Monday, April 15, 2013

Withholding tax rate not to include cess and surcharge if treaty is silent on these aspects

In the instant case, the assessee had paid management fee, interest, etc., to a resident of France. However, surcharge was not taken into consideration by assessee while deducting the tax at source. Revenue contended that under the Income-tax Act, the taxpayer is expected to deduct tax after taking into consideration surcharge. Assessee, on the other hand, contended that it was not liable to deduct tax including surcharge as the DTAA between India and France is silent on inclusion of surcharge for the purpose of deduction of tax at source.

On appeal, the Tribunal held in favour of assessee as under:

1) It was not in dispute that there was an agreement between the government of India and Government of France for avoidance of double taxation. It was also not in dispute that the DTAA between the government of India and France didn’t say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source. Therefore, there was an apparent conflict between the Income-tax Act and DTAA between the two sovereign countries with regard to inclusion of surcharge and education cess for the purpose of deduction of tax at source;

2) In respect of a taxpayer on whom the DTAA applied, the provisions of the Indian Income-tax Act would apply to the extent they were more beneficial to that taxpayer. In other words, if the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income-tax Act. Since the DTAA was silent on the surcharge and education cess for the purpose of deduction of tax at source, the taxpayer would take advantage of that provision in the DTAA for deduction of tax – ITO  v. M Far Hotels Ltd. [2013] 32 100 (Cochin - Trib.)

Offshore services not taxable under DTAA, despite being covered in Sec. 9(1)(vii) post-amendment

Income from offshore activities, even though taxable under Sec. 9(1)(vii) in view of the Explanation substituted by the Finance Act, 2010, cannot be taxed in India if it is not effectively connected with its PE in India.

The assessee, a tax resident of Japan, carried out the offshore and onshore contract of supply of equipments and services. In respect to income from offshore contracts, the assessee did not offer to tax any income therefrom by claiming that it had not accrued or arisen in India. It provided that all activities in connection with the offshore supplies were undertaken outside India and project office in India, set-up for onshore contract, had no role to play in respect of such offshore services. Since the transfer of property in goods as well as the payments were carried on outside India, the income from such transaction was not taxable in India.

The Tribunal held in favour of assessee as follows:

Position under Section 9:

1) Before amendment, the provisions of Section 9(1)(vii) envisaged fulfilment of two conditions for treating the payment as ‘Fees for technical services’, viz., the services which were the source of income must have been utilized in India and such services must have been rendered in India;

2) However, the amendment by the Finance Act, 2010 had diluted these twin conditions. Now the rendering of services even outside India would be a good case for bringing the income of NR from fees for technical services within the purview of Sec. 9(1)(vii), if such services were utilized in India;

3) Thus, the payment for offshore service contract, even though carried outside India, would fall within the domain of Sec. 9(1)(vii).

Position under DTAA:

1) The Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd v. DIT [2007] 158 TAXMAN 259 (SC) has held that Article 7 – Business Profits would be relevant insofar as the income from offshore services were concerned;

2) Since the entire services rendered outside India were not connected with the permanent establishment (‘PE’) in India, there could not be any taxability of this amount in India;

3) Hence, the income arising from the offshore services would not be taxable in India.

Therefore, the income from the offshore supplies, even though chargeable to tax under Section 9(1)(vii), yet was exempt under the DTAA and could not be charged to tax in view of Section 90(2) – IHI Corporation v. ADIT [2013] 32 132 (Mumbai - Trib.)