Thursday, February 21, 2013

Even retro amendment can't tax indirect transfer as it doesn't override tax treaties; HC follows Vodafone

Retro amendments made to overcome Vodafone's decision are fruitless exercises as the same do not contain a non-obstante clause to override treaty. Therefore, where a French company acting as an Investment vehicle transferred its interest in Indian concern to another French company, the transferor was not liable to any tax in India as per India-France DTAA

The facts of the case were as under:

a) L, Hyderabad was an Indian company and 80 per cent of its shares were held by French company S;

b) Company S was a JV between two French companies G and M. G and M sold their shares in S to another French company Sanofi;

c) G and M had applied for Advance Rulings to AAR regarding the taxability of capital gains in India arising out of sale of shares in S to Sanofi in terms of Article 14(5) of Indo-France DTAA;

d) AAR held that such deal was chargeable to tax in India. Hence, G and M filed separate writ petitions before the High Court challenging the ruling of AAR;

e) Sanofi was held as 'assessee in default' for non-deduction of TDS under section 195 from payment made to G and M. Hence, present writ petition was filed by Sanofi before the High Court.

The High court held in favour of assessee as under:

1) S is an independent corporate entity registered and resident in France and FDI in SBL is its commercial substance and purpose;

2) S was established as a Special Purpose Vehicle to facilitate FDI and to cushion potential investment risks of M and G on direct investment in L;

3) Uncontested assertion by petitioners that a higher rate of tax on capital gains (in comparison to what would have been chargeable in India) is payable in France and has been remitted to Revenue in France lends further support to the inference that S was not conceived, pursued and persisted with to serve as an Indian tax avoidant device;

4) Since Revenue failed to establish its case that genesis or continuance of S establishes it to be an entity of no commercial substance and/or that S was interposed only as a tax avoidant device, no case made out for piercing or lifting of the corporate veil;

5) Subsequent to the transaction in issue and currently as well, S continues in existence as a registered French resident corporate entity and as the legal and beneficial owner of L shares;

6) The transaction in issue clearly and exclusively is one of transfer of the entire shareholding in S by M/G in favour of Sanofi. Transfer of L shares in favour of S is neither the intent nor the effect of the transaction;

7) The Revenue's contentions that retrospective amendments by Finance Act,2012 would over-ride DTAA provisions deserves to be rejected for the following reasons:

a. The Finance Act, 2012 introduced GAAR provisions (sections 95 to 102) which override treaties in case of abuse of treaty provisions was proposed to be operationalized w.e.f 1-4-2014. Section 90(2A) inserted by Finance Act,2012 enables application of GAAR even if same is not beneficial to assessee;

b. In contra-distinction, retrospective amendments relied upon by Revenue-Explanation 2 to section 2(47) and Explanations 4 and 5 to section 9 are not fortified by a non-obstante clause to override tax treaties - Sanofi Pasteur Holding SA v. Department of Revenue, Ministry of Finance [2013] 30 222 (Andhra Pradesh)

Tuesday, February 19, 2013

Testing services through machines are technical services, still not taxable as FTS as human intervention is missing

Merely because certificates have been provided by the humans after a test is carried out in a laboratory by automatic machines, it can’t be held that the services have been provided through the human skills. Such service is not “Fees for Technical Services”

In the instant case, the moot question that came up before the Tribunal was:
“Whether the payment made purely for standard facility provided by the Laboratory which is done automatically by the machines without any human intervention can be covered under the ambit of Fee for Technical Services”?

The Tribunal held in favour of assessee as under:

1) The expression “fees for technical services” has been defined as consideration for rendering managerial, technical or consultancy services. The word “technical” as appearing in the Explanation 2 to section 9(1)(vii)  is preceded by the word “managerial” and succeeded by the word “consultancy”. It can’t be read in isolation as it takes colour from the word “managerial and consultancy” between which it is sandwiched;

2) Managerial and consultancy services have to be rendered by human only and not by any means or equipment. Therefore, the word “technical” has to be construed in the same sense involving direct human involvement, without that technical services can’t be made available;

3) Where simply an equipment or sophisticated machine or standard facility is provided albeit developed or manufactured with the usage of technology, such a user can’t be characterized as providing technical services; and

4) One has to see whether any kind of human interface or human involvement is there for providing technical services. Merely because certificates have been provided by the humans after a test is carried out in a laboratory automatically by the machines, it can’t be held that services have been provided through the human skills - Siemens Ltd. v. CIT [2013] 30 200 (Mumbai - Trib.)

Wednesday, February 6, 2013

Royalty paid by an NR to other NR can't be taxed in India if it arises from patent exploited outside India

The royalty in respect of license granted by a non-resident to another non-resident for manufacturing of CDMA handsets cannot be taxed in India even if these handsets are sold to Indian parties. The source of royalty would be deemed as the place where patent is exploited, viz, where the manufacturing activity takes place, which is outside India.

In the instant case, the appellant was a company incorporated in the USA and was engaged in development and licensing of CDMA technology. The appellant granted license to 'use and sell CDMA technology' to the unrelated Original Equipment Manufacturers ('the OEMs'), who were non-resident and were located outside India, in consideration for royalty. The licenses granted by the appellant to the OEMs were used for manufacturing of handsets and network equipments, which, in turn were sold to various parties located outside India and in India. In respect of taxability of its income in India, the appellant contended that the royalty income earned by it from the OEMs of CDMA mobile handsets and network equipments sold in India was not taxable in India either under Section 9(1)(vi)(c) of the Act or under Article 12(7)(b) of the India-USA DTAA.

Deliberating on the issue, the Tribunal held in favour of assessee as under:

1) The license to manufacture products by using the patented intellectual property of the appellant had not been used in India as the products were manufactured outside India and when such products were sold to parties in India it couldn't be said that OEMs had done business in India;

2) Sale in India without any operations being carried out in India would amount to business with India and not business in India;

3) No patents of the appellant had been used for customization of handsets;

4) The role of appellant ended when it licensed its CDMA technology for manufacturing handsets and when it collected royalty from OEMs on these products;

5) There was no finding that the OEMs had carried on business in India or a part of the sale consideration was attributable to any sale or licensing of software carried out in India. When OEM's itself were not brought to tax, to hold that the appellant was taxable was not correct;

6) The source of royalty was the place where patent was exploited, viz, where the manufacturing activity took place, which was outside India. Hence, the Indian parties would not constitute source of income for the OEMs; and

7) The software was only used with the hardware and was not independent of the equipment or the chipset. Since no separate consideration was paid by Indian parties for licensing of the software and the consideration was paid only for the equipment which had numerous patented technologies, the sale couldn't be bifurcated or broken down into different components.

Thus, the royalty earned by the appellant couldn't be brought to tax in India under Section 9 of the Act or Article 12 of the India-USA DTAA - QUALCOMM INCORPORATED v. ADIT [2013] 30 30 (Delhi - Trib.)