Draft rules relating to tax credit of Foreign country

F.No. 142/24/2015-TPL
Central Board of Direct Taxes
(TPL Division)
***
New Delhi, dated 18th April, 2016
Sub: Draft rules for granting relief or deduction of Income-tax under section 90/ 90A/ 91 of the Income-tax Act – reg.
 
Clause (ha) of sub-section (2) of section 295 of the Income-tax Act, 1961 (the Act) provides that the Central Board of Direct Taxes (CBDT) may prescribe rules specifying the procedure for the granting of relief or deduction, as the case may be, of any income-tax paid in any country or specified territory outside India, under section 90 or section 90A or section 91, against the income-tax payable under the Act.
II. A Committee was set up by CBDT to suggest the methodology for grant of Foreign Tax Credit (FTC) after examining the various issues related to it. After due consideration of the issues raised by various stakeholders, the Committee submitted its report. Taking into account, the report of the Committee and the provisions of the Act the draft rules for grant of FTC are proposed as under:
(1) An assessee being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule.

Gist of latest important tax caselaws / judgements

Below are the recent important tax caselaws related to Income tax, Service tax, Excise in brief. The citation is made available for your benefit :

INCOME TAX

SECTION 9

INCOME – DEEMED TO ACCRUE OR ARISE IN INDIA

The assessee, an event management company, engaged the services of a non-resident agent to bring the foreign Artists to India. The assessee paid remuneration to the Artists and commission to the agent. It deducted tax on the amounts paid to the Artists but did not deduct tax on the commission paid to the agents. - Sum paid to agent could not be deemed to have arisen from the personal activities in a contracting State in status of entertainer or athlete - Commission paid to the agent was not hit by Article 18(2) of India-UK DTAA, and, therefore, income arising to agent couldn't be said to be taxable in India - Director of Income-tax (International Taxation) v. Wizcraft International Entertainment (P.) Ltd. (2014) 45 taxmann.com 24 (Bombay)     SECTION 92C TRANSFER PRICING - COMPUTATION OF ARM’S LENGTH PRICE Comparables and adjustments/TNMM: Where in transfer pricing proceedings, TPO made adjustment to assessee's ALP in respect of software development services, in view of fact that two comparables selected by TPO were improper on account of very high turnover, impugned adjustment was to be set aside and, matter was to be remanded back for disposal afresh - Adaptec (India) (P.) Ltd. v. Assistant Commissioner of Income-tax (2014) 44 taxmann.com 236 (Hyderabad - Trib.)       SERVICE TAX SECTION 65(27) TAXABLE SERVICES - COMMERCIAL TRAINING OR COACHING SERVICES Prior to 27-2-2010, definition of 'vocational training institute' nowhere mandates that institute must be recognized or accredited; therefore, export import management and retail management and merchandising activities are exempt from service tax even if courses are not approved/affiliated - Commissioner of Service Tax, Delhi v. Ashu Exports (P.) Ltd. (2014) 44 taxmann.com 113 (Delhi)       CENTRAL EXCISE ACT SECTION 35G APPEALS - MAINTAINABILITY OF Question 'whether assessee can avail of SSI-exemption simultaneous with Cenvat credit in respect of goods' relates to interpretation of exemption notification and 'rate of duty' and not appealable before High Court - Commissioner of Central Excise, Mumbai v. BD Industries (2014) 44 taxmann.com 75 (Bombay)     SECTION 35K APPEALS - BINDING NATURE OF PRECEDENTS Where revenue had initiated coercive recovery during pendency of stay application of assessee, said proceedings were quashed and contempt proceedings against revenue were dropped after unconditional apology - Fashion Suitings (P.) Ltd. v. Superintendent, Central Excise & Service Tax (2014) 44 taxmann.com 84 (Rajasthan)

DCIT vs. Gupta Overseas (ITAT Agra)

S. 40(a)(i): Disallowance of payment to Non-residents without TDS violates ‘deduction neutrality non-discrimination‘ clause in DTAA as there is no similar bar for residents as per Merilyn Shipping 136 ITD 23 (SB)


In Rajeev Sureshbhai Gajwani 137 TTJ 1 (Ahd)(SB) it was held that differentiation simplicitor is enough to invoke the non-discrimination clause. Consequently, it will be contrary to the deduction neutrality clause in non-discrimination in the tax treaties if the provisions for deduction of payments to non-residents are more onerous than those applicable for payments to residents. The payments made to residents of Ireland, Denmark and Austria are protected by the deduction neutrality clauses and any pre-conditions for deductibility, which are harsher than payments made to the residents are ineffective in law. However, payments to the residents of Belgian, UK, Italy and Spain will not be entitled to the same protection under the omnibus non-discrimination clause of Article 24(1) based on nationality (Herbalife International 103 TTJ 78 (Del) referred)

High Court Explains Why Off-Shore Profits Are Not Taxable In Hands Of Foreign Company

Samsung Heavy Industries Co. Ltd. vs. DIT (Uttarakhand High Court)

Article 7 of DTAA: Even in a composite contract, Dept cannot assess off-shore profits without showing how it is attributable to the permanent establishment


The assessee entered into a consortium contract with ONGC and L&T to carry the work of surveys, design, engineering, procurement, etc. It opened a project office in India for co-ordination and execution of the project. The assessee claimed that a portion of the work was carried out inside India and a portion was carried out outside India. It claimed that it had suffered a loss on the work done inside India and that income on the work done outside India was not assessable to tax in India. The AO held that 25% of the work done outside India had to be assessed in India. This was upheld in principle by the Tribunal (133 ITD 413 (Del)) on the ground that the contract was indivisible and that opening a project office in India was a condition precedent for the contract. It was held that the said project office constituted a “permanent establishment” under Article 5(1) of the India-Korea DTAA and that it covered the entire scope of work. As regards the percentage of income attributable to the PE, the Tribunal directed the AO to determine the extent of business activities carried on through the said project office. On appeal by the assessee to the High Court HELD reversing the Tribunal:

Being a resident of Korea, the assessee is governed by the Income-tax laws as prevalent in Korea. Therefore, it has a tax identity in Korea. In addition, the assessee has submitted to the jurisdiction of Indian taxing authorities by furnishing return of income and, thereby, acknowledged that it has also a tax identity in India. The question is, this identity is covered by which provision of the India-Korea DTAA. In terms of Article 7(1), the assessee will acquire its tax identity in India only when it carries on business in India through a permanent establishment situate in India. By submitting the return, the assessee has held out that it is carrying on business in India through a permanent establishment situated in India. In the circumstances, the contention of the assessee, whether the Project Office of the appellant opened at Mumbai can be, or cannot be said to be a permanent establishment within the meaning of the said DTAA is of no consequence. In terms of the DTAA, if an enterprise does not have a tax identity in India in the form of a permanent establishment, it has no obligation to either submit any tax return with, or pay any tax to India. The Indian Taxing Authority is not entitled to arbitrarily fix a part of the revenue to the permanent establishment of the assessee in India. The assessee held out that a part of the revenue was received by it for doing certain work in India. It did not contend that even those works were done by or through its Project Office at Mumbai. On the other hand, there is not even a finding that 25 per cent of the gross revenue of the assessee was attributable to the business carried out by the said Project Office. Neither the AO nor the Tribunal has made any effort to bring on record any evidence to justify the same. Tax liability cannot be fastened without establishing that the same is attributable to the tax identity or permanent establishment of the enterprise situate in India.

Revenue earned by eBay from its website won't be FTS; its Indian marketing agents won't form its agency PE

a) The assessee, incorporated in Switzerland, operated specific websites in India that provided an online platform for facilitating the purchase and sale of goods and services to users based in India;

b) For the purpose, the assessee had entered into marketing support agreements with eBay India and eBay motors, for availing of certain support services in connection with its websites;

c) The Assessing officer concluded that the payments received by the assessee from operations of websites were mainly in the nature of FTS. Further, it also held that the assessee had a PE in India in the form of its entities namely, eBay India and eBay motors;

d) On appeal, the DRP upheld the order of AO. Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The modus operandi of the transactions undertaken through the websites made it clear that the fees accruing to assessee on successful completion of the transactions between the buyer and seller could not be described as FTS, as the assessee had no role to play in effecting sales and these were in nature of business profits;

2) The existence of PE as per Article 5 of India-Singapore DTAA (‘treaty’) is a must for bringing to charge any business profits as per Article 7 of treaty. The eBay India and eBay motors were dependent agents of assessee, as they were assisting it in carrying on business in India and if any of the conditions given in para 5 of Article 5 of treaty was satisfied, then they would constitute dependent agent PE of the assessee in India;

3) First condition provided in Para 5 of treaty refer to that the dependent agent "has and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise”. By performing the activities as narrated in the agreement, it was seen that eBay India had at no stage negotiated or entered into contract for or on behalf of the assessee;

4) Second condition provided in Article 5 of treaty refers to the dependent agent habitually maintaining a stock of goods for or on behalf of the enterprise. This condition was not satisfied as eBay India didn’t maintain any stock of goods for delivery for or on behalf of the assessee;

5) Third condition applies where the dependent agent manufactures or processes the goods or merchandize in that State for the enterprise. Obviously, this clause was also not applicable because eBay Motors was not required to manufacture or process the goods or merchandise on behalf of the assessee;

6) Thus, the eBay India and eBay motors were dependent agents of assessee but they did not constitute dependent agent PE and, thus, profits earned by assessee could not be taxed as per Article 7 of treaty - eBAY INTERNATIONAL AG V. DY. DIT (2013) 40 taxmann.com 20 (Mumbai - Trib.)

Tribunal Has Power And Duty To Order Refund Of Taxes Illegally Collected By AO: High Court

DCIT vs. ITAT (Punjab & Haryana High Court)

Dept hauled up for “over-zealousness” and “ham-handed” attempt to recover taxes in violation of stay order. Tribunal is duty-bound to order refund of such taxes
The AO raised a demand of Rs.210.57 crores by making certain adjustments for the AMP expenditure incurred. This was confirmed by the DRP. The assessee filed an appeal before the Tribunal as well an application before the CBDT under the Mutual Agreement Procedure (MAP) prescribed in Article 27 of the India-USA DTAA. The assessee also filed a stay application before the Tribunal. The Tribunal granted a stay of the demand for a period of 180 days or disposal of the appeal or of the MAP application, whichever is earlier. It was provided that the assessee sought an adjournment, the stay would be vacated. On the date fixed for hearing, the assessee pointed out that the issue of adjustments to the AMP expenditure was pending before the Special Bench in L. G. Electronics (since decided 152 TTJ 273) and so the appeal was adjourned. The AO took the view that as the assessee had sought an adjournment, the stay stood automatically vacated and so he attached the assessee’s bank account. The assessee filed an application u/s 151 of the CPC before the ITAT seeking refund of the amount recovered by the revenue. The Tribunal held that the adjournment was granted by it suo motu in conformity with judicial discipline as the issue was pending before the Special Bench. It held that the AO had acted in violation of the stay order and directed him to refund the amount collected. The Department filed a Writ Petition to challenge the said order. HELD by the High Court dismissing the Petition:
(i) A trivial adjournment, an overzealous revenue department, compelled apparently by year ending revenue collection targets, has led to this unnecessary litigation. It is not a case where the assessee sought an adjournment but one where the Tribunal chose to adjourn to await the decision of the Special Bench. Apart from that the show cause notice issued to the assessee does not refer to vacation of the stay order but refers to admission or not of the MAP application though that there was discussion relating to vacation of the stay order during the personal hearing. The AO should have been honest enough to issue a show cause notice on the ground that the stay order stands vacated. The vacillating stand of the revenue clearly indicates a confused state of mind, apparently compelled by the need to achieve targets fixed by superiors of the department;
(ii) As regards the jurisdiction of the Tribunal to order refund of the amount appropriated by the revenue, the Tribunal has rightly held that it is empowered, in view of nature of its jurisdiction, as well u/s 151 of the CPC to order refund, as the stay order has not been vacated. The power to ensure that its orders are not violated during pendency of a lis are inherent in any Court or Tribunal. In fact it is the bounden duty of the Tribunal to ensure where its order is violated that the violation is adequately redressed and money appropriated, is restituted. If such a power is held not to be available to the Tribunal, its interim orders would be flouted with impunity. If, the revenue was of the opinion that the stay order has been violated by the assessee or has been vacated, it should have approached the Tribunal for clarification by way of an appropriate application but instead proceeded in a ham-handed manner, to appropriate this amount.
Note: This impliedly approves RPG Enterprises 251 ITR 20 (Mum) (AT), MSEB 81 ITD 299 (Mum) & KLM Royal Dutch Airlines 1 SOT 659 (Del) where the Tribunal directed the AO to refund taxes illegally recovered