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November 28, 2006
Recent
Indian Rulings on International Taxation
In
re AT & S India Private Limited, AAR No. 670 of 2005
The
recent ruling of the Authority for Advance Rulings (“AAR”)
in the case of AT & S India Private Limited has held that the
payment by the Applicant to its Austrian parent company of the
income and other related expenses of seconded employees would be
characterized as fees for technical services and therefore subject
to a withholding tax in India on the gross amount.
The
AAR found that under the Foreign Collaboration Agreement’ (“FCA”)
in place between the Applicant and its parent, the latter was
under an obligation to provide the Applicant with appropriate
support, technology and ‘other services’. The AAR read the FCA
and the secondment agreements together, and noting that the
removal/replacement of seconded personnel and the quantum of their
compensation were not
at the sole discretion of the Applicant, held that the Applicant
could not be found to be the employer of the seconded personnel,
although the control and supervision of the services of the
seconded personnel. The AAR found that the role of the parent
company was not limited to that of an employment agency, and that
the amounts received from the Applicant was a fee for technical
services, and therefore subject to withholding.
In
re Angel Garment Limited, AAR No 729 of 2005
This
case involved the question of whether the Indian liaison office of
a Hong Kong company ("Company") in the textile
industry, would be
subject
to tax in India. The activities of the proposed liaison office
would primarily consist of acting as a channel of communication
between the Company and the Indian exporters and following up with
Indian exporters for timely export of goods ordered by the
Company. The
Company submitted that
as the liaison office is proposed to be set up only to
purchase goods for
the purpose of export,
the activities would fall within the exception to the deeming
clause in section 9 of the Income Tax Act, 1961 ("ITA")
(specifically Explanation 1(b) of Section 9(1)(i),
which states that in the case of a non-resident, no income
shall be deemed to accrue or arise in India through or from
operations which are confined to the purchase of goods in Indian
for the purpose of export.
In
light of the above, the AAR held that the proposed liaison office
of the Company cannot be taxable in India.
In
re IMT Labs (India) Pvt. Ltd, AAR No 676 of 2005
The
applicant, an Indian company called IMT Lab (India) Pvt Ltd. (“Applicant”),
had entered into an agreement with Conversagent Inc., a Delaware
Corporation (“Conversagent”) for securing the license
to use particular software. It had sought a ruling from the
Authority on whether it was required to deduct tax at source under
the Indo-US DTAA while making periodical payments to Conversagent
for the use of software on the Internet in the absence of any
office / establishment of Conversagent in India.
The
Authority examined the license agreement between the Applicant and
Coversagent and analyzed the relevant articles of the Indo-USA
DTAA as well as the provisions of the ITA. Pursuant to the review
of the license agreement, the Authority observed that the payments
made by the Applicant are towards consideration for the use of, or
the right to use, any industrial, commercial or scientific
equipment and hence would fall within the definition of
“Royalty” as per the Indo-US DTAA and the ITA. Further, the
technical and consultancy services being rendered by the provision
of services of technical personnel and e-mail support is covered
by the description of “Fees for included services” as per the
Indo-US DTAA and the ITA. In light of the above, the Authority
held that the payments made by the Applicant to Conversagent
qualify as ‘Royalties” and “Fees for Included Services’
and hence such payments are chargeable to tax in India under
Article 12 of the DTAA as also under Section 9 of the ITA.
In
re British Gas India Private Limited AAR No. 725 of 2006
In
this case, the applicant had sought a ruling on the tax liability
on salary paid in India to two of its employees who were deputed
to group companies in the U.K and had become non-resident in
India. While the AAR was of the view that the salary paid in India
by the applicant to the concerned employees was taxable in India
under the provisions of the domestic law relating to chargeability
to tax and ascertainment of total income, it applied the
provisions of the DTAA between India and the UK, since the
employees had become tax residents of the UK. Under Article 16 on
dependent personal services, the AAR held that the salary paid in
India to the employees deputed outside India would not be taxable
in India, as the same was taxed in the U.K. in pursuance of the
DTAA. Accordingly, there was no withholding tax obligations on the
applicant either under section 195, regarding payment to
non-residents or under 192 regarding payment of salaries. The
employees are however required to make the appropriate declaration
to the applicant regarding the payment of tax in the UK on this
salary.
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