Sushil Lakhani

CREDIT OF TAXES AND WITHHOLDING TAXES-CROSS BORDER ISSUES
SUSHIL LAKHANI
PROFESSOR KLAUS VOGEL APPRECIATES THE INDIAN JUDICIARY FOR DECISIONS ON INTERNATIONAL TAXATION - ESPECIALLY THE DELHI SPECIAL BENCH DECISION IN THE CASE OF NOKIA, ERICCSON AND MOTOROLA ECONOMIC TIMES OF 7TH APRIL 2006
Cross Border Payments-Withholding Tax Issues
IFA-RRC - April, 2006
Cross Border Payments Withholding Tax IssuesCross Border Issues
Sushil Lakhani
Section 195 (1) Scope of the section any person responsible for paying to a non-resident or a foreign company
Non resident to non resident covered. Payment by Branch to HO (ABN Amro Bank (280 ITR (AT) 117)(Kol SB))
Capital Gains NR to NR trf of shares?? Sec 195 vs Sec 196D?? (Int to FIIs) Interest whether all interest or only interest chargeable to tax covered?? Gift?? Gross Sum vs Income element FTS, Royalty etc Other than Sec 44D
sum chargeable to tax (other than Salaries)

Sushil Lakhani
Section 195 (1) Scope of the section

Treaty vs Act meaning of Liable to Tax Recent developments
- Abdul Razak Meman (276 ITR 306)(AAR)
- GE Pension Trust (280 ITR 425) (AAR)

- Green Emirates Shipping and Travel (99 TTJ 988) (Mum)
Surcharge and Education Cess not to be included when treaty applied .
Sushil Lakhani
Section 195A Grossing up of tax
Deductibility of TDS borne by payer--S.40(a)(ii)??

Sec 40(a) (ii)
any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains
Incidental issues Expenses whether disallowed u/s 40(a)(i), if TDS partly deducted??
Sushil Lakhani
Certificate by a CA for remittance: Clause 1 name & address of beneficiary
Beneficiary meaning of Beneficial Owner or Recipient?

Clause 7 determination of a PE and profits of PE: Whether CA duty bound to ascertain the existence of PE? Determination of attributable to PE ?
Sushil Lakhani
Certificate by a CA for remittance: Some Issues:

Consequence of difference of opinion between a CA and AO Consequence of change in the view due to an amendment or a judicial decision or circular subsequent to issue of certificate. Determination of any special relation between payer and payee. Tax residency certificate if not available? Tax residency certificatenot sufficient -- dual residency? Validity period of tax residency certificate / undertaking / declaration from the payee for a year or for single payment?
Sushil Lakhani
Certificate by a CA for remittance:

Some Issues (Cont):
Whether CA certificate is an alternative to Order u/s 195(2)? Non resident status of the receiver at what point of time to be considered? at the time of signing of agreement or the prior financial year or making of remittance In absence of address in the agreement is the payer obliged to determine the status of purchaser for purchase of capital gains?
Sushil Lakhani
SECTION 9(1)(i)--BUSINESS CONNECTION

Taxable only if : relates to a source of income or asset in India; or if business connection under IT Act and PE under the treaty exists. Taxable only to the extent reasonably attributable to operations in India. Specific exclusions Explanation 1(b); 1(c) & 1(d) of Section 9(1)(i) Specific inclusions Explanation 2 to Section 9(1)(i)
treaty concept of dependent agent introduced in Act agent need not be in India but must Act in India.
Sushil Lakhani
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SECTION 9(1)(i)--BUSINESS CONNECTION

Section 9(1)(i) Interpretations Business Connection Judicial
CIT Vs. R.D. Aggarwal & Co. (56 ITR 20) & Circular 23 and 786 lay down certain tests. Business in India Vs. Business with India Difference between a BC and a PE
BC is wider in scope than PE.
Sushil Lakhani
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SECTION 9(1)(i)--BUSINESS CONNECTION - Issues Source of Income outside India

Source meaning of (91 ITD 133(Del); 85 ITD 478(Del)) Whether Export a source outside India ??(262 ITR 513(Mad))
Service utilised is where the income accrues (250 ITR 164(AP))
Query?
Fees to Investment Advisor of non- resident FII--both are outside :
- No presence of adviser in India (250 ITR 194(AAR); 271 ITR 1 (AAR); 272 ITR 416 (AAR)) - Presence of adviser in India Service PE clause
Payment of commission to foreign agents (Circular 23 of 1969; 125 ITR 525(SC); contrary - 278 ITR 97(AAR))
Sushil Lakhani
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SECTION 9(1)(i)--BUSINESS CONNECTION - Issues Payments for supply and installation of equipment
Payment of design and drawings alongwith equipment (259 ITR 248)(Del)Mitsui); Payment for installation and supervision of machinery suppliednot taxable --as part of supply(262 ITR 110(AP)-Sundwiger) ; Contrary Decisions: Proportionate amount relating to provision of certain subsidiary services in course of supply taxable as PE existed. Protocol of India Japan Treaty (271 ITR 193)(AAR)-IHH) Where consideration for supply and installation separately stated (279 ITR 165)(AAR)-Rotem) Finalisation and signing of deal by country manager in India amounts to PE (268 ITR 156)(AAR)-Sutron)
Sushil Lakhani
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ROYALTIES
Royalty and FTS deemed to accrue or arise in India if payable by:
In all cases without exception
Government Resident
In all cases, except where payable for any right, property etc. or services utilized for the purpose of / in 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 Only in cases where it is payable for any right, property etc. or services utilized for the purpose 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
Non-resident
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ROYALTIES
For Agreements on or after 1 April 2003
No PE in India
Section 115A of the Act
Taxed on gross basis

Lower rate for Central Government approved Agreements or those relating to matter included in Industrial Policy 20% for agreements entered before 1 June 2005 10% for agreements entered on or after 1 June 2005
Provisions earlier applicable only to foreign companies extended to all non-resident entities w.e.f. AY 2004-05
Sushil Lakhani
15
ROYALTIES
For Agreements on or after 1 April 2003
PE in India and Royalty / FTS effectively connected with such PE
Section 44DA of the Act w.e.f. AY 2004-05 Taxed on net basis at the rate applicable to Non Residents Amounts paid to Head Office / Other Offices not deductible (except reimbursement of actual expenses)
PE as defined in Section 92F(iiia) of the Act fixed place PE
Sushil Lakhani
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ROYALTIES Difference in definition of Royalty under Act and Treaties ACT TREATY(UN Model)
Consideration for transfer of all of any rights Cinematographic films specifically excluded Services in relation to transfer of any rights covered Use of equipment in connection with exploration of mineral Oil excluded
Consideration for use or right to use Cinematographic films included Services in relation to transfer if incidental will get covered here else not No Such exclusion. Use of all sorts of equipment covered.
Sushil Lakhani
17
ROYALTIES
Payment for Software

Off- the -shelf Software ; (94 ITD 91 (Bang.-Samsung)); ( TCS-SC-271 ITR 401)

Customised Software; ( 88 ITD 134(Mum)ISBC)
Software along with Hardware (82 TTJ 163-BangLucent)
Sushil Lakhani
18
ROYALTIES
Payment for following whether Royalty ?

Consideration for design and drawings (Indian Hotels (Unreported)
Payment for Know how and Information

Payment for access to info base-not royalty (94 ITD 9 (Bang)Wipro)
Payment for the use of satellite (78 TTJ 498 (Del)-Asiasat)
Sushil Lakhani
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ROYALTIES
Analysis of some treaties signed by India Excludes Ships and Aircrafts
UK USA
Exclude ICS equipment from ambit of Royalties

Belgium / France / Greece / Israel / Netherlands / Sweden
Excludes payment for use of Aircraft

Ireland Includes proceeds from outright sale of copyrights etc. that are contingent on its use by purchaser USA
Sushil Lakhani
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Fees For Technical Services (FTS)

FTS receipt taxable in India regardless of situs and mode of services other than FTS utilised in a business or source outside India.
Consideration (includes lump sum consideration) for

rendering any:
Managerial, technical or consultancy services
Thrust is on Services
Technical Services vs Technology driven services
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Excludes:
Construction, Assembly,
Mining,
Any like project, Income chargeable as salaries,
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SOME ISSUES IN FTS

Connectivity payments standard facilities (80 TTJ 191 (Bang)Wipro) Payment for use of telephone, electricity etc i.e. standardised products is not FTS (251 ITR 53)(Mad)-Skycell
Payment for repairs

Hardware (273 ITR 437)(AAR)-Airport Authority-Not FIS Software Clause 12 (4) (a) of India USA Treaty Ancillary and subsidiary to royalty (273 ITR 437)(AAR)-Airport Authority Specialised repairs FTS (79 TTJ 268) (Del)-Sahara General repairs-Not FTS (91 ITD 133)(Del)-Lufthansa
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Absence of specific Article on FTS Bangladesh, Brazil, Greece, Indonesia, Libya, Mauritius, Nepal, Philippines, Sri Lanka, Syria, Thailand, UAE, UAR Concurrent Coverage under Independent Personal Services (IPS)
Japan, New Zealand
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Fees for Included Services (FIS) Make Available

Deals with Technical Services - but coverage is very
narrow.
Services under FIS should be technical (Mckinsey (99 TTJ

857)); and
Services should satisfy further conditions as per the MOU

of India US Treaty
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Fees for Included Services (FIS) Make Available (Cont) Associated with Service PE
The words make available held to have the same

meaning as in India-USA Treaty even in absence of the MOU (Raymonds Ltd. (80 TTJ 120))
Caution! These treaties also have Service PE clause.
Sushil Lakhani
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Fees for Included Services (FIS) Make Available (Cont)

Case Laws
Advisory service not FIS (80 TTJ 806) (Cal)-Raymonds Preparation of project report-FIS?? (85 TTJ 794)(Del)-Sinar Mas Payment for strategic consultancy services-Not FIS (99 TTJ 857)(Mum) Mckinsey Payment for testing charges-FIS (278 ITR 233)(AAR); (278 ITR 97)(AAR)
Analysis of few Treaties signed by India (FIS)

Directly - Australia, Canada, Cyprus, Malta, Portugal, Finland, Singapore, USA, UK Due to MFN Clause - Belgium, France, Israel, Kazakhstan, Spain, Sweden(Service PE missing)
Sushil Lakhani
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Reimbursement of expenses
Reimbursement of incidental expenses in addition to payments of Fees for Technical Services (FTS) / Royalty
Reimbursement of cost of services of a third party engaged by the non-resident.

(278 ITR 97)(AAR) -Wallace Reimbursement of allocated cost (i.e. costs- sharing arrangements) (268 ITR
1)(AAR)-Danfoss
Payments for services rendered at cost. (273 ITR 67)(AAR)-Timkin Reimbursement of living allowance, etc of a person deputed to India by the nonresident. (274 ITR 261)(Del) Direct payments by the non-resident of expenses and salaries of foreign technicians. (233 ITR 751)(All)
Sushil Lakhani
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Reimbursement of expenses (Cont)

GREY AREAS Reimbursement of expenses incurred by group company outside India on behalf of
Indian company
If the services are taxable in India and If the services are not taxable in India Reimbursement of pre joint venture expenses like incorporation, registration fees etc. incurred by a foreign joint venture partner.
Sushil Lakhani
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INTEREST AND SHIPPING INCOME
Analysis of some treaties signed by India:

interest on deferred payment sales included in the definition Indonesia, Philippines Penalty charges for later payment excluded Singapore, Indonesia
Payment of usance interest is not a part of purchase price (261 ITR 113) (Guj)
Sushil Lakhani
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INTEREST AND SHIPPING INCOME Payments for Shipping:
Freight
Payment to Shipping Agent (Circuar 742) Bare Boat lease (113 ITR 307)(SC)
Wet Lease is same as bare boat lease sec 44B does not apply (4
SOT 18)
Analysis of Treaties signed by India
Profits taxable only in residence country USA, Singapore

Profits taxable where effective management is situated Profits taxable in India for specified no of years Netherland, Japan Profits taxable in Indian but at concessional rates Cross Border Payments Withholding Tax IssuesCross Border Issues
Sushil Lakhani
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Cross Border Payments Credit of Taxes
Sushil Lakhani
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EXEMPTION METHOD Full Exemption Exemption with progression taken into account for rate purposes CREDIT METHOD Full credit No restriction Ordinary credit restricted to the extent of tax payable qua Income Underlying tax credit except Mauritius & Singapore Treaty only one way in Indian Treaties Tax sparing
Sparing w.r.f. certain income Sparing w.r.f. tax payable (e.g. Mauritius)
Sushil Lakhani
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Underlying Tax Credit

Directly UK Parent / Home Company Income (Grossed up) Tax @ 30% Underlying Tax Credit (633) 1,633 (490) 1,143 490 1,633 Offshore Intermediary Company Income (Grossed up) Tax @ 15% Underlying Tax Credit (633) Withholding Tax Via Mauritius Income (Grossed up) Tax @ 30% Underlying Tax Credit 1,633 (490) 1,143 245 1,388 1,633 (245) 1,388 245
1,633 NIL
1,633
Indian Host Company Tax @ 30% DDT @ 12.5% Withholding Tax
1,633 (490) 1,143 (143) 1,000 NIL 1,000
Tax @ 30% DDT @ 12.5% Withholding Tax
1,633 (490) 1,143 (143) 1,000 NIL 1,000
Sushil Lakhani
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General Principles
Whenever exemption method is followed the expenses are also not deductible. Grossing up of Underlying Tax & Dividend Distribution Tax. No Grossing up of Tax Sparing as no tax has been paid.
Sushil Lakhani
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Case Studies for Group Discussion:

Case Study (a)
Facts:
X (Parent Company in India)
Z (100% Subsidiary in Mauritius)

A (50% Subsidiary in BVI)
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Case Study (a) Contd. (i) What is the Mauritius Tax payable ??
As per (Article 23(3) of the India - Mauritius Treaty)
Mauritius tax payable shall be deemed to include any amount

which would have been payable as Mauritius tax for any year but for an exemption or reduction of tax granted for that year or any part thereof under:
(i) section 33, 34, 34A and 34B of the Mauritius Income tax Act, 1974 (41 of 1974) (ii) any other provision which may be subsequently be made granting an exemption or reduction of tax which the competent authorities of the contracting states agree to be for the purposes of economic development.
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Case Study (a) Contd.

(ii) Will X be entitled to a foreign tax credit in India for the taxes payable (before Tax Sparing) in Mauritius ??
Article 23(3)(i) of India Mauritius Treaty Section 33, 34, 34A and 34B of the Mauritius Income Tax Act, 1974 have been deleted Article 2(2) has ambulatory approach Similar taxes which are imposed after the date of conventions are also covered.
Therefore X Should be entitled to credit of taxes payable in Mauritius though the taxes are not paid because of Tax Sparing Clause in Article 23(3).
Sushil Lakhani
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Case Study (a) Contd.
(iii)Whether change in the character of income makes a difference for credit??

The Residence State is obliged to give credit / exempt on income so long as the source state has taxed that item in accordance with provision of the convention.
(Para 32 of OECD Commentary on Article 23)

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Case Study (b)
Whether Exchange Rate fluctuation should be considered for giving credit ??

Rate of exchange for conversion into rupees of income expressed in foreign currency. (Rule 115 of the Income Tax Rules 1962)
Telegraphic Transfer buying Rate of such currency as on the specified date. (31 ITR 538 (Ch. D))
Sushil Lakhani
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Case Study (c)

Whether foreign tax credit can be denied on the ground that the taxes are not paid by the foreign deductor to the Govt. of foreign country ??
No ?? (104 ITR 233(Guj))
Sushil Lakhani
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Case studies on withholding of taxes
Sushil Lakhani
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Case Study 1: 1. Whether PH can claim refund or US Co will have to claim refund?
Circular 790 dated 20.04.2000 Whether the two instances in the Circular are only illustrative? 83 TTJ 458 (mum)(TELCO) if assessee was not liable to deduct tax it can claim refund if TDS certificate not issued 2. Will the answer be different if the TDS certificate is issued? Yes. Not entitled to claim refund (82 TTJ 325(Del)) 3. If the tax was borne by PH, whether that would make a difference? No if certificate has been issued??
Sushil Lakhani
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Case Study 1: (Cont)
4 What is the obligation of PH for issue of TDS Certificate. Certificate has to be issued within 30 days of credit of deduction of tax (Rule 31) 5 Whether excess deduction u/s 195 in one quarter can be adjusted against short deduction u/s 195 in next quarter? Yes Quarterly return to be filed in Form 27 6 Whether excess deduction u/s 195 can be adjusted against payment of TDS u/s 194A to 194D? Yes No restrictions under the Act
Sushil Lakhani
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Case Study 2: 1. Whether payments for business information will amount to FTS in India and hence liability to TDS?
Non Technical Services not FIS (99 TTJ 857-Mckinsey)
2. Whether application u/s. 195(2) mandatory?

No Payer should apply only when he is unable to determine the sum chargeable to tax
Sushil Lakhani
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Case Study 2: 3 Whether the AO was justified in disallowing the payments u/s. 40(a)(i)?
Yes?, if he is of the view that TDS was deductible (Sol Pharma (83 ITD 72 (Hyd)) Appeal can be filed against such an addition - Fact that in the assessment of Exotic USA the income was not taxable can of help in getting a favourable order but that by itself not enough.
Sushil Lakhani
46
Case Study 3:
1 Whether payment by a non resident to another non resident in respect of shares in Indian company is chargeable to TDS?
Yes; Difficult for the Department to enforce .
If Yes, Whether Canada Ltd. should consider the details of different shareholders before deducting tax?
Yes Indexation not available (Section 48)
What is the rate of tax applicable to :

Resident Shareholders No TDS Ismail (UAE) (Green Emirates Vs.Meman) Not deductible- As per India UAE Treaty gains taxable only in UAE, hence not deductible.
Sushil Lakhani
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Case Study 3: (Cont)
Charlie (Mauritius) Not deductible. As per India Mauritius Treaty gains taxable only in Mauritius, hence not deductible. Dinanath (NRI) Section 115E TDS on LTCG 10% TDS on STCG 10% Other non-residents (Assumed to be resident of USA) - TDS on LTCG 10% - TDS on STCG 10 % Sub account of foreign FII No TDS Sec 196D (2)
Sushil Lakhani
48
Case Study 4: 1. Whether tax is deductible on payment for purchase of software?

No --as purchase of software not royalty if copyrights not transferred.
2. Assuming payment for purchase of software is royalty, whether TDS is deductible when: (a) Payment of Rs 5 Cr is made to Software Ltd Yes (b) Payment of Rs. 5 Cr is made to Singapore Ltd Yes? (c) Payment of Rs. 5 Cr is made by Singapore Ltd to Software Ltd Yes??
Sec 9(1)(vi)(c) a person who is a non resident for the purpose of business or profession carried on by such person in India
Sushil Lakhani
49
Case Study 5:
A Ltd.
Contract to supply Personnels
B Ltd. - HR Agency
Contract to appoint persons at Project Cost of persons + 10% of fees
In India Outside India
Project of A Ltd.
Appointment of qualified persons
C Inc. Wholly owned subsidiary
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Case Study 5:
1 Is TDS u/s 195 deductible on payments made by B
Ltd. to C Inc in respect of Cost of the person

employed and 10% fees?
TDS deductible on both cost of the person and 10% fees
charged
278 ITR 97 (AAR)-Wallace and Timkin( 273 ITR 67 AAR)
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Case Study 6: 1 What will be the tax to be deducted at source for payment of Professional Fees paid to Individual?
Covered under S 9(1)(vii)
Treaty--Specific provision (FIS) Provision (IPS) overrides general
Covered under IPS of India- USA Treaty

- Fixed base or - 60 days in the source state
If does not fit in Professional Services of IPS Article

Article 5 (PE) applies. No TDS
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Case Study 7:
Whether payment for roaming charges is royalty?

No
Service (E-Commerce report of OECD) vs use of
equipment
Technical Services vs Technology driven services (Wipro (80 TTJ 191 Bang); Skycell (251 ITR 53 Mad))
Sushil Lakhani
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Sushil Lakhani
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Sushil Lakhani

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CREDIT OF TAXES AND WITHHOLDING TAXES-CROSS BORDER ISSUES

Cross Border Payments-Withholding Tax Issues

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

sum chargeable to tax (other than Salaries)

IFA-RRC - April, 2006

Section 195 (1) Scope of the section

- GE Pension Trust (280 ITR 425) (AAR)

Surcharge and Education Cess not to be included when treaty applied .

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

Section 195A Grossing up of tax

Deductibility of TDS borne by payer--S.40(a)(ii)??

Certificate by a CA for remittance: Clause 1 name & address of beneficiary

Beneficiary meaning of Beneficial Owner or Recipient?

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

Certificate by a CA for remittance: Some Issues:

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

Certificate by a CA for remittance:

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

SECTION 9(1)(i)--BUSINESS CONNECTION

SECTION 9(1)(i)--BUSINESS CONNECTION

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

SECTION 9(1)(i)--BUSINESS CONNECTION - Issues Source of Income outside India

Service utilised is where the income accrues (250 ITR 164(AP))

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

IFA-RRC - April, 2006

Taxed on gross basis

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

PE as defined in Section 92F(iiia) of the Act fixed place PE

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

Cross Border Payments Withholding Tax IssuesCross Border Issues

Payment for Software

Customised Software; ( 88 ITD 134(Mum)ISBC)

Software along with Hardware (82 TTJ 163-BangLucent)

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

Payment for following whether Royalty ?

Payment for Know how and Information

Payment for the use of satellite (78 TTJ 498 (Del)-Asiasat)

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

Exclude ICS equipment from ambit of Royalties

Excludes payment for use of Aircraft

Fees For Technical Services (FTS)

Consideration (includes lump sum consideration) for

Fees For Technical Services (FTS)

IFA-RRC - April, 2006

Cross Border Payments Withholding Tax IssuesCross Border Issues

SOME ISSUES IN FTS

Payment for repairs

Fees For Technical Services (FTS)

Japan, New Zealand