Case Law 1 

Refund due and payable to Assessee is ‘debt-owed’ and payable by revenue. Consequently, interest arising on such refund is also a debt claim payable by revenue and, thus, it shall be exempt from tax in India by virtue of specific provisions contained in Indo-Italy Double Taxation Avoidance Agreement  [Ansaldo Energia SPA vs. CIT (2016)  369 (Madras High Court)]

The Assessee is a company incorporated under the laws of Italy. By giving effect to the previous orders, refund was granted to the Assessee which also carried interest u/s 244A of the Income Tax Act, 1961 (the Act). While making payment of the interest along with refund, the tax officer deducted tax at source at 42.024%.

Challenging the deduction at source made on the interest payable on the refund, the Assessee filed appeals before First Appellate Authority which was dismissed and consequent appeal to Income Tax Appellate Tribunal (‘ITAT’) was also dismissed. Aggrieved by the orders, the Assessee preferred appeal before the High Court.

Before the High Court, the Assessee contended that the interest paid on the refund in terms of Section 244-A of the Act is a debt claim within the meaning of the term “interest” under paragraph 4 of Article 12, and therefore, it is exempt under Clause (a) of paragraph 3 of Article 12. As per the provisions of Clause (a) of para 3 of Article 12, the interest arising in a Contracting State is exempt from tax in that State if the payer of the interest is the Government of that Contracting State or a local authority thereof.

However, the tax authorities urged that the Assessee has a permanent establishment in India, which already stands adjudicated by an order of the Tribunal and also confirmed by an order of the High Court, and therefore, the provisions of Article 12 shall not be applicable. Accordingly, exemption as per paragraph  3(a)  of  Article 12  shall  not  be  applicable.  As such by virtue of paragraph 6 of Article 12 read with Article 5 and 7, the interest paid on the refund of income tax under Section 244-A shall constitute business profit taxable under Article 7 of the Indo-Italy Double Taxation Avoidance Agreement (‘DTAA’).

The High Court held that:

In this case, the payer of interest is the Government of the contracting State, namely the Government of India. Therefore, Article 12.6 has no application at all to the case.  Only in a case where the Assessee is the payer of the interest, the second part of Article 12.6 will attract.

Under Sub-section (1) of Section 244-A, an Assessee is entitled to receive in addition to any amount of refund that has become due to him, simple interest calculated in the manner provided therein. Subsection (1) of Section 244-A uses two important expressions, namely (i) becomes due, and (ii) be entitled to. The expression “becomes due” is a clear indication that an Assessee will be entitled to the benefit of Section 244-A only if the refund of any amount has become due. If a refund has become due, interest on the refund is also automatic subject to the satisfaction of other conditions. Anything that is due and which a person is entitled to collect, is naturally in the nature of a debt claim. Therefore, the law is well settled to the effect that what was due as a refund and what was payable as interest on such refund are debt claims within the meaning of Article 12.4.

As a consequence, they satisfy the parameters of Article 12.3(a).

The High Court therefore held that the interest on refund is not taxable under the provisions of the DTAA between India and Italy.


Case Law 2

In terms of Double Taxation Avoidance Agreement between India and US, Indian subsidiary cannot be held as Dependent Agent PE of the US parent if it does not have the authority to conclude contracts  [Adobe Systems Incorporated vs. Assistant Director of Income-tax (2016)  228 (Delhi)]

The Assessee, a company incorporated in USA, was engaged in the business of providing software solutions for network publishing and broadband applications. The subsidiary of the Assessee in India provided software related Research & Development (R&D) services, on principal to principal basis, to the Assessee. These R&D services were paid by the Assessee on cost plus basis in terms of the agreement entered between Assessee and the Indian Company. The Assessee company does not have any business operations in India.

In assessment proceedings, the tax officer held that the activities carried on by the Indian Company are the core business activities of the Assessee and thus Indian Company was held to be the PE of the Assessee in India. It was also held that cost plus basis to remunerate Indian Company does not capture the fair share of income attributable to PE in India. The Assessee disputed the order of the tax officer and filed appeal before the first and second appellate authorities.

On the issue, the High Court held as under:

A subsidiary is an independent tax entity and is separately taxed for its income in the country of its domicile. The fact that a holding company in another contracting state exercises certain control and management over a subsidiary would not render the subsidiary as a PE of the holding company. This is expressly provided under Article 5 of the India-US DTAA;

In the present case, the Assessee does not have any office or establishment in India. Further, there is no evidence that the Assessee has any right to use the premises or any fixed place at its disposal. The AO has simply proceeded on the basis that the R&D services performed by the Indian Company are an integral part of the business of the Assessee and therefore office of the Indian Company represents the fixed place of business of the Assessee. Thus clearly the right to use test or the disposal test is not satisfied for establishing the PE under Article 5(1) of the DTAA of the Assessee in India;

Further, there is no material on record to establish that the Assessee’s employees constitute a Service PE in terms of Article 5(2)(I) of the DTAA;

Also, there is no material available on record to form a view that Indian Company acted as an agent for an on behalf of the Assessee. In the present case it could not be established that the Indian Company concluded contracts on behalf of the Assessee and thus it cannot be seen as a PE of the Assessee in India in terms of Article 5(5) of the DTAA.


Case Law 3

Consideration for the ‘use of work’ would not constitute royalty. To constitute royalty in terms of India-US Double Taxation Avoidance Agreement transfer of ‘use of copyright in the work’ is a prerequisite  [Deputy Director Income-tax (IT)-2(1), Mumbai vs. Reliance Industries Ltd. (2016)  311 (Mumbai-Trib.)]

The Assessee, an Indian Company, is engaged in the business of oil and gas exploration and for its business in India it has purchased software from residents of different countries. However while making payment for such purchase the Assessee did not withhold taxes at source considering the same to be non-taxable in India. The tax officer disputed the taxability of the payment and held the same as royalty in terms of the Act and India-US Double Taxation Avoidance Agreement (‘DTAA’). Accordingly, the Assessee was treated as Assessee in default for non-withholding of taxes at source. On appeal by the Assessee the CIT(A) held that the payment made by the Assessee for purchase of software would not amount to royalty. The aggrieved-revenue filed an appeal before the Tribunal.

On appeal Tribunal held in the favour of the Assessee is as under:

In order to determine whether the impugned payment falls within the definition of royalty what is relevant is that the consideration must be paid “for the use of” or the right “to use” any “copyright”. The right to use a computer software programme has not been specifically mentioned in the DTAA with any country;

Though explanation 4 inserted under section 9(1)(vi) of the Act, include the right to use a computer software program as royalty but it cannot be said that the definition of royalty under the Act is in parimateria with that under the DTAA. Since the definition provided under the royalty in the DTAA is more beneficial to the Assessee, as per the provisions of section 90 of the Act, the definition of royalty as provided under DTAA is to be taken;

One has to understand the difference between the term “use of copy right in software” and “use of software” itself. To constitute “royalty” under DTAA, it is the consideration for transfer of “use of copyright in the work” and not the “use of work” itself.

The amendment by which the Explanation 4 has been introduced with retrospective effect to section 9(1)(vi) of the Act has the effect of change in the law. By the introduction of the said Explanation 4, computer software has been specifically included in the definition of ‘right, property or information’ which was never assumed to have been included by any court of law prior to such insertion;

The Assessee was under the bonafide belief that there was no liability to deduct tax in respect of the consideration paid for the said purchase of software. Hence, Assessee was not supposed to deduct TDS on such purchases.


Case Law 4

Payment received for providing web hosting services by using certain scientific equipment cannot be treated as ‘consideration for use of, or right to use of, scientific equipment’ and accordingly cannot be held as royalty both under the Act and DTAA  [DDIT vs. Savvis Communication Corporation (2016) 69 106 (Mumbai-Trib.)]

The Assessee being a US Company engaged in the business of providing Information Technology Solutions, including web hosting services. Such web hosting services were also provided to certain Indian entities and income so earned was claimed to be not taxable in India in view of the provisions of the Indo-US Double Taxation Avoidance Agreement (‘DTAA’). While concluding the assessment proceedings the tax officer held that services rendered by the Assessee are essentially in the nature of specialized facilities and the receipts thereof was essentially for granting the right to use the scientific equipment which was taxable in India under item (va) of Explanation 2 to section 9(1)(vi) as also article 12(3)(b) of the DTAA.

On appeal, CIT(A) held in favour of the Assessee that impugned payment does not amount to royalty.

Against the order, tax authorities filed an appeal before the ITAT and it was held that use of a scientific equipment by the Assessee, in the course of giving a service to the customer, is something very distinct from allowing the customer to use a scientific equipment. A payment cannot be said to be consideration for use of scientific equipment when person making the payment does not have an independent right to use such an equipment and physical access to it. In the instant case also, what the Assessee is providing is essentially web hosting service, though with the help of sophisticated scientific equipment, in the virtual world. The scientific equipment used by the Assessee enable rendition of such a service, and such a use, which is not even by the Indian entity, is not an end in itself. In this view of the matter, even though the services rendered by the Assessee to the Indian entities may involve use of certain scientific equipment, the receipts by the Assessee cannot be treated as ‘consideration for the use of, or right to use of, scientific equipment’ which is a sine qua non for taxability under section 9(1)(vi) read with Explanation 2 (iv a) thereto.


Case Law 5

Consideration for the provision of basic engineering design to set up a plant is not subject to tax withholding in India, where designing work was carried outside India and payment was also made outside India  [Hindustan Petroleum Corporation Ltd. vs. ADIT (2016) 69 166 (Mumbai-Trib.)]

The Assessee entered into a licence and engineering agreement with an American company for CCR-platforming processing unit at Vishakhapatnam. As per the agreement certain sums were payable towards various services and purchase of Basic Engineering Design Specification (‘BEDS’). Accordingly, the Assessee made an application to Assessing Officer, for issuance of a certificate that no tax was liable to be deducted at source in respect of remittance towards basic engineering design under section 195(2) of the Act. While filing the application it was claimed that job carried out by the American company was in the nature of procurement of capital asset, it was not in the nature of Fee for Included Services (‘FIS’).

While adjudicating the application, Assessing Officer held that US company was not only supplying BEDS but was also making available the necessary support to use and maintain the same in future by the employees of the Assessee and that the amount payable by the Assessee was taxable in the hands of US company as fees for included services. He held that Assessee should deduct tax at the rate of 17.25 per cent with education cess at the rate of 2 per cent.

On appeal, the Commissioner (Appeals) held that the payment had to be taxed as Royalty/FIS. On appeal by the Assessee the Mumbai Tribunal reversed the order of the First Appellate Authority, the impugned payment was neither royalty nor FIS. While pronouncing the order, Mumbai ITAT relied on the various rulings pronounced by difference benches of this court and arrived at the conclusion that if an Assessee makes payment for BEDS to a non-resident entity and the supplier does not have a PE in India, such payments would not be taxed in India. If the Assessee purchases BEDP out rightly it would amount to purchase of capital asset. There is conceptually difference in payment made for use of certain rights for a certain period and payment made for acquiring basic designing. It was held that in the case under consideration, it is clear that the Assessee had treated other two payments as Royalty and had deducted tax at source. The American-company had provided the Assessee basic engineering design to set up a plant, that designing work was not carried out in India and the payment was also made outside India. Therefore, the Assessee was not liable for deducting tax at source for the said payment.


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