India: India Tax Weekly - May 4, 2012

Last Updated: 27 November 2012

Director of Income-tax vs Guy Carpenter & Co Ltd – Delhi High Court

Taxpayer, a UK tax resident, is an international reinsurance broker. It receives commission / brokerage from Indian insurance companies under re-insurance. During tax year 2005-2006, the Tax Officer treated such commission/brokerage as 'fees for technical services' (FTS) under Incometax Act, 1961 (IT Act) read with article 13 of the India-UK DTAA. The first appellate authority also agreed with the order passed by the Tax Officer and treated such receipts as FTS subject to tax in India.

The Tax Tribunal reviewed the entire process of reinsurance transaction and ruled that such payments were not subject to tax in India as FTS. The Tribunal held that the 'make available' condition under India-UK DTAA was not satisfied as taxpayer did not make available any technical knowledge, experience, skill, know-how, processes to the Indian insurance companies operating in India. The Tribunal further held that there was no development or transfer of any technical plan or technical design in the present case.

Delhi High Court confirmed the order of the Tribunal and ruled in favour of the taxpayer. Delhi High Court held that the taxpayer did not make available any technical knowledge, experience, skill, know-how, processes to the Indian insurance companies. Accordingly, commission/brokerage received by the taxpayer was not subject to tax in India as FTS under IT Act and/or article 13 of India- UK DTAA.

ITA No. 202/2012. Judgment delivered on April 23, 2012

Mahindra Engineering & Chemical Products vs Income-tax Officer – Mumbai Tax Tribunal

Taxpayer, an Indian tax resident, assigned trademarks namely 'MSeal' and 'Mr. Fixit' to Pidilite Industries Limited (PIL) for tax year 1999-00. Taxpayer also sold copyrights, technical knowhow, assets and goodwill pertaining to the 'sealants and adhesives business' to PIL. Taxpayer and PIL entered into nine separate agreements for a total consideration of INR 320 millions. Out of the total consideration received, taxpayer offered to pay Income-tax on the portion of consideration received on account of goodwill and non-compete fee. The balance consideration received on account of sale of trademarks, copyright and technical knowhow (amounting to INR 280 millions) was not offered to Income-tax. Taxpayer claimed the latter portion of consideration to be capital receipts and not taxable under IT Act. Tax Officer observed that taxpayer had transferred its entire 'sealant and adhesive division' to PIL. Accordingly, Tax Officer held that the transaction constitutes a slump sale of entire business and not an itemized sale of assets as claimed by the taxpayer. The first appellate authority also agreed with the order passed by the Tax Officer.

Tax Tribunal observed that for the purposes of 'slump sale', IT Act defines 'undertaking' to include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a

whole. The Tribunal held that the provisions in relation to 'slump sale' were rightly invoked as the business was sold as a whole and does not constitute an itemized sale of assets. The Tribunal held that the 'substance' of the agreements is to be considered and 'form' has to be ignored. Accordingly, the Tribunal concluded that trademarks, plant and machinery, technical knowhow, copyright along with goodwill and renunciation of right to compete is part and parcel of the same business. Such assets were integral, indivisible components of a composite unit sold to PIL. A joint reading of all the agreements leads to a conclusion that what was sold by the taxpayer to PIL was 'the running business as a going concern' and not merely a few assets under an itemized sale.

Tribunal also rejected the taxpayer's argument that since land was not transferred, the transaction could not be considered a slump sale as the same is not the deciding factor. The Tribunal also distinguished on facts the Special Bench decision in Summit Securities Ltd [ITA No.4977/Mum/2009]among others.

ITA No.2544/Mum/2010. Judgment delivered on April 18, 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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