India: India Tax Weekly - March 31, 2012

Last Updated: 20 November 2012

Centric India offshore Private Ltd – Authority for Advance Rulings (AAR), New Delhi

Applicant, an Indian tax resident, is a wholly owned subsidiary (WOS) of a UK company namely Centrica Plc, UK. The said UK company along with two other subsidiaries located in UK and Canada (Overseas Entities) are engaged in the business of supplying gas and electricity to various consumers across UK. The Overseas Entities outsourced their back office support functions to third party vendors located in India.

Applicant was set up in 2008 for coordinating services provided by such third party vendors. The applicant also entered into a secondment agreement with the Overseas Entities to provide staff with requisite knowledge of various process and practices to perform managerial activities for the applicant in India. Under the secondment arrangement, seconded employees continue to retain lien on their employment with Overseas Entities. Overseas Entities were also responsible to provide salaries and other benefits to such seconded employees. However, the applicant agreed to reimburse such salaries and other benefits to the Overseas Entities on cost basis.

The applicant approached the AAR on the question whether amounts paid to the overseas entities, which is equivalent to salary and other benefits paid to seconded employees, initially paid by Overseas Entities, are subject to tax in India and whether applicant is liable to withhold income-tax from such amounts.

AAR observed that seconded employees were rendering managerial services in India. Such managerial services were not included in the definition of 'technical services' under both India- UK and India-Canada DTAAs. Thus, AAR ruled that payments made by applicant to overseas entities does not constitute 'fee for technical services' under Income-tax Act, 1961 (IT Act). AAR relied upon the observations made by Supreme Court in the case of Morgan Stanley [292 ITR 416] and observed that employees seconded in India are still the employees of Overseas Entities and continue to retain lien on their jobs outside India. Such employees are serving their overseas employer by rendering services in India for a specified period, for a subsidiary or an associate enterprise of their overseas employer. AAR held that such an arrangement will expose overseas employer to service permanent establishment (PE) in India under both India-UK and India- Canada DTAAs. Thus, payments made by applicant to Overseas Entities under the secondment arrangement will constitute income accruing in India to such Overseas Entities in view of service PE existing under India-UK and India-Canada DTAAs. Accordingly, applicant is liable to withhold Income-tax from such payments under the 'source rule' under IT Act.

A.A.R. No. 856 of 2010.Ruling delivered on March 14, 2012

RST – AAR, New Delhi

Applicant, a tax resident of Germany, had set up a WOS in India. The WOS proposed to buy-back shares from the applicant (parent company) under a buy-back arrangement. Buy-back of shares constitutes transfer of a capital asset under IT Act and is subject to capital gains tax in the hands of transferor. Applicant approached the AAR in regard to the taxability of such transfer and questioned whether such transfer of shares in WOS will be subject to tax in India and whether WOS is liable to withhold income-tax from sale consideration to be paid to the applicant.

Indian tax authorities argued that gains arising on buy-back of shares in an Indian company are subject to capital gains tax in India in the hands of the shareholder under section 46A of the IT Act and/or article 13.4 of India-Germany DTAA. Section 46A of the IT Act provides that the gains arising in the hands of a shareholder on buy-back of shares by the issuing company will constitute capital gains under IT Act. Applicant contended that section 46A of the IT Act is not a charging provision under IT Act and any gains arising from buy-back of shares can be chargeable to Incometax only under section 45(1) read with section 46A of the IT Act. Applicant also claimed relief from such capital gains tax under section 47(iv) of the IT Act. Section 47(iv) of the IT Act provides that transfer of a capital asset will not be subject to capital gains tax in case such transfer is taking place between a parent company and its subsidiary provided the transferee subsidiary company is an Indian company. Applicant contended that it fulfills the conditions prescribed by the exemption provision under section 47(iv) of the IT Act and should not be liable to any capital gains tax.

AAR observed that section 47 of the IT Act contains a non-obstante clause only in respect of section 45 of the IT Act and not with respect to section 46A of the IT Act. AAR held that once section 46A of the IT Act is attracted in case of a share buy-back, it is obvious that gains arising on account of such buy-back will be taxed in terms of section 46A read with section 48 of the IT Act.

Accordingly, such buy-back of shares is not exempt from capital gains tax under IT Act and the applicant is entitled to receive gains on share buyback only after withholding of Income-tax in India at applicable tax rates.

AAR no. 1067 of 2011. Ruling delivered on February 27, 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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