have oces or agents in India which may constute PE inIndia or business connecon in India u/s 9(1)(i) of the Income Tax Act, 1961.

Under domesc law i.e. Income Tax Act, 1961, the import transacon is taxable in India in

all circumstances if there is a PE of non-resident exporter. Hence, we may claim the benet

of DTAA, if available, but Tax Residency Cercate (TRC) of Non-resident is required for

the same.

If the benet of DTAA is claimed or undertaken, the said transacon is covered under

Arcle 7 of the DTAA i.e. Business Prots. As per Arcle 7 of the DTAA, the income is

taxable in India only if the sale acvity is aributable to the PE in India. If sale is not

connected to PE, then the same is not taxable in India.


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For example:A Inc has PE in Delhi. A Inc exported goods to B in Delhi and C in Mumbai.

The sale to A is connected with the PE in India as the sale contract entered through the

PE in India. However, C has directly ordered goods to A Inc without the involvement of PE.

If A Inc provides TRC and declaraon for the same, the sale to B is taxable in India but sale

made to C is not taxable in India.

Hence, merely having PE in India does not aract taxability in India under DTAA. The only

excepon to this rule is force of aracon rule in DTAA which will be discussed in later

mails.

Rate of TDS if Import transacon is taxable in India

If sale is taxable in India, the TDS should be deducted @ 40% plus applicable Surcharge, EC

& SHEC on the value of Imports. No TDS is required on the value of Custom, Insurance or

Freight if shown separately. The importer or exporter may apply to the AO for lower rate

of TDS u/s 195(2) or (3)

Conclusion

Following important points should be considered in arriving at non- taxability of oshore

equipment:

Ownership, tle & property in goods transferred outside India to Owner

Payments remied by owner directly to foreign country outside India.

Bill of entry in name of owner.

Goods imported by owner & customs duty paid by owner or his agent.

No acvies undertaken in India for oshore supply contract.

Equipment shipped to owner preferably on FOB & not CIF basis

Risk of loss of equipment passes to owner outside India other than risk of deterioraon

in the goods necessarily incident to the course of transit.

No PE or oce in terms of DTAA nor any acvies carried by PE, if any, related to

oshore supply contract.

No force of aracon rule present in Arcle 7 of the DTAA

10.1.2 Buyers Credit incase of imports:

Generally, every importer takes buyers credit for Import of goods from the Indian Bank.

Indian Bank do not give this credit directly but engages another bank for the same. The

corresponding bank may be a foreign bank or foreign branch of an Indian Bank. Then,

there may be a 3rd bank involved in the enre transacon which actually gives credit and

charges interest for the same. At the end, Indian bank charges the enre amount from the

Importer and asks 15CA/ CB from him.

Lets understand the transacon with some no.

A, an importer, takes buyers credit for Import of goods from the Indian Bank lets say SBI

for Rs. 1,000. The goods are coming from UK.

SBI engages CITI Bank for providing the credit but CITI further engages HSBC Bank for the

same. For arranging HSBC Bank, CITI Bank charges his commission of Rs. 1.

HSBC Bank actually gives buyers credit of Rs. 1,000 for 30 days and charges interest of Rs.

10.

At the end, SBI charges Rs. 4 as his commission for the enre transacon and ask the

importer to pay Rs. 1,015 (1000 +10+1+4). SBI asks 15CA/ CB from the importer.

Few common Q & A on this subject is given as follows:

Queson 1: When the interest is paid to foreign branch of Indian Bank, whether TDS is

deducble or not?

Answer: In this case, foreign branch of Indian Bank is regarded as resident in India as it

just an extension of Indian Bank only. Hence, it is the transacon between two

residents and Secon 195 is not applicable. Hence, it is covered u/s 194A and

there will be no TDS in this case because of specic exempon granted to Banks

u/s 194A.

If foreign branch of India Bank is a separate company (Only in some cases), then it

is to be treated as separate assessee like a normal non-resident and provisions of

Secon 195 is applicable like a foreign bank.

Queson 2: How to prepare 15CB in case of payment of interest is made to foreign branch of

Indian Bank?

Answer: There is no need to prepare 15CB in this case as Secon 195 itself is not applicable.

But, if the bank insists for the same, the dra 15CB in this case is aached.

Queson 3: At what stage, 15CB should be given under Buyers Credit Transacon?

Answer: Generally, 15CB to the extent of Value of Import should be given at the me oftaking of the buyers credit.

15CB for the interest and commission amount should be given when the actual

payment of the same is given to the bank at the end of credit period.

Queson 4: When the commission or bank charges is paid to foreign branch of Indian Bank,

whether TDS is deducble or not?

Answer: The answer to this queson is also same as queson 1. This is the transacon

between 2 residents. Hence, Sec 195 is not applicable.


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10.1.3 Clearing and Forwarding (C & F) Charges:

In the case of ACIT v Leaap Internaonal (P.) Ltd.15 taxmann.com 251, The Chennai

Tribunal held that payment made to foreign companies partly towards freight charges

for moving the goods and partly for transportaon for clearing/forwarding at the foreign

ports and the remiances were for services rendered outside India and the companies to

whom payments were made did not have any branches or PE in India and the payments

were made in accordance with the RBIs circular as also the CBDT Circular No. 10/2002

dated 9-10-2002 and, therefore, the payments were not liable for deducon of tax under

secon 195.

10.1.4 Payment of Freight to Shipping Company:

Export Cargo Freight income accrues in India and so taxable under Domesc Law.

Import Cargo Freight income accrues outside India. So, It is taxable only if received in

India under Domesc Law.

Arcle 8 of the treaty reads as follows: Prots from the operaon of ships or aircra in

internaonal trac shall be taxable only in the Contracng State in which the residence/

place of eecve management of the enterprise is situated

Arcle 8 also applies to the prots from the following:

parcipaon in a pool;

a joint business;

an internaonal operang agency.

As per the OECD Commentary, ancillary acvies including leasing of ships, use,

maintenance and rental of containers, etc eligible for benet of Arcle 8.

Most of the DTAAs provide that income of Foreign Shipping Companies (FSC) would be

taxable in the country of residence/ eecve management of the FSC. If income is not

taxable in India based on tax treaty, a relief order is issued from the tax department. For

obtaining the order, an applicaon has to be led with tax authories accompanied with

following documents:

Cercate of incorporaon of the non-resident company

Details of eecve management/ residence of the non-resident company

Details of holding company

Sample copy of the bill of lading, etc.

Agency agreement

10.1.5 Commission Agent outside India:

CBDT issued circular no. 786 dt 23-07-2000 exempng commission paid to a non-resident

(NR) from tax in India. But, the circular was withdrawn on 22-10-2009 which leads to

confusion on Taxability of Overseas Commission paid to non-residents.

Commission paid to Non-resident may of 2 types

Commission for Commercial Service

Commission for Technical Service

Commission for Commercial Services

- The said commission is taxable in India under Domesc Law only if

Income accrues to NR in India, or

Income is received by NR in India, or

NR is having business connecon in India under Sec 9(1)(i), or

NR is having source of Income in India

- Keeping the above condions in mind, generally, NR agent sases one of the

above condions. Hence, the commission paid to them is generally (Not in all cases) is

taxable in India under the Income Tax Act, 1961 (Domesc Law)

- Now, we need to claim the benet of DTAA in this case.

- Commission paid to NR is regarded as Business Prots as referred under Arcle

7 of the DTAA. The business prots is taxable in India only if the NR agent is having PE, as

specied under Arcle 5 of the DTAA, in India.

- Generally, NR do not have any PE in India. Hence, it is not taxable in India.

Commission for Technical Services

As per Delhi ITAT in case of Adidas Sourcing Limited (ITA/5300/Del/2010), it is held that

the commission is said to in the nature of Technical Service if it is necessary that some sort

of managerial, technical or consultancy services should have been rendered. If the same istaxable then the rate will be 10.3% as described u/s 115A of Income Tax Act or applicable

DTAA rates whichever is more benecial to the assessee.

10.1.6 Bandwidth Charges:

Overme there has been lot of controversies involved on issue of taxability of bandwidth

charges paid to non-resident assessees especially aer the amendment in denion of

the term Royalty by Finance Act, 2012. Denion of the term Royalty under secon 9(1)

(vi) of the Act was amended vide Finance Act, 2012 with retrospecve eect from 1-6-

1976, to ensure that soware services and payments by broadcasters to satellite television

content providers are regarded as income accruing or arising in India. The retrospecve


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amendment expanded the scope of and put to unrest the seled law that a mere payment

for service without any right to control the equipment is not royalty. (Asia Satellites case)

Aer the case of Verizon Communicaon Singapore Pte. Ltd (Madras High court ruling)

the issue gained more dissension wherein it was armed that in view of retrospecve

amendment in Finance Act in 2012, the earlier decisions in favour of taxpayers whic

Practical Aspects of Form 15CA TEXT 7x9-5

Documents

Transcript of Practical Aspects of Form 15CA TEXT 7x9-5