Case of Authority for Advance Rulings, August 21, 2006 (case In Re: ABC Ltd. Vs)
| President | Syed Shah Mohammed Quadri, J. (Chairman) and A.S. Narang, Member |
| Resolution Date | August 21, 2006 |
Order:
Syed Shah Mohammed Quadri, J. (Chairman)
-
In this application under Section 245Q(1) of the IT Act, 1961 (for short "the Act"), the applicant is a company incorporated in Switzerland and is a tax resident of that country. It is a part of the D Group of companies. E Ltd. is one of the D Group of companies. It was incorporated in UK and it is a tax resident of UK. The said company was engaged in the business of manufacturing of turbochargers and providing engineering services. XYZ Ltd. issued a letter of intent ('LOT') duly specifying the key terms and conditions for the supply of turbochargers in favour of E Ltd. for the purchase of turbochargers for 1 litres diesel engines in September, 2003. The D Group took up a restructuring exercise with the objective of centralizing key functions in Switzerland whereunder E Ltd. transferred its business of manufacturing turbochargers on a going concern basis to the applicant w.e.f. 1st Jan., 2004. Thereafter the applicant is engaged in the business of manufacture of turbochargers for passenger and commercial vehicles. Under the arrangement the LOI issued by XYZ Ltd. to E Ltd. for the purchase of turbochargers was transferred by it (E Ltd.) to the applicant as a successor. The applicant entered into a turbocharger development and supply (TDS) agreement with XYZ Ltd. for manufacturing and supply of turbochargers for vehicles manufactured by XYZ Ltd. using L litres diesel engines. The applicant proposes to establish an Indian subsidiary named J (P) Ltd. to be incorporated under the Indian Companies Act, which would be engaged in the business of supplying of turbochargers to customers including XYZ Ltd. as per the TDS agreement. J (P) Ltd. would manufacture locally and supply turbochargers to XYZ Ltd. For that purpose the applicant would assign its rights, interests and obligations in the TDS agreement to J (P) Ltd. on agreed consideration to be paid to the applicant in installments. As part of the agreement the applicant proposes to provide a volume guarantee to J (P) Ltd. to the effect, should the volumes under the TDS agreement fail to materialize from XYZ Ltd. at the prices indicated thereunder, the applicant would source additional turbochargers from J (P) Ltd. to make good such deficiency. In this backdrop the applicant has set forth the following questions to seek advance rulings of the Authority:
-
On the facts and in the circumstances of the case, whether the receipt arising to the applicant, from the proposed assignment of the turbocharger development and supply agreements in accordance with the assignment deeds be taxable in India having regard to the provisions of the IT Act, 1961 ("the Act") and the Double Taxation Avoidance Agreement between India and Switzerland ("the DTAA")?
-
If the answer to (1) above is in affirmative, then, to what extent and in which year/s would the receipt be taxable in India having regard to the provisions of the Act and the DTAA?
-
If in the facts and circumstances of the case, the receipt is not taxable in India, then, whether the assignee of the turbocharger development and supply agreement is required to withhold any tax under Section 195 of the Act while making remittance to the applicant?
-
The Commissioner of Income-tax-I, Pune (for short "the CIT") has sent the following comments:
XYZ Ltd. will be using the technology and the product supplied by the applicant directly or indirectly through the subsidiary for being used and utilized in India and payments made by the subsidiary to the applicant will be out of the profits earned by the Indian subsidiary. Because such remittances would include element of taxable profits (of which no details are available at present) the same are taxable. It is a matter of record that the applicant had taken steps to register its subsidiary J (P) Ltd. on 18th July, 2005 even before completion of one year from the date of execution of TDS agreement dt. 6th Aug., 2004. Though the applicant had made every attempt to show that no income would be deemed to accrue or arise in India as it has no business connection, source of income or assets or transfer of any capital asset situate in India, it has not given any reason as to how the assignment of the agreement would not be taxable under the provisions of the Act. Even under the DTAA between the Government of the Republic of India and the Government of the Swiss Confederation dt. 29th Dec., 1994 (for short the "treaty"), Article 7 would be attracted and if it has a permanent establishment (PE) in India it would be taxable. Every person designated to carry on any function on behalf of the foreign company would be treated as a PE. Having regard to the sequence of events, namely, the applicant executed an agreement in August, 2004 and thereafter proposes to assign the same to subsidiary to be incorporated would disclose well thought over arrangement, therefore, receipt arising to the applicant out of proposed assignment of TDS agreement are taxable in India under the Act as well as under the treaty. In regard to question No. 2, it is stated that the financial year in which the assignment of the TDS agreement takes place, will be the year in which the consideration would be taxable. In regard to question No. 3, it is stated that since receipts by the applicant are taxable in India the provisions of Section 195 of the Act will be attracted.
-
Mr. Porus Kaka, learned Counsel appearing for the applicant, has submitted that the subject-matter of assignment between the applicant and the J (P) Ltd. is the TDS agreement dt. 6th Aug., 2004 which would be executed outside India and the consideration for the assignment would also be received by the applicant outside India, therefore, the applicant, being a non-resident, would not be taxable. He argued that under Section 9(1) of the Act no income would be deemed to accrue or arise in India to the applicant under any of the limbs of the Section 9(1)(i) of the Act. The applicant, it is submitted, has no business connection in India; the activities of J (P) Ltd. consequent upon the assignment of the TDS agreement for manufacture and supply of turbochargers to XYZ Ltd. would be in discharge of its own obligations under the agreement and could not be treated as for and on behalf of the applicant. Refuting the contention of Mr. T.N. Chopra, learned Counsel appearing for the CIT, that the consideration paid to the applicant under the assignment agreement is in the nature of royalty, Mr. Kaka has submitted that the TDS agreement contemplates only supply of products - turbochargers - to XYZ Ltd., no technical know-how, patents or license of any technology is involved therein, therefore, they are not the subject-matter of transfer under the assignment agreement and J (P) Ltd. will have to procure separately the technology required for manufacturing turbochargers from a different D Group entity holding intellectual property rights. For these reasons, the consideration for assignment of TDS agreement cannot be regarded as royalty. Under the treaty also the consideration is not taxable. Article 7 of the treaty provides for taxation of business profits only when the applicant has a PE in India. As the applicant is not carrying out any business in India and it has no PE in India the consideration payable to the applicant will not be taxable.
-
Mr. T.N. Chopra, learned Counsel appearing for the CIT, has contended that the assignment fee has nexus with the running of business and therefore, is in the nature of revenue profits in the hands of the applicant and is taxable. It is not a case of simpliciter assignment without carrying on any activity in India. The Indian subsidiary set up by the applicant is merely a projection of foreign enterprise on the soil of India and the assignment fee is, therefore, liable to tax under Section 9(1)(i) of the Act as well as Article 7 of the treaty. What is purportedly labelled as assignment fee is in the nature of royalty liable to tax under Section 9(1)(vi) of the Act as well as Article 12 of the treaty. Since deduction of tax at source under Section 195 of the Act is tentative and provisional subject to final determination at the time of regular assessment, Section 195 of the Act is attracted at the time of payment of so-called assignment fee.
-
The rival contentions of the parties give rise to the following points for determination:
(i) Whether amounts payable under the assignment agreement, either in the nature of business receipts or royalty, are taxable under the Act?
(ii) If the answer of the first point is that they are taxable as "business receipts", whether the applicant has a PE in India?
(iii) Whether the amounts payable under the TDS agreement attract Section 195 of the Act?
(i) To comprehend the real nature of payments to be made by the J (P) Ltd. to the applicant under the assignment agreement, it is necessary to read both the TDS agreement dt. 6th Aug., 2004 (Exhibit-2) as well as draft assignment agreement (Exhibit - 4) because the subject-matter of Exhibit - 4 is the same as the subject-matter of Exhibit - 2. Exhibit - 2 is between the XYZ Ltd. and the applicant. We have carefully gone through it. It will be apposite to refer to the following clauses of the agreement Exhibit - 2 which are relevant for the present discussion:
(1) The preamble of the agreement recites, inter alia, that as a result of long experience in the business of design, development and manufacture of trucks and passenger vehicles for the Indian and overseas markets, XYZ Ltd. has developed and has acquired and/or possesses technical knowledge in these fields and has industrial and intellectual property rights consisting of designs, product engineering, technological and other information with respect to those vehicles and related parts and components.
(2) In regard to D Group, it is mentioned that PQR belongs to that group and as a result of long experience in the business of design...
To continue reading
Request your trial