DIRECT TAX - Nangia & Co

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Tax & Regulatory Newsletter Issue 05 – AUGUST, 2010 NANGIA & CO. Chartered Accountants New Delhi – Mumbai - Dehradun The Revenue contended that the taxpayer had a place of business in India since its source of revenue was from advertisements which were broadcasted by an Indian channel and paid mainly by persons in India. Also, there was a direct economic link between the collection of advertisement revenue by the taxpayer from India and payments made to the Singapore company for acquisition of broadcasting rights and hence the Indian company which carried on marketing activities constituted a Permanent Establishment of the taxpayer. The Income Tax Appellate Tribunal ruling in favour of the taxpayer observed - The Royalty arose in Singapore since the taxpayer was a tax resident of Singapore. For Royalty to arise in India three conditions had to be satisfied i.e. (a) Payment should be made to a Non Resident; (b) There should be a Permanent Establishment in connection to which the Royalty was incurred; and (c) The Royalty should be borne by the Permanent Establishment; Mere existence of a Permanent Establishment could not lead to the conclusion that Royalty arose in India, the liability should have been incurred in connection with as well as borne by the Permanent Establishment in India; The existence of an ‘economic link’ was essential for Royalty to be taxed in India and in the present case there was no such economic link between the taxpayer and the Permanent Establishment. [Source: DDIT Vs. SET Satellite (Singapore) Limited (ITAT Mumbai) dated June 25, 2010] Professional firms can have ‘Service PE’ in India and services rendered offshore for projects in India are also taxable in India Linklaters LLC *“the taxpayer”+, a UK-based limited liability partnership engaged in the practice of law, did not have a branch or office in India but rendered legal services in India. These services were rendered from its office in the UK and at times its partners and staff members visited India to render these services. During the tax year under consideration, the taxpayer’s partners and staff were present in India for a period exceeding 90 days. The taxpayer filed a return of income declaring ’NIL’ taxable income on the basis that it did not have a Permanent Establishment *“PE”] in India under the UK Treaty for its income to be taxable in India either as business profits or as income from Independent Personal Services *“IPS”+. The taxpayer argued that the Service PE rule was merely an illustration of the Basic PE rule and was to be considered as resulting in a PE only if it satisfied the Basic PE rule. Also, the taxpayer’s activities in India did not satisfy the requirement of ‘furnishing of services’ as it was an international professional enterprise rendering Page | 7
Tax & Regulatory Newsletter Issue 05 – AUGUST, 2010 NANGIA & CO. Chartered Accountants New Delhi – Mumbai - Dehradun services directly to its clients whereas the IPS article of the UK Treaty extended only to individuals and, hence, it could not be applied to a partnership like the taxpayer. The Assessing Officer rejected the taxpayer’s arguments and concluded that it had a PE in India under the Services PE rule and proceeded to tax its entire Income in relation to India projects (including services rendered from the UK office) on the basis of actual revenues received. On appeal, the first appellate authority agreed with the Assessing Officer on the existence of the PE but restricted taxation to the extent of services rendered in India. Upon appeal by both sides the Income Tax Appellate Tribunal ruled that – Though a UK partnership was a “person” under Article 3(2), the question whether it was a “resident of UK” was of question. Article 4(1) defined a “resident of a <strong>Co</strong>ntracting State” to mean a person “liable to tax in that State by reasons of domicile, residence, place of management or any other criterion of similar nature”. Also, according to the OECD Report on Partnerships, mere computation of income at the level of partnership was not sufficient to hold that the partnership firm was ‘liable to taxation’ in the residence country, however, this view was not correct and had also been rejected by India. A partnership was eligible to the benefits of the DTAA provided the entire profits of the firm were taxed in UK whether in the hands of the firm or in the hands of the partners directly; The Service PE formed part of the second category of the two heterogeneous categories of PE in the Indo-UK tax treaty which consisted of extensions of the basic PE rule and deemed PEs and hence did not need to satisfy the requirement of a Basic PE rule. Also, the term ‘rendering’ and ‘furnishing’ were interchangeably used and the term furnishing could not exclude the rendering of professional service directly to clients as suggested by the taxpayer; The IPS article of the UK Treaty could not be applied as it related to performance of services by individuals; As regards the quantum of profits attributable to the PE, the argument that by virtue of Article 7(2), the PE must be assessed by taking the value of services rendered by the PE at the market value of such services in India and not the price at which the taxpayer billed its clients was not acceptable. The fiction of hypothetical independence in Article 7(2) was confined to a PE’s transactions with its head office and branches and did not extend to transactions with third parties. The arms length principle in Page | 8
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DIRECT TAX - Nangia & Co

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