TaxTMI 
TaxTMI 
2006 (8) TMI 121
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....ective of centralizing key functions in Switzerland whereunder E. Ltd. transferred its business of manufacturing turbochargers on a going concern basis to the applicant w.e.f. 1st January, 2004. Thereafter the applicant is engaged in the business of manufacture of turbochargers for passenger and commercial vehicles. Under the arrangement the LOI issued by XYZ Ltd to E Ltd. for the purchase of turbochargers was transferred by it ( E Ltd.) to the applicant as a successor. The applicant entered into a turbocharger development and supply (TDS) agreement with XYZ Ltd for manufacturing and supply of turbochargers for vehicles manufactured by XYZ Ltd using L litres diesel engines. The applicant proposes to establish an Indian subsidiary named " J Pvt. Ltd. to be incorporated under the Indian Companies Act, which would be engaged in the business of supplying of turbochargers to customers including XYZ Ltd as per the TDS agreement. J Pvt. Ltd. would manufacture locally and supply turbochargers to XYZ Ltd. For that purpose the applicant would assign its rights, interests and obligations in the TDS agreement to J Pvt. Ltd. on agreed consideration to be paid to the applicant in installments. A....
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....ance Agreement between the Government of the Republic of India and the Government of the Swiss Confederation dated 29th December, 1994 (for short the "Treaty'), article 7 would be attracted and if it has a permanent establishment (PE) in India it would be taxable. Every person designated to carry on any function on behalf of the foreign company would be treated as a PE. Having regard to the sequence of events, namely, the applicant executed an agreement in August, 2004 and thereafter proposes to assign the same to subsidiary to be incorporated would disclose well thought over arrangement, therefore, receipt arising to the applicant out of proposed assignment of TDS agreement are taxable in India under the Act as well as under the Treaty. In regard to question no.2, it is stated that the financial year in which the assignment of the TDS agreement takes place, will be the year in which the consideration would be taxable. In regard to question No. 3, it is stated that since receipts by the applicant are taxable in India the provisions of section 195 of the Act will be attracted. 3. Mr. Porus Kaka, learned counsel appearing for the applicant, has submitted that the subject matter of ....
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....l as article 7 of the treaty. What is purportedly labeled as assignment fee is in the nature of royalty liable to tax under section 9(1)(vi) of the Act as well as article 12 of the treaty. Since deduction of tax at source under section 195 of the Act is tentative and provisional subject to final determination at the time of regular assessment. Section 195 of the Act is attracted at the time of payment of so called assignment fee. 5. The rival contentions of the parties give rise to the following points for determination:- Whether amounts payable under the assignment agreement, either in the nature of business receipts or royalty, are taxable under the Act. If the answer of the first point is that they are taxable as "business receipts", whether the applicant has a PE in India? Whether the amounts payable under the TDS Agreement attract section 195 of the Act? (i) To comprehend the real nature of payments to be made by the J Pvt. Ltd. to the applicant under the assignment agreement, it is necessary to read both the TDS agreement dated 6.8.2004 (Exhibit-2) as well as draft assignment agreement (Exhibit -4) because the subject matter of Exhibit-4 is the same as the subject ma....
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....lternate sources. It is also necessary to notice the following clause in para 2.2.4 under the caption 'Prices':- "Notwithstanding anything contained in this agreement, risk, title, ownership and property in the products shall pass to XYZ Ltd. once the products are handed over to the freight forwarder designated by XYZ Ltd. at the relevant PQR factory gate". Para 2.3 - Local facility and customer support - is also worth noticing. "In its endeavour to remain price competitive, PQR shall aggressively explore possibility of localization of Imported Products in India. In view of this, PQR will provide the following support. Local Support and Manufacture. PQR intends to localize/ manufacture its' Products in India in two discrete phases. Phase 1 Supply base: PQR has positioned two person supply base team in India during Quarter 1, 2004 to develop local suppliers. This team will be responsible for local sourcing. Engineering: PQR will provide XYZ Ltd. with engineering support in India as soon as reasonably required (assuming first part of the development of the engine will be led in Europe). PQR plans to place 2 engineers in India for support purposes OR earlier as per actual r....
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....pany and/or subsidiary, or in the event of a sale of all or substantially all of the assets required to manufacture the items that are the subject of this Agreement". From the above excerpt of the (Exhibit-2) agreement, it is evident that XYZ Ltd intended to offer and PQR has accepted to supply products (defined in 2.1.1 of the agreement) which mean imported products as well as local products, which, in combination, constitute a turbocharger at the agreed prices. The products would be handed over to the designated carrier of XYZ Ltd. at the PQR factory gate. PQR has also undertaken to explore the possibility of localization of imported products in India in two phases which have been noted above. It was specifically agreed upon between the parties that the rights and obligations of the parties shall not be transferable or assignable by such party without the prior written consent of the other party thereto and an exception to that clause provides that the applicant will be allowed to assign that agreement to any of their respective affiliate company and/or subsidiary on an event of sale or substantially all of the assets required to manufacture the items that are subject to that ag....
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....a 2.5 of Exhibit-4 provides for payment of additional consideration being a percentage of additional sales from XYZ Ltd.. All the terms of payment of additional consideration would be mutually agreed upon between the parties separately. The agreement guarantees that in the event of failure of XYZ Ltd. to procure the products as per the volumes indicated in Appendix 1 to the TDS agreement (for any reason other than manufacturing defect and quality in workmanship), the assignor has agreed to procure from the assignee the necessary products (which may be of different capacities and makes) to compensate the deficiency in procurement by XYZ Ltd. from the assignee. Para 4 of Exhbit-4 also postulates that except to the extent stated in the assignment agreement, all the terms and conditions of TDS agreement shall apply mutatis mutandis to the assignor as is set out herein extenso. We have referred to some clauses of Exhbit-4 (the draft assignment agreement), which are material for the present discussion. It is seen that what is proposed to be assigned under the draft assignment agreement is the rights and obligations of the assignor under Exhibit-2 (TDS agreement). Exhibit-4 - agreement ....
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....9 of the Act, which elucidates the expression "income deemed to accrue or arise in India". 8. On the contentions of the parties, provisions of clauses (i) and (vi) of sub-section(1) of Section 9 of the Act would be relevant which read as follows:- Income deemed to accrue or arise in India 9. (1) The following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. (ii) to (v) x x x x x x x x (vi) income by way of royalty payable by the Government; or a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the ....
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....nclude any business activity carried out through a person who, acting on behalf of the non-resident,- has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or 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 habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business: Provided further that where such broker, general commission agent or any other agent works mainly on behalf of a non-resident (hereinafter in this proviso referred to as the p....
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....ty of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection". In the light of above discussion, the essential features of "business connection" may be summed up as follows: - a real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India; such relation, shall contribute, directly or indirectly, to the earning of income by the non-resident in his business; a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of 'business connection' in India. 9. We shall now turn to the explanation-2 of sub-section (i) of Section 9(1)of the Act, quoted above. It says that business connection shall include any business activity carried out through a person who acting on behalf of the non-resident commits anyone of the activities outlined in clauses (a) to (c) of explanation-2 of sub-section (i) of Se....
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....as participation in tests and interaction with AVL Austria, who have supplied the diesel engine to the XYZ Ltd would be required. Within three months of the letter of intent, Applicant would provide complete details regarding setting up of manufacturing and assembly facility in India such indigenous manufacturing facilities are to be set up in India within a period of eighteen months. Similar stipulations have been made in the TDS agreement dated 6.8.2004 (article 2.3 of the TDS agreement). Article 2.2.7 of the TDS agreement is regarding the funding of toolings and Appendix 1 to the agreement speaks of initial expenditure of about 7 lacs euro to be incurred by the Applicant. TDS agreement also speaks of setting up of supply base as well as service network. In fact it is stated that supply base team has already been stationed in India during first quarter of 2004 which would develop local suppliers of raw materials for the Applicant. 11. It may be pointed out that the requirements of business connection for the purpose of Section 9(1)(i) of the Act have to be examined with reference to the income in question. There must be nexus between the income in questi....
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....ed but it is not mentioned as to when the business activities have commenced, therefore it is not possible to say whether J Pvt. Ltd. is carrying out business for and on behalf of the applicant and that unless the constitution of J Pvt. Ltd. is given and details of the activities are known, it cannot be said that the applicant has no business connection in India under article 9(1)(i) of the Act and article - 5 of the treaty is not applicable. 11. In our view to determine the business activities of a limited company it is not necessary to wait and watch the commencement of actual business activities. They can be ascertained from the articles of association and the attending circumstances. On the facts stated by the applicant, on the basis of the articles of association of J Pvt. Ltd. and the deed of assignment it is not possible to conclude that J Pvt. Ltd. is carrying out business for and on behalf of the applicant. Indeed what appears to us is that it would be carrying on business in its own rights and that it has also acquired business under the deed of assignment. It cannot be lost sight of that in view of section 245S of the Act, the advance ruling pronounced by the Aut....
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....d at Switzerland on 23rd February, 2006. The consideration payable for the assignment of the rights and obligations under TDS agreement is the amount equivalent to Amount-M,. The liability to pay taxes in relation to the assignment is that of the assignor though the stamp duty has to be borne by the assignee. Clause - 6 of deed provides that it would be governed in all respects by the laws of Switzerland and that in case any dispute arises between the Parties during the subsistence or thereafter, in connection with the validity, interpretation, implementation or alleged material breach of any provision of this Agreement or regarding any question, the courts of Lausanne, Switzerland shall have exclusive jurisdiction in the matter. Therefore, it cannot but be concluded that the deed of assignment was executed outside India and the consideration for the assignment is payable outside India. The situs of the deed being of Switzerland (outside India), the income or profit if any, accruing or arising to the applicant on account of deed of assignment cannot therefore be said to arise in India. The fact that the agreement is stamped in India would, in our view, make no difference to the s....
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.... for the reasons stated above, compared with the volumes as indicated in Appendix 1 to the TDS Agreement, the Assignor agrees to procure from the Assignee, the necessary Products (which may be of different capacities and makes) to compensate the deficiency in procurement by XYZ Ltd. from the Assignee. It is hereby expressly clarified that such procurement shall make good the deficiency in relation to the gross margins that the Assignee would have earned in supplying the Products to XYZ Ltd. as per the volumes indicated in Appendix 1 to the TDS Agreement. We are afraid we cannot accede to the contention of the learned counsel. A plain reading of TDS agreement shows that a particular volume of the products was to be supplied by the applicant to XYZ Ltd.. It is that volume of products which is a subject matter of assignment. Parties have provided the eventuality in the case of increase in the supply of volume of products as well as decrease in the volume of products. In neither case it can be accepted that the business connection is established. The rights and obligations under the agreement cannot be taken as proof of existence of business connection. The business connection must ex....
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.... things supplying of materials and equipment was the responsibility of the applicant. The price of offshore supply and offshore services was paid in US dollars and for onshore supply of services, construction and erection partly in US dollars and partly in Indian rupees. The consideration for offshore supply of equipment and materials supplied from outside India was received by the applicant by credit to a bank account in Tokyo and the property in the goods passed to Petronet on high seas outside India. On these facts the Authority has ruled, inter alia, the consideration represents only the price of the goods and the transaction of sale is completed outside India and not by or through a business connection in India, so on the sale of goods profits cannot be deemed to accrue or arise in India. From the above discussion it follows that the applicant has no business connection in India, therefore, Section 9(1)(i) of the Act is not attracted. In as much as the preconditions of deemed income under section 9(1)(i) read with explanation-2 of the Act are not satisfied, it is superfluous to refer to articles-7 and 5 of the treaty because it is well settled that if no obligation exists un....
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....ion of cinematographic films; or (vii) rendering of any services in connection with the activities referred to above. We have discussed above in detail the subject matter of the TDS agreement as well as assignment agreement. From a close reading of the said agreements, it is amply clear that none of the clauses of explanation-2 is attracted to the draft assignment agreement/deed of assignment. Therefore, the consideration for the assignment payable under the deed of assignment does not answer the description of the meaning of 'royalty' under explanation-2 to clause (vi) of Section- 9(1) of the Act. In as much as the payments do not satisfy the requirement of the definition of 'royalty' within the meaning of section 9(1)(vi) of the Act, it will be otiose to delve on the definition of the royalty under the treaty. (ii) In view of the above finding, it is idle to discuss point (ii). (iii) The third point relates to deduction of tax at source under section 195 of the Act The applicant's contention is that if the consideration payable under the proposed assignment deed is not chargeable to tax under the Act no deduction of tax can be made under section 195 of the Act. Mr. Chopra on ....
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....o contend that tax is deductable at source. Transmission Corporation of A.P. Ltd. & Another In that case A.P. State Electricity Board (for short the 'Board') made certain payments to non-residents against the purchase of machinery and equipment and also against the work of erecting and commissioning the machinery and equipment executed by them in India. In regard to payments made by the Board without deducting tax at source u/s 195 of the Act to a non-resident company for the financial year 1966-67 to 1972-73, it was required to pay the amount of tax in the assessment proceeding by the ITO. In appeal, the Appellate Assistant Commissioner (AAC) took the view that the words "any other sum chargeable under the provisions of this Act" in section 195 apply only to the cases of pure income profits. Thus, he allowed the appeal. Against that order unsuccessfully the Revenue preferred appeal before the ITAT. From the order of the Tribunal a reference was carried to the High Court of AP. The question was whether the Board was under an obligation to deduct tax at the time of making payments to the non-residents. It was held that whatever tax was deducted at source u/s. 195 of the Act from ....
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....urt has no application to the facts of this case. Danfoss Industries In the above case the applicant, an Indian company has proposed to enter into an agreement with DS, a foreign company which provided services to a group of companies including the Indian company. The consideration for availing of those services was a service fee based on the portion of the services it received in relation to the total costs of DS in providing such services. The question set forth before the Authority, was whether the payment to be made to the foreign company as fee for services would be subject to withholding tax under section 195 of the Act. The Authority held, inter alia, that in the absence of break-up of the cost incurred by DS in providing services and the fees payable by each individual company, the only possible conclusion was that there was no direct nexus between the actual cost incurred by the foreign company in providing the services to a company of the group of companies and the fees payable by each individual company which availed of the services. Therefore, it could not be said that the fee payable by the Indian company was nothing but reimbursement of costs incurred by the DS in ....