| 2017-TII-INSTANT-ALL-436 | 11 March 2017 |
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TII BRIEF Combating Black money menace - Renegotiation of DTAAs to continue: Minister TII Circular/Notification Circular/Notification No : 387 CASE LAWS
CIT Vs MARUTI SUZUKI INDIA LTD: SUPREME COURT OF INDIA (Dated: March 10, 2017) Income tax - Sections 92B, 92C, 92CA, 142(1), 143(2), 143(3), 144C & Rule 10B Keywords: AE - AMP expenses - brand promotion - bright line test - mutual arrangement - royalty & use of foreign trademark The assessee is a subsidiary SMC and is engaged in the manufacture of passenger cars in India. The assessee had started its business as a Government of India owned company and independently selected SMC as its business partner. A licence agreement was entered between the assessee and SMC in October 1982 for its models M-800, Omni and Gypsy. By the said agreement, the assessee was permitted to use the co-branded trademark 'Maruti-Suzuki' on the said vehicles. For the A.Y 2006-07, the TPO passed the order u/s 154 r/w/s 92CA(v), enhancing addition by Rs.34,39,96,700/- and recomputing the AMP adjustment to Rs.158.64 crores. The AO thereafter passed rectification order u/s 154, enhancing the total addition by the above sum while computing the total income. On appeal, the ITAT partly allowed assessee's appeals against both the orders of the TPO for A.Ys 2005-06 & 2006-07 and sent the matter back to the file of TPO/AO for determination of the AMP in the light of the Sony Ericsson's case. The HC held that in the absence of some data, it cannot be simply asserted that the benefit of MSIL's AMP spend to SMC is not merely incidental. The Court is unable to accept the assertion of the Revenue that the mere fact of incurring AMP expenditure should lead to an inference of the existence of an international transaction. HC also distinguished the Sony Ericsson ruling as the same was rendered in the context distributors of products manufactured by foreign AEs. On appeal, the Supreme Court grants leave to the Revenue to defend their case against M/s Maruti Suzuki India Limited on the issue of AMP spend & Marketing Intangibles. Leave granted TRANSPERK INDUSTRY LTD Vs DCIT: GUAJRAT HIGH COURT (Dated: February 13, 2017) Income Tax - Writ - Sections 40(a)(i), 143(3), 147 & 195. Keywords - Reopening of Assessment - Tanker Hire Charges & Interest. The Assessee company is engaged in the business of manufacturing and trading of chemicals. Its return was picked up scrutiny and assessment order was issued. After a gap of four years, the process of reopening of the assessment was initiated. In its submissions to the AO, the assessee claimed that no FTS or royalty was paid towards tanker hire charges to any French resident nor any interest was paid on the same to any bank situated in India. However, after receiving a copy of the reasons recorded by the AO, the assessee decided to file a writ petition. After hearing the parties, the High Court held that, Whether when there is no tangible material available with the AO indicating any remittance towards tanker hire charges to a French resident on record even then the AO is free for form an opinion that certain income has escaped assessment - NO: HC + according to the A.O. by not deducting T.D.S. on the payment of Tanker Hire Charges to the resident of France during the year under consideration, there was escapement of income from the assessment and therefore, the assessment is sought to be reviewed beyond the period of four years. However, it is required to be noted that it was specific case on behalf of the assessee so stated in the objection that there is no payment of Tanker Hire Charges to the resident of France during the year under consideration. The same has not been dealt with by the A.O. while disposing of the objection. From the objections it appears that payment of Tanker Hire Charges was made to the resident of U.K. and Singapore only. The counsel appearing on behalf of the revenue is not in a position to point out any tangible material available with the A.O. in support of his belief that any payment of Tanker Hire Charges was made to the resident of France, on which T.D.S. was required to be deducted; + under the circumstances, there is no tangible material available with the A.O. to form an opinion that the income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. Under the circumstances, and more particularly considering the fact that the assessment was sought to be reopened beyond the period of four years and there does not appear to be any failure on the part of the assessee in not disclosing the true and correct facts necessary for assessment and also on the ground that there was no tangible material available with the A.O. with respect to any payment of Tanker Hire Charges to the resident of France, on which T.D.S. was required to be deducted and thereby no income chargeable to tax has assessed the assessment, the impugned reassessment proceedings cannot be sustained; Whether if there is no evidence indicating any payment of interest to a bank located in India even then the AO is empowered to assume jurisdiction under provisions of Sec 147 - NO: HC + it is required to be noted that one of the grounds on which the assessment is sought to be reopened is that the interest was paid to the banks situated in India. However, the same was factually not correct. As per the specific case on behalf of the assessee so stated even in the objections, no amount of interest was paid to any of the banks situated in India. Under the circumstances, assumption of jurisdiction to reopen the assessment on the aforesaid ground was on incorrect factual premise. Under the circumstances also the impugned reassessment proceedings deserved to be quashed and set aside. Assessee's Appeal Allowed ITO Vs RELIANCE INDUSTRIES LTD: MUMBAI ITAT (Dated: March 8, 2017) Income Tax - Sections 9(1)(vi), 195(2) - India USA DTAA - 3, 7, 12 & 13 Keywords: royalty - purchase of software - business profits - PE - deduction of tax at source - standardized version & limitation clause The assessee made applications u/s 195(2) for remitting the payments without TDS. AO held that the payments would quality as royalty as per DTAA between India and USA and accordingly directed the assessee to deduct tax at source at applicable rates. Assessee challenged the decisions rendered by AO by filing appeals before CIT(A). In some of the cases, CIT(A) had accepted the contentions of assessee that the payments so made constitutes business income in the hands of recipient and the same was not taxable in India, since the recipient does not have PE in India. The revenue had filed the appeals in those cases, where CIT(A) has decided the issue by holding the same as not royalty, but business profits. The assessee had filed appeals, where the CIT(A) has upheld the view of AO that the payments constitute royalty. Assessee had purchased software from various parties for using the same in its Jamnagar Refinery complex. It had contended that software was a standardized software supplied to assessee on non-exclusive basis and further the assessee does not have right to copy the same except as provided in the agreement for internal use. It had further submitted that the source code was not supplied to assessee and the assessee had been given only license to use the software, which was akin to shrink wrapped software. DR submitted that the Explanation 4,5 and 6 inserted by the Finance Act, 2012 to section 9(1)(vi) and Explanation inserted after sec. 9(2) were applicable to the instant cases. DR had also given detailed written submissions on various points contested by him. However, as stated earlier, the co-ordinate bench had considered an identical issue in the assessee's own case and had concluded that payments made for purchase of standardized version of software shall not fall under the definition of Royalty as provided in DTAA. Having heard the matter, the Tribunal held that, Whether a DTAA entered between the two sovereign nations, can be amended unilaterally as per the change in domestic provisions of one of the participant country - NO: ITAT Whether payments made by assessee to foreign companies for purchase of standardized software for its internal use in business, is liable to tax in India as "Royalties" as per sec. 9(1)(vi) read with India-USA DTAA - NO: ITAT + we notice that the co-ordinate bench of tribunal has decided an identical issue in the case of M/s Baan Global B V has considered an identical issue and observed that retrospective amendment brought into statute with effect from 01.06.1976 cannot be read into the DTAA, because the treaty has not been correspondingly amended in line with new enlarged definition of 'royalty'. The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of "royalty" in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the 'royalty' has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision. Thus, we do not find any merit in the contention of DR that the amended and enlarged definition should be read into the Treaty. Accordingly, by following the decisions rendered by the co-ordinate benches of the Tribunal, we hold the payments made for purchase of standardized software cannot be considered to be a royalty with the meaning of provisions of sec. 9(1)(vi) as well as India-USA DTAA. The orders passed by CIT(A) holding the above view are upheld and other orders passed by CIT(A) and that of the assessing officer are set aside. In the result, the appeals filed by the revenue are dismissed and the appeals of the assessee are allowed. Revenue's appeal dismissed DDIT Vs E-BAY INTERNATIONAL AG: MUMBAI ITAT (Dated: March 8, 2017) Income Tax - Sections 9(1)(i), 9(1)(vii) - India-Switzerland DTAA - Article 5 & 7 Keywords: fees for technical services - business connection - dependent agent PE - transaction fee & marketing support agreement The assessee is resident of Switzerland and was engaged in the business of operating websites, which provide online platform for facilitating purchase and sale of products worldwide. Assessee had operated in its India specific websites, viz., www.ebay.in and www.b2motors.ebay.in and they provided online platform for facilitating purchase and sale of goods and services to users based in India. Assessee had also entered into marking support agreements with two of its subsidiary companies, viz., M/s. e-Bay India Private Limited and M/s. e-Bay Motors Private Limited. These websites were operated from servers located outside India. The modus operandi of its operation was that it signs agreement with the Indian customers, who wish to list their products and services on their websites. For listing the products at prominent places, the assessee charged a listing fee. Besides the above, as and when transaction of sale was successfully completed, transaction fee was also charged by the assessee from the seller. No fee was charged from the buyers of the products/services. The agreement for purchase and sale of goods was entered directly between the buyer and seller of the products/services, i.e. the assessee never acquired any right or property in the goods sold. Assessee had also entered into a marketing support agreement with two companies stated above for facilitating online purchase and sale of products or services. AO took the view that assessee had business connection in India and accordingly took the view that the revenue generated by assessee had accrued in India. AO also took the view that the said revenue falls in the category of FTS. On appeal, CIT(A) noticed that an identical issue was examined by ITAT in assessee's own case in ITA No. 6784/mum/2010 2012-TII-169-ITAT-MUM-INTL, wherein the Tribunal had held that the revenue earned by assessee form specific Indian websites were not in the nature of "fees for technical services" and hence not taxable in India. CIT(A) followed the said decision and accordingly reversed the order passed by AO. CIT(A) also noticed that while disposing of the appeal for A.Y. 2006-07, the then CIT(A) had taken the view that the assessee was having PE in the form "dependent agent PE" in India and hence the revenue earned by assessee was taxable as business profit. CIT(A) noticed that the said issue was also examined by Tribunal in A.Y. 2006-07 referred above and has held that the agents, viz., M/s. e-Bay India Private Limited and M/s. e-Bay Motors Private Limited do not constitute a PE in India. Accordingly, Tribunal had held that no profits can be computed in terms of Article 7 of India-Switzerland DTAA in respect of revenue generated by assessee from India. CIT(A) followed the order of Tribunal in respect of above said issue also and accordingly allowed the appeal of the assessee in all the three years under consideration. Having heard the matter, the Tribunal held that, Whether any question of taxability can arise when the services received by assessee from its foreign counterparts cannot be characterized as fees for technical services - NO: ITAT + we noticed that the Coordinate Bench has examined the nature of transaction vis-à-vis the terms "technical services", "consultancy services" and "fees for technical services" in AY 2006-07 (referred supra) in para 9 to 11 of its order and finally came to the conclusion that fees received by the assessee can't be considered as fees for technical services. Since, the CIT(A) has followed the decision given by the Coordinate Bench on this issue, which have been given under identical set of facts, we do not find any reason to interfere with this decision; Whether Indian subsidiaries of foreign companies doing business in India with no server located in India can be considered as dependent agent PE of that foreign entity - NO: ITAT Whether in such event business profits are liable to tax in India - NO: ITAT + with regard to existence of the permanent establishment also, we notice the Coordinate Bench has given a categorical finding in AY 2006-07 after examining the Article 5(2)a), Article 5(5) & 5(6) of DTAA that the two subsidiary companies M/s. e-Bay India Private Limited and M/s. e-Bay Motors Private Limited are dependent agents of the assessee but do not constitute dependent agents of the permanent establishment of the assessee in terms of Article 5. Accordingly, the Tribunal has held that the question of computing business profit of the assessee as per Article 7 of DTAA does not arise, since the assessee has no PE as per Article 5. We noticed that the CIT(A) has followed the decision of the Coordinate Bench on this issue also and hence we do not find any reason to interfere with his order passed on this issue. In the result, all three appeals of the Revenue are dismissed. Revenue's appeal dismissed |
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