NOTIFICATION

India notifies DTAA with Maldives

CASE LAWS

2016-TII-11-ARA-IT

THE REGENTS OF THE UNIVERSITY OF CALIFORNIA: AUTHORITY FOR ADVANCE RULINGS (Dated: August 16, 2016)

Income Tax - India-USA DTAA - Articles 5 & 7.

Keywords - Educational modules - PE.

Whether when the non-resident corporation is a non-profit entity engaged in providing education, any payment remitted to it from its Indian counterparts can be said to be business income - NO: AAR

Whether when the Indian counterpart is under obligation to arrange places for conduct of the educational programs, it can still be said that the non-resident had a PE in India - NO: AAR

The applicant is a tax resident of the USA. It entered into a contract with an Indian entity i.e. Northwest Universal Education Private Ltd. Applicant claimed to be a non-profit public benefit corporation formed for the purposes of providing education. The applicant agreed to send its professors for training senior executives working in India with respect to management techniques. There were various modules to be undertaken under the agreement which were of the duration of 4 days, 5 days, 10 days & 12 days. The Indian counterpart i.e. Northwest was to arrange the place for conducting these short duration programs in India. The relationship between the applicant and Northwest was neither of independent contractor nor a joint venture nor it was in the nature of employment agency or partnership. The applicant sought advance ruling on payments received from Indian counterpart for holding these educational programs.

The AAR held that,

+ the only serious objection that the Revenue seems to have is that there is a PE of the applicant in India. But the contention raised by the Revenue is not correct. Firstly, the activity of the applicant cannot be said to be a business activity particularly because the applicant is registered in the USA as a non-profit public benefit corporation formed for the purpose of providing education. This is not disputed by the Revenue. If the applicant is registered as a non-profit benefit corporation in USA then its activities i.e. providing education cannot be said to be business activity of the applicant. The reliance of Revenue, therefore, on Article 7 of the Treaty is completely uncalled for as Article 7 specifically deals with business income;

+ similar is the case of the plea regarding the PE of the Applicant in India. Viewed from any angle there cannot be a PE as defined in Article 5 of the Treaty as indeed there is none in India. It is to be seen that every time the program is undertaken in India, it is Northwest which has arranged for the place for conducting the programs. Northwest need not every time arrange for a same place. It may happen that Northwest may arrange 4 different location for conducting the program. On this ground also there cannot be any fixed place of business on the part of the applicant. Therefore, on both the counts namely on the question of business and on the question of PE, the contention of the Revenue is unacceptable to us.

Ruled in favour of Applicant

2016-TII-10-ARA-IT

DR REDDY LABORATORIES LTD: AUTHORITY FOR ADVANCE RULINGS (Dated: April 12, 2016)

Income Tax - Sections 9(1)(vii)(b) & 195 - India-Russia DTAA - Articles 7 & 22.

Keywords - business connection - business income - cost plus mark-up - fees for technical services - FTS - marketing service - 'other income' - PE - service fee - subsidiary.

Whether when the subsidary is only doing brand promotion to push sales of the parent company in Russia, it can be said that the subsidary is rendering consultancy services to the parent - NO: AAR

Whether activities of medical representatives relating to marketing of products manufactured by the parents fall within the four walls of technical services as per Sec 9 of the I-T Act - NO: AAR

Whether when the parent pays service fee to its subsidiary in Russia for product promotion it can be said that the payment was towards enhancing export in Russian market - NO: AAR

The applicant is a resident pharma company. It had a subsidary in Russia named DRL Russia. Applicant proposed to enter into an agreement for marketing of its products in Russia. Marketing services to be rendered by its subsidiary included promotion of goods from the parents to the end customer by way of meeting with medical and pharmaceutical experts, participation in pharmaceutical circles and distribution of promotional materials to medical and pharmaceuticals experts. In consideration for these services the applicant was to remunerate DRL Russia on cost plus markup basis. Subsequently, this agreement came into effect in January 2014. In the application the applicant took the stand that DRL Russia was a mere marketing and distribution arm for the applicant in Russia and accordingly service fee could be considered as income arising through or from any business connection in India under the Act. The applicant claimed that the service fee paid did not fall within the ambit of the definition of FTS as these were not managerial, technical or consulting in nature. The applicant further argued that the service fee received by DRL Russia was business income but in the absence of its PE in India, the income arising to DRL Russia was not chargeable to income-tax in India under the India-Russia DTAA. As the service fee, according to the applicant, was business income, it was argued that such income could not be categorized as other income within the scope of Article 22 of India- Russia DTAA. During the course of hearing it was further revealed that the applicant had entered into three separate agreements with DRL Russia (and not only one as disclosed in the application).

Having heard the parties, the Authority ruled that,

+ in the application filed by the applicant only one agreement relating to product promotion service was mentioned and the application was silent on other agreements signed by it with DRL Russia. However, later on it disclosed that it had first entered into a contract for supply of goods called as “Distribution Agreement”. According to this agreement the applicant was to sell customer medicines and food supply to the Russian company. The research service agreement and product promotion services agreements were signed on much later. The second agreement relating to promotion of goods cannot be related to the distribution agreement which was signed about 2 years prior to this agreement. However, the main argument of the Department of Revenue is that even promotion of goods involving brand promotion and advertising etc has been done by DRL Russia utilizing the specialized knowledge of the dynamics of the Russian market and, therefore, services rendered by DRL Russia by utilizing services of professionally qualified personnel were professional in nature. The stand of the Department is based on the assumption that the reports of medical representatives of DRL Russia are sent to India which is being utilized in India for the purpose of brand promotion in Russia. The Department has further assumed that the marketing services for research agreement and marketing services for promotion of goods agreement are interconnected and they together constitute marketing services. According to the Department the marketing research team prepares presentations for the purpose of utilization by medical representatives when they make field visits and such presentations highlight the advantages that brand of DRL India have over other similar products of the competitors. During the course of hearing we repeatedly asked the CIT (IT & TP), Hyderabad, whether he had any evidence to support his assumptions, particularly the fact that reports prepared by the product promotion team were in respect of brand promotion and were utilized in India by the applicant. He could not produce any. It is also noticed that the Department had conducted a survey u/s 133A of the IT Act in the business premises of the applicant but could not find any such evidence and did not even ask any question relating to this aspect in the statements recorded of senior executives;

+ the facts presented by the applicant do not support the assumptions made by the department. The applicant has stated that medical representatives of DRL Russia merely promote the goods by way of meeting doctors and pharmacies and their activities are executory in nature since such services do not entail the rendering of advice to the applicant. Based on this fact it cannot be said that DRL Russia is providing any consultancy service. The Department has based its arguments merely on the assumptions. They have not been able to establish that the reports prepared by market research team were utilized by medical representatives and their reports, in turn, related to brand promotion which were further utilized by DRL India. On the contrary sample reports submitted by the applicant show that the information collected by medical representatives are in relation to stock availability and demands for product in a pharmacy. If this is so such reports are not relevant to the research team. There is no evidence to suggest that the reports prepared by medical representatives have been utilized by DRL India in respect of brand promotion or for deciding the strategy for sale of goods in Russia. In order to establish that consultancy services have been provided based on work undertaken by medical representatives it is necessary that these services should be utilized by DRL India for brand promotion.

+ the alternative argument of the department relating to services being managerial in nature is also far-fetched because the job of medical representatives is merely to meet doctors and pharmacies. Such jobs cannot be said to be managing the affairs of DRL India in Russia. Therefore, the services rendered pursuant to this agreement cannot be classified as managerial services either.

+ as we have concluded the services rendered by DRL Russia in respect of agreement for promotion of goods cannot be treated as fees for technical services, it is not necessary to go into the argument whether such services will be covered by exception u/s 9(1)(vii)(b) of the Act though the applicant has argued that his case is covered by exception. However, it is suffice to say that the stand and argument of the applicant is completely faulty mainly because the product promotion agreement dated 30.1.2014 cannot be related with distribution agreement dated 16.2.2012 signed two years ago, under which exports were made. Therefore it cannot be said that service fees under product promotion agreement were paid in order to promote its products for enhancing export in Russian market.

Ruled in favour of Applicant

2016-TII-09-ARA-IT

MERO ASIA PACIFIC PTE LTD: AUTHORITY FOR ADVANCE RULINGS (Dated: August 17, 2016)

Income tax - Section 9(1)(i) - India-Singapore DTAA - Articles 5 & 7.

Keywords - attributable to - composite contract - offshore supply of goods - Installation PE.

Whether if the contract entered into by the assessee with an Indian entity is a composite one and payment is not linked with services and supply but made on the basis of stages of completion of contract, is liable to tax in India - YES: AAR

Whether if contract does not specify separate price of goods supplied by way of offshore supply or sale of goods, it is to be presumed that it was supplied at the sub-contractor's premises in India - YES: AAR

Whether, under such circumstances, PE can be said to have played a role in design, selection and procurement of materials - YES: AAR

MERO Asia Pacific Pte Ltd. (MAPL) is a tax resident of Singapore. It was engaged in the business of executing contracts in relation to structural glazing and wall cladding works. It had set up project Offices in India for the purpose of executing the contract works. Delhi International Airport Private Limited (DIAL) had entered into operations, management and Development Agreement (OMDA) with the Airports Authority of India. DIAL floated a global tender for various works in connection with the development of T3 terminal in Delhi Airport. Larsen & Toubro (L&T) won the contract involving design and construction of a state of art passenger terminal. The main contract was awarded by DIAL (Employer) to L&T (contractor) and L&T, in turn, awarded the contract for entire external and internal façade for the glazing and cladding systems for Piers, fixed link bridges and nodes to the applicant (sub-contractor) for which an agreement was entered into. The applicant was to design the curtain wall and façade, supply all materials, erect, install, inspect, test and commission the entire sub contact works. The currency of the contract was Indian Rupees and place of payment was Delhi and pursuant to an option given the payment was also made in Singapore dollar in Singapore. The contract was to be completed by 26/03/2010.

Applicant filed an application before the Authority for Advance Ruling seeking whether the sum receivable from L&T, the sub-congractor, towards offshore supply of goods were liable to tax in India.

Having heard the parties, the Authority held that,

+ the substance of the present contract very clearly shows that it is composite in form as there is no division in the contract on the basis of supply and services, payment is not separately linked with services and supply but is to be made on the basis of stages of completion of the contract irrespective of goods and materials brought in the premise;

+ our key findings are:

I. The contract is a composite one and offshore supplies are not an independent scope of work.

II. All parts of the transaction relating to sale of goods to L & T were not completed outside India.

III. No separate price of goods supplied by way of offshore supply or sale of goods to L & T outside India is specified in the contract.

IV. PE played a role in design, selection and procurement of materials to be used in the façade related work.

V. The fact pattern of this case is not at all similar to that of Ishikawajima Harima and the law as enunciated by the Supreme Court does not apply to the facts of the present case.

+ in view of above, we hold that the contract in this case is a composite one and the entire amount received by the applicant from L&T is taxable in India.

Ruled against Applicant