2014 (2) TMI 802 - AAR - Income Tax

Permanent Establishment Chargeability of payments received u/s 9(1)(vii) r.w section 115A and 44DA of the Act - Whether the payments received/receivable in connection with the provision of services of technical/professional personnel to Booz India is chargeable to tax in India as FTS under section 9(1)(vii) read with section 115A as well as Section 44DA of the Act in the absence of fixed place PE in India - Held that - The OECD does not expressly define what constitutes the place to be at the disposal of the taxpayer and instead gives examples wherein it may or may not tantamount to right of disposal - Conducting trading operations of the taxpayer which is called the disposal test - Relying upon Rolls Royce Plc v. DIT 2011 (8) TMI 313 - DELHI HIGH COURT - The taxpayer had a fixed place PE in India because RRIL s premises were available to all of employees and assessee paid all the expenses in maintaining its premises - An employee of MSCo when deputed to MSAS does not become an employee of MSAS - A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist s terms and employment - on request/requisition from MSAS the applicant deputes its staff - The request comes from MSAS depending upon its requirement - On completion of his tenure he is repatriated to his parent job - He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2)(l) there was no infirmity in the ruling of the ARR on this aspect - MSCo is rendering services through its employees to MSAS - the AAR was right in ruling that MSAS would be a Service PE in India under Article 5(2)(l), though only on account of the services to be performed by the deputationists deployed by MSCo and not on account of stewardship activities. Income attributable to the Permanent Establishment Held that - The Transactional Net Margin Method was the appropriate method for determination of the arm s length price in respect of transaction between MSCo and MSAS - the ruling of AAR is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm s length basis taking into account all the risk-taking functions of the multinational enterprise - The decision in Aramex International Logistics Versus Director of Income-tax 2012 (6) TMI 187 - AUTHORITY FOR ADVANCE RULINGS followed - When a business cannot be carried on exclusively in so far as it relates to customers in India without intervention of another entity, a subsidiary, normally that entity must be deemed to be the establishment of the group in that particular country the Indian subsidiary must be taken to be a permanent establishment of the group in India - the subsidiary must be considered to be a permanent establishment of the group in the concerned country, here, India. Nature of payments received Scope of Article 12 of DTAA Chargeability to tax as FTS u/s. 115A read with section 9(1)(vii) as well as section 44DA of the Act - Held that - The applicants have Permanent Establishment in India, the incomes received by them from the Indian Company are taxable as business profit under Article 7 of the Tax Agreement of India and the respective countries (except M/s.Booz & Co.(ME) Ltd. Cayman Islands) with which there is no tax treaty by India, and M/s.Booz & Co.(Italia)S.R.L., Italy ), whose income will be taxed as per provisions of the Act) thus, the applicants have Permanent Establishment in India and their incomes are taxable as business profits Also, the income being taxable as business profits, the payments by the Indian company to the applicants will be subjected to withholding of tax under section 195 of the Act - Decided against Assessee.

Issues Involved:
1. Taxability of payments received by the Applicant for services provided to Booz India as "Fees for Technical Services" (FTS) or Royalty under the relevant DTAA.
2. Taxability of payments received by the Applicant for services provided to Booz India under section 9(1)(vii) read with section 115A and Section 44DA of the Income-tax Act, 1961.
3. Taxability of reimbursements of actual out-of-pocket expenses incurred by the Applicant for Booz India.
4. Rate of withholding tax under Section 195 of the Act from payments made to the Applicant.

Detailed Analysis:

1. Taxability as Fees for Technical Services (FTS) or Business Income:
The core issue is whether the payments received/receivable by the Applicant for services provided to Booz India are chargeable to tax in India as "Fees for Technical Services" (FTS) under the provisions of Article 12 of the relevant DTAA, or as business income in the absence of a Permanent Establishment (PE) in India.

Applicant's Stand:
The Applicant argued that in the absence of a PE, the fee received from Booz India is not taxable as business income and should be taxed as FTS at 10% under section 115A of the Act.

Revenue's Stand:
The Revenue contended that Booz India constitutes a PE for the Applicant due to the interdependence among Booz Group companies, the nature of services, and the control over technical/professional personnel. The Revenue argued that Booz India acts as a dependent agent PE, service PE, and fixed place PE, making the payments taxable as business income.

Judgment:
The Authority held that Booz India constitutes a PE for the Applicant in India. Consequently, the payments received by the Applicant are taxable as business profits under Article 7 of the relevant DTAA, except for M/s. Booz & Co. (ME) Ltd., Cayman Islands, and M/s. Booz & Co. (Italia) S.R.L., Italy, whose incomes will be taxed as per the provisions of the Act.

2. Taxability under Section 9(1)(vii) read with Section 115A and Section 44DA:
The issue revolves around whether the payments received by the Applicant for services provided to Booz India are chargeable to tax as FTS under section 9(1)(vii) read with section 115A and Section 44DA of the Act.

Applicant's Stand:
The Applicant argued that the payments should be taxed as FTS at 10% under section 115A, as there is no fixed place PE in India.

Revenue's Stand:
The Revenue argued that due to the PE in India, the payments should be taxed as business income under Article 7 of the relevant DTAA.

Judgment:
The Authority concluded that the Applicant has a PE in India, and thus, the payments received are taxable as business profits under Article 7 of the DTAA, making the provisions of section 115A and Section 44DA inapplicable.

3. Taxability of Reimbursements of Out-of-Pocket Expenses:
The issue is whether the reimbursements of actual out-of-pocket expenses incurred by the Applicant for Booz India are chargeable to tax in India under the Act and the Tax Treaty.

Applicant's Stand:
The Applicant argued that these reimbursements are part of service provisioning and do not have any element of income embedded therein, thus not taxable.

Revenue's Stand:
The Revenue did not provide a specific argument on this issue as the Applicant withdrew this question during the proceedings.

Judgment:
Since the Applicant withdrew this question, the Authority did not express any opinion on the taxability of reimbursements.

4. Rate of Withholding Tax under Section 195:
The issue is the rate at which Booz India is required to withhold tax under Section 195 of the Act from payments made to the Applicant.

Applicant's Stand:
The Applicant argued that the payments should be subject to withholding tax at 10% as per Article 12 of the relevant DTAA.

Revenue's Stand:
The Revenue argued that due to the existence of a PE, the payments should be subject to withholding tax under section 195 of the Act.

Judgment:
The Authority held that since the payments are taxable as business profits, Booz India is required to withhold tax under section 195 of the Act.

Conclusion:
The Authority concluded that the Applicants have a PE in India, making the payments received taxable as business profits under Article 7 of the relevant DTAA. Consequently, the payments are subject to withholding tax under section 195 of the Act. The applications were disposed of accordingly, and the ruling was pronounced on 14 February 2014.

← Previous Next →