‘Managerial services’ do not fall within the ambit of ‘fees for technical services’; not taxable under India-UK Tax Treaty – AAR
Cummins Ltd., In re A.A.R NO. 1152 OF 2011 (dated 12.01.2016)
- Cummins Limited, UK is a company incorporated in the UK. Cummins Technologies India Limited (CTIL) is a company incorporated in India.
- CTIL is engaged in the business of manufacture and sale of turbochargers. CTIL purchases turbocharger components directly from third party in UK and US and in relation to such purchases, Cummins Limited provides supply management services vide Material Suppliers Management Service Agreement.
- As per the agreement CTIL pays supply management service fees calculated at 5% of the base prices from the suppliers
- As per the agreement, Cummins Ltd, UK is responsible for following activities:
- Finalization of supplier prices from UK and US suppliers and ensuring market- competitive pricing from suppliers;
- Ensuring that the approved suppliers have the necessary manufacturing capacities and infrastructure to provide for the raw material requirements;
- Assisting in ensuring on-time delivery of components by the suppliers to Cummins India as well as resolution of delivery performance issues with suppliers, if any
- Ensuring that suppliers maintain strict compliance with the standards, procedures and processes and support in obtaining response from supplier to any quality control violation issue; and
- Performance review of the supplier
- Cummins Ltd does not have a permanent establishment (PE) in India in respect of the supply management services as per the provisions of the India-UK Treaty.
Once certificate u/s 195(2) is obtained for NIL deduction, AO cannot disallow the expense u/s 40(a)(i) – Mum ITAT
DCIT v M/s Carl Zeiss India (P) Ltd (ITA No 1251(B)/2014, 1258(B)/2014 dated 24 July 2015) Mumbai ITAT
During the course of assessment proceedings, the AO noted that the assessee has claimed Rs.1,12,51,602 under the head cost of senior management pertaining to activities of Carl Zeiss India Branch. On query, by the AO, the assessee submitted that during the financial year amount has been reimbursed to Carl Zeiss, Singapore Pte Ltd. being the cost allocated based on the proportion of work performed. Thus, it was submitted that the cost reimbursed by the assessee is in the nature of reimbursement on actual basis without any mark-up. The assessee has also pointed out that the payment was made and the amount was remitted only after obtaining a certificate from the AO u/s 195(2).
The AO did not accept the contention of the assessee and was of the view that the services provided by the head office through 3 senior managerial personnel fall under the category of fee for technical services (FTS). Thus, the AO held that the remittance in truth and reality is consideration for technical services disguised as reimbursement of expenses. Since the assessee did not deduct tax at source, the said payment of Rs.1,12,51,602 was disallowed and added to the total income.
The CIT(A) gave partial relief by accepting contentions of the assessee with respect to 1 managerial personnel and dismissed the ground regarding other 2 personnel and upheld the order of the AO that the services were indeed FTS. (more…)
Profit on sale of shares through PMS to be taxed as capital gains & not business income – Karnataka HC
CIT v KAPUR INVESTMENTS (P) LTD [ITA NO.158/2014 & ITA NO.159/2014 dated 20.04.2015] KARNATAKA HIGH COURT
Assessee Company is engaged in the business of finance and films. The assessee had invested money in shares through the Portfolio Management Scheme of M/s.Kotak Securities Limited. Since there were regular transactions of sale and purchase of shares, the Assessing Officer, for the relevant assessment years, held the same to be ‘business income’.
Commissioner of Income-tax (Appeals) granted relief to the assessee and held the profit to be taxed as capital gains. Against the orders of theCIT(A), the tax authorities filed appeals before the ITAT. In the first round, the Tribunal remanded the matter to the CIT(A), which again held in favour of the assessee. Thereafter, the Tribunal dismissed the appeals of the Tax Authorities. (more…)
CIT v GRUP ISM P. LTD. (ITA 325/2014 dated 29.05.2015) Delhi High Court
The assessee Company made payment of Rs 56,54,963/- to M/s. CGS International, UAE (“CGS International”) and Rs 37,76,863/- to M/s. Marble Arts & Crafts LLC, UAE (“Marble Arts & Crafts”) (aggregating to Rs 94,31,826/-). The AO noted that no TDS had been deducted by the assessee while making the payment to the said two foreign concerns and asked the assessee to justify the same. The assessee stated that the payments were made towards commission and that neither of these concerns had any business in India and therefore, it was not required to deduct TDS. However, the AO disallowed the amounts stating that the payment made was towards consultancy services and therefore, liable to TDS.
On appeal before the CIT(A), the CIT(A) held that the payment made by the assessee to the two UAE entities would not come within the purview of “technical services‟, as defined in Explanation 2 to Section 9(1)(vii) of the Act and consequently, the provisions of Section 9(1)(vii) were not attracted in the assessee’s case. The CIT(A) also held that Article 14 of the DTAA with UAE is applicable in the facts of the case and that the AO could not have denied the applicability of the said Article on the sole premise that the two UAE entities are companies. Accordingly, since the remittances to such non-resident entities are liable to be taxed in the UAE, no TDS was required to be deducted. The ITAT dismissed Revenue’s appeal and confirmed CIT(A)’s order. (more…)
CIT v India Advantage Securities Ltd (ITA No 1131 OF 2013 dated 13.04.2015) BOMBAY HIGH COURT
The assessee had received dividend income of Rs Rs.1,40,859/- which was exempt from tax. The assessee had however, not made any disallowance of expenses relating to exempt income. The A.O. in the course of assessment proceedings therefore, computed the disallowance u/s.14A as per Rule 8D which come to Rs.48,73,483/- consisting of interest expenditure of Rs.39,00,174/- and other expenses of Rs.9,73,309/-.
In the first level appellate proceedings, the assessee contended that the interest expenditure had been claimed by the assessee as deduction u/s.36(1)(iii). It was also submitted that the shares had been shown as stock-in-trade in the books of accounts and, therefore, such stock-in-trade could not be taken into account while computing the disallowance under Rule 8D. The CIT(A) was satisfied by the explanation given and agreed that the disallowance under Rule 8D could be made only with respect to investment and not in stock-in-trade. (more…)
If earning rent income is the main object of a Company, it cannot be taxed as ‘Income from House Property’ – SC
CHENNAI PROPERTIES & INVESTMENTS LTD v CIT [CIVIL APPEAL NOS. 4491-4493 OF 2004 dated 09.04.2015] SUPREME COURT
The assessee is a company incorporated under the Indian Companies Act. Its main object, as stated in the Memorandum of Association, is to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as income from business in the return filed by the assessee. The Assessing Officer held since that the income was received from letting out of the properties, it was in the nature of rental income and thus it would be treated as income from house property. (more…)
DDIT v Serum Institute of India Limited ITA No.792/PN/2013 dated 30.03.2015) – Pune ITAT
Assessee during the financial year 2010- 11 made payments to non-residents on account of interest, royalty and fee for technical services. The assessee deducted tax at source on such payment in accordance with the tax rates provided in the Double Taxation Avoidance Agreements (DTAAs) with the respective countries. The tax rate so provided in the DTAAs was lower than the rate provided under the Income-tax Act, 1961. In case of some of the non-residents, the recipients did not have Permanent Account Numbers (PANs). The AO treated such payments, as cases of ‘short deduction’ of tax in terms of the provisions of section 206AA of the Act. Section 206AA prescribes that if the recipient of any sum or income fails to furnish his PAN to the person responsible for deduction tax at source, the tax shall be deductible at the rate specified in the relevant provisions of the Act or at the rates in force or at the rate of 20%. The AO treated it as short deduction being difference between 20% and the actual tax rate on which tax was deducted in terms of the relevant DTAAs. As a consequence, demands were raised on the assessee for the short deduction of tax and also for interest u/s 201(1A) of the Act. CIT(A) granted relief holding that where the DTAAs provide for a tax rate lower than that prescribed in 206AA of the Act, the provisions of the DTAAs shall prevail and the provisions of section 206AA of the Act would not be applicable. (more…)
Anriya Project Management Services(P)Ltd. v DCIT (ITA No.1799/Bang/2013 dated 20.02.2015) – Bangalore ITAT
The assessee during the year did not earn any exempt income and therefore, did not make any disallowance under section 14A in its return of income. However, the AO made disallowance u/s 14A holding that there is increase in the investment of the assessee during the relevant assessment year resulting in increase of interest on total loans and thus interest bearing funds were utilized in investments earning exempt income. Therefore, he held that proportionate interest on investments earning exempt income is disallowable. (more…)
The Union Budget for the fiscal year 2015-16 was presented by the Finance Minister on 28th February 2015.
Apart from abolishing Wealth Tax Act, 1957 and officially warding off Direct Tax Code (‘DTC’), he also deferred the least liked GAAR (General Anti-Avoidance Rules) for two more years. He proposed to implement a roadmap for the reduction of corporate tax rate to 25% over a period of four years and also promised to phase out exemptions to give a fillip to the stagnant tax-base in India.
Most of the direct tax proposals in the Finance Bill, 2015 are effective from the financial year commencing on 1 April 2015, unless otherwise specified.
Expression “fees for technical services” in s. 9(1)(vii) explained with reference to “consultancy” services – SC
GVK Industries Ltd vs. ITO (Supreme Court)
The assessee paid fees to a non-resident (NRC). The obligation of the NRC was to: (i) Develop comprehensive financial model to tie-up the rupee and foreign currency loan requirements of the project.(ii) Assist expert credit agencies world-wide and obtain commercial bank support on the most competitive terms. (iii) Assist the appellant company in loan negotiations and documentation with the lenders. The assessee claimed that as the fees were paid for services rendered outside India, the same were not chargeable to tax in India and that the assessee was under no obligation to deduct TDS u/s 195. However, the AO and CIT rejected the claim of the assessee. The High Court (228 ITR 564) held that the said payment was not assessable u/s 9(1)(i) but that it was assessable u/s 9(1)(vii). The assessee claimed that s. 9(1)(vii) was constitutionally invalid as it taxed extra-territorial transactions. However, this claim was rejected by the Constitution Bench of the Supreme Court in 332 ITR 130. On merits, the matter was remanded to the Division Bench of the Supreme Court. HELD by the Division Bench dismissing the appeal: (more…)