India: India Tax Weekly - June 8, 2012

Last Updated: 21 November 2012

Alstom Transport SA – Authority for Advance Rulings (AAR)

Applicant, a tax resident of France, along with three other companies, entered into a consortium agreement (CA) to execute design, manufacture, supply, installation, testing and commissioning of signaling/ train control and communication systems tendered by Bangalore Metro Rail Corporation Limited (BMRC). In terms of the CA, the consortium members were jointly and severally responsible for the work tendered by BMRC. Applicant approached the AAR for a ruling on whether payments received for the offshore supply of plant and materials, including spare parts, offshore designing and training of operating and maintenance personnel, and offshore services were taxable in India either under the Income-tax Act, 1961 (IT Act) or the India-France DTAA.

AAR ruled that the consortium members constitute an AOP and are liable to be taxed as such. Income arising from offshore supply of equipment is subject to Income-tax in India in the hands of non-resident taxpayer. AAR noted that the consortium members jointly prepared the bid and came together for executing the project. Consortium members were jointly responsible for performing the entire work. Their common object was to perform the contract and earn income there from. Accordingly, AAR ruled that the consortium members had a common object in coming together and there was a common purpose in the concerted action.

AAR further ruled that the contract was a composite one and could not be dissected into different parts. AAR also ruled that a contract has to be read as a whole and cannot be split up into separate parts as consisting of independent supply or sale of goods and for installation at the work site and so on. AAR placed reliance on the three judge bench Vodafone judgment [341 ITR 1] and followed it in preference to the dissecting approach approved by the earlier two judge bench shikawajima judgment [288 ITR 408]. AAR relied upon the 'look at' principle postulated by the Supreme Court in the Vodafone judgment and ruled that the legal nature of the transaction has to be ascertained by looking at it as a whole, without adopting a dissecting approach. AAR has followed its recent ruling in Linde AG Germany case.

AAR No. 958 of 2010. Ruling delivered on June 7, 2012

Aramex International Logistics – AAR

Applicant, a tax resident of Singapore, is an entity belonging to the Aramex group. Aramex group is engaged in the business of door-to-door express shipments by air and land and related transport services. Aramex International Limited incorporated in Bermuda has a wholly owned subsidiary in India namely Aramex India Private Limited (AIPL). AIPL and applicant have entered into a business arrangement under which AIPL has appointed applicant as a non-exclusive service provider responsible for transportation of packages throughout the world outside India and applicant has appointed AIPL as a non-exclusive service provider responsible for transportation of packages in India.

Applicant claimed that it has no office, equipment, employee or agent in India and no operations were being carried out it in India. Thus, applicant wanted to ascertain whether it has any permanent establishment (PE) in India under the India-Singapore DTAA in connection with the International express business. If so, whether applicant's receipts from outbound and inbound consignments are attributable to such PE in India. Applicant also wanted to know whether any income can be attributed to such PE if transactions are conducted on an arm's length basis.

AAR noted that the Indian courier business and its reputation and appealability belong to Aramex Group. Applicant controlled AIPL on behalf of the Aramex Group and was carrying out the business of the Aramex Group. Relying upon the Organization for Economic Co-operation and Development's (OECD's) commentary on article 5 (PE), which suggests that for a place to constitute a PE, the enterprise using such place must carry on its business wholly or partly through such place, AAR concluded that AIPL would emerge as applicant's PE in India. AAR further ruled that the business agreement between applicant and AIPL is merely a camouflage to screen the fact that AIPL is really a PE of the applicant's group in India.

AAR also ruled that the applicant's receipts from the inbound and outbound consignments are attributable to such PE in India and are chargeable to tax in India. AAR further ruled that whether transactions are on arm's length basis or not needs to be verified in order to determine whether any income can be attributed to such PE in India. AAR also ruled that receipts received by the applicant from AIPL would be subject to tax withholding under IT Act.

AAR No. 1061 of 2011. Ruling delivered on June 7, 2012

Solar Turbines International Company – AAR

Applicant a tax resident of USA is engaged in the business of manufacturing industrial gas turbines. It supplied gas turbines to Oil and Natural Gas Corporation (ONGC) and also secured a contract for repair and overhauling services of the said turbines. Under the contract, in case of any defect, ONGC were to transport the defective turbines to USA and bring them back to India after rectification of defect by the applicant. The applicant was also responsible to furnish a report to ONGC on the rectification process. ONGC could use the technical information furnished by the applicant for its turbines but could not use the information for the benefit of anyone else. In the above background, applicant sought an advance ruling from AAR on whether the amount received from ONGC for repair and overhauling was taxable as 'fees for included services' (FIS).

Applicant contended that consideration received from ONGC was not taxable as FIS under the India USA DTAA as no technical skill, knowledge, experience etc. was made available to ONGC. Indian revenue authorities argued that the applicant had attempted to artificially split up the contract and offered income from installation and troubleshooting to tax under section 44BB of the IT Act. Section 44BB of the IT Act provides a presumptive tax regime in relation to profits and gains earned by a non resident taxpayer. Revenue further argued that the applicant had also made available technical specifications and engineering design data to ONGC along with the overhauled machinery.

AAR ruled that payment for licensing intellectual property rights in relation to the engineering, design, data and specifications to ONGC constitute royalty and are taxable under the IT Act as well as India-USA DTAA. Further, a portion of the consideration must be assigned to the inspection and boroscoping activity that takes place in India. Such portion would constitute 'fee for technical services' under the IT Act. However, the said portion does not satisfy the test of 'making available' knowledge under India-USA DTAA.

AAR further ruled that a part of the consideration relates to the modifications incorporated by the applicant and submission of report to ONGC. Such report makes available the technical knowledge to ONGC and ensures that ONGC comprehends the working of the replaced parts or new technologies. Thus, such portion of consideration will constitute FIS and subject to tax both under IT Act as well as under the India-USA DTAA.

AAR No. 931 of 2010. Ruling delivered on May 30, 2012

Assistant Commissioner of Income-tax vs Genom Biotech Private Limited – Mumbai Tax Tribunal

Taxpayer, an Indian tax resident, is a manufacturer of pharmaceutical products. It is engaged in exporting such products to its associated enterprises (AEs) outside India for further sales. Taxpayer also reimburses the advertising, marketing and brand promotion (AMP) expenses incurred by its AEs in their respective countries.

During the transfer pricing (TP) audit, the transfer pricing officer (TPO) held that the AMP expenditure incurred by the taxpayer to be excessive and rejected the comparable uncontrolled price (CUP) method used by the taxpayer to arrive at an ALP for the reimbursement of AMP expenditure. TPO instead applied the transactional net margin method (TNMM) to arrive at an ALP. Taxpayer filed an appeal before the first appellate authority. The first appellate authority ruled in favour of the taxpayer on the ground that the margin earned by the taxpayer on exports were better than the industry average. Thus, revenue filed an appeal before the Tribunal for adjudicating whether TPO had arrived at the ALP for reimbursement of AMP expenses in accordance with the provisions of the IT Act.

Tribunal ruled in favour of the taxpayer and held that the TPO compared the average AMP expenditure incurred by pharmaceutical companies without analysing the comparability of the products sold, market conditions, period of advertising and other relevant factors. TPO has not established any common attributes between the taxpayer and said pharmaceutical companies. TPO failed to give any cogent reasons for rejecting the CUP method adopted by the taxpayer. TPO also failed to explain how TNMM is more appropriate method as compared to the transfer pricing analysis carried out by the taxpayer for determination of ALP. Tribunal further noted that the TPO had already accepted the method adopted by the taxpayer in determining the ALP for reimbursement of expenses to AEs for an earlier tax year.

ITA No. 5272/Mum/2007. Judgment delivered on May 16, 2012

Metal One Corporation vs Deputy Director of Income-tax – Delhi Tax Tribunal

Taxpayer, a Japanese tax resident, is into metal business and a member of Mitsubishi Corporation group. Taxpayer opened a liaison office (LO) in India with an approval from the Reserve Bank of India (RBI). Taxpayer claimed that the LO had carried out only preparatory and auxiliary activities in India and does not constitute PE in India under India-Japan DTAA and reported 'nil' income.

Tax Officer held that the LO was engaged in undertaking revenue generating activities and its activities could not be treated as preparatory and auxiliary services. Tax Officer concluded that the taxpayer was engaged in locating potential buyers, negotiating and selling the goods in the market. Tax Officer's conclusion was upheld by the dispute resolution panel (DRP).

Taxpayer contended a presumption must be made that the LO was carrying out only preparatory and auxiliary activities as RBI had not found any violation of the conditions imposed on the LO. Tax Tribunal held that the Tax Officer had not taken any step to bring on record any information indicating the alleged nature of LO's activities. Tax Tribunal further held that the Tax Officer had failed to substantiate that LO's activities were beyond RBI's mandate even if selective information was submitted by the taxpayer. Tax Tribunal relied upon a Delhi High Court judgment UAE Exchange Centre Ltd. vs Union of India [(2009) 223 CTR 250] which held that LO could not be taken to be a PE unless its activities exceeded the purview of activities permitted by RBI or the Income-tax department was able to produce any concrete material which contradicted the facts presented by the taxpayer. The said ruling was also relied upon by AAR while passing a ruling in the matter of K. T. Corporation, Korea [AAR No. 791/2008].

Tax Tribunal further relied upon a co-ordinate bench's judgment in Sofema SA [I.T.A. No.3900/Del/2002] which is also affirmed by the jurisdictional High Court and the Supreme Court of India. The said judgment held that LO could not be considered as PE in the absence of any evidence relating to commercial activities conducted by LO. Relying upon the above rulings, the Tribunal held that there must be evidence on record that the taxpayer has carried on business activities from the LO. In absence of such evidence, LO will not constitute a PE in India.

ITA No. 5377/Del/2011. Judgment delivered on May 11, 2012

Published June 8, 2012

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