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CONTENTS
No.

Chapter no.

Page No.

Overview of International Taxation

Brief introduction on OECD model & UN model

Concept of withholding tax

11

Overview of section 206AA & Grossing up

18

Residential Status, Duet Residence, Concept of POEM for Companies

22

Business Connection u/s 9(1)(i)

25

Permanent Establishment

28

Capital Gains

35

Overview of Royalty & FTS

37

10

WHT liability on some common transactions

41

Import of materials
Buyers credit in case of imports
Clearing & Forwarding charges
Payment of freight to shipping company
Commission agent outside India
Bandwidth charges
Reimbursement of expenses
Salary
Remuneration to directors
Payment of college fees to university
Repatriation of money
Payment to conference speakers
E-commerce transactions
FTS for rendering consultancy outside India
Software payments

11

Secondment of employee to India

52

12

Recent circulars & amendments

55

13

Sample Form 15 CB

57

Chapter 1
Overview of International Taxation
1.1 Background: International taxation generally refers to the tax treatment of cross-national
transactions. Since each nation has its own tax rules and the rules of one nation are rarely
matched with those of another, it is possible that income will be taxed more than once
(sometimes referred to as double taxation) or that it will go untaxed by any jurisdiction.
The design of sensible tax policies for modern economies require that careful attention
be paid to their international ramifications. This is a potentially daunting prospect, since
the analysis of tax design in economies entails all of the complications and intricacies that
appear in closed economies, with the addition of many others, since multiple, possibly
interacting, tax systems are involved.

1.2

Principles of Taxation : There are three basic principles followed by different countries for
taxation:

1.2.1 Residence Based Taxation - The principle of residence-based taxation asserts that natural
persons or individuals are taxable in the country or tax jurisdiction in which they establish
their residence or domicile, regardless of the source of income. In the case of non-natural
persons such as companies or firms, the place of incorporation or the place where control
and management is exercised is deemed to be the place of residence. In the context of
income tax, the ability to pay of the residents of that country is fully measured by their
global income. Therefore, the principle of residence-based taxation of income envisages
the taxation of global income. Accordingly, India follows residence based taxation in case
of residents.

1.2.2 Source Based Taxation - There are individuals/entities whose residence is in one country
but their business is actually carried on in another country and their income is earned
in the latter country. In such cases, the principle of residence based taxation would be
inappropriate. Therefore, there is a view that the country which provides the opportunity
and facilities to generate income or profits should also have the right to tax the same.
This forms the underlying basis of the principle of source based taxation of income. India
follows source based taxation in case of non-resident.

1.2.3 Citizenship Based Taxation- Citizenship-based taxation (CBT) means that the government
taxes the worldwide income of citizens of the country, under the idea that citizens benefit
from that government, regardless of where they reside or where their income is generated.
Thus, in this method, payment of taxes is determined by citizenship rather than residency
or the source of income.Only two nations in the world have citizenship-based taxation:
USA and Eritrea in north-eastern Africa.

1.3

Concept ofDouble taxation: The interaction of two tax systems each belonging to different
country, can result in double taxation. Every country seeks to tax the income generated
within its territory on the basis of one or more connecting factors such as location of the
source, residence of taxable entity, maintenance of Permanent Establishment and so on.
Double Taxation of the same income in the hands of same entity would give rise to harsh
consequences and impair economic development. Double TaxationAvoidanceAgreements
(DTAA) between two countries, therefore, aims at eliminating or mitigating the incidence
of double taxation. DTAAs comprise of agreements between two countries, which, by
eliminating international double taxation, promotes exchange of goods, persons, services
and investment of capital.

Chapter 2
Brief introduction on OECD model & UN model
2.1 TheOrganization for Economic Co-operation and Development(OECD) is aninternational
economic organizationof 34 countries, founded in 1961 to stimulate economic progress
and world trade. It is a forum of countries describing themselves as committed to
democracyand themarket economy, providing a platform to compare policy experiences,
seeking answers to common problems, identify good practices and coordinate domestic
and international policies of its members.

1.3.1 Classification of DTAA:

On the basis of scope:

Comprehensive DTAAs- They provide for taxes on income, capital gains, etc. Comprehensive
agreements ensure that the taxpayers in both the countries would be treated equally and
on equitable basis, in respect of the problems relating to double taxation.

Limited DTAAs They refer only to income from shipping and air transport, or estates,
inheritance and gifts.

On the basis of parties to treaties:

Bilateral Treaties-DTAA entered between two countries.

Multilateral Treaties- DTAA entered between a group of countries e.g. convention

between Nordic countries including Denmark, Finland, Iceland Norway and Sweden.

2.1.1

An accord reached between member states of the OECD that serves as a guideline for
establishing tax agreements. The convention consists of articles, commentaries, position
statements & separate reports on evolving tax issues. Its primary applicability is in guiding
the negotiation of bilateral treaties between two or more countries.

Brief description of different articles of OECD:

S.No.

Particulars

Issues covered

Article 1

Person covered

Who can claim the benefit of

DTAA
Outlines the range of taxes
covered under DTAA
Definitions used in DTAA

Article 2
Article 3
Article 4

1.4

Different Models of Tax Treaties:

OECD Model-This model lays emphasis on residence based taxation. Developed countries
adopts this model in case of treaties with other developed countries.

UN Model-This model lays emphasis on source based taxation. Developed countries

adopts this model in case of treaties with developing countries or between two developing
nations.

Article 6

US Model-This model is basically used by USA for all treaty negotiations. This model had
influence on existing treaty between India & US.

Article 7

Article 5

Article 8

Description

Resident of any or both the

contracting state
Taxes Covered
Taxes on income & capital,
Trade Taxes, Profit Tax, etc.
General
Meaning of India, Person,
Definitions
Company etc
Resident
Provisions relating to
Resident means either of the
residential status of a person person is liable to tax as per
including Tie-breaker Rule
his domicile/residence.
Permanent
What would constitute a
PE means fixed place of
Establishment
PE and what would not
business, branch, factory,
considered as PE
Agency PE, Installation &
Construction PE, Service PE,
etc...
Income from
Taxation of income of resident Primary right to tax is for the
Immovable
from immovable property
country where the property is
Property
located.
Business Profit
Business income earned by
Business profit attributable to
an resident enterprise of
PE in that country is taxable.
one country from business
performed in other country
Shipping, inland
Taxation of profits and
Taxable in the country in
airways and water gains from operations of
which the place of effective
transport
ships in international inland
management is situated.
waterways and aircrafts

Article 9

Associated
Enterprise

Article 10

Dividend

Article 11

Interest

Article 12

Article 13

Article 14

Article 15

Royalty Fees for

technical services
(FTS)
Capital Gain

Independent
Personal
Services(IPS)
Income from
employment

Enterprise in one country

controls other enterprises
capital management in other
country
Paid by the resident company
of one contracting state to
another contracting state
Interest on Debt/securities/
arising in one contracting
state and paid to the resident
of other contracting state.
Royalty means considerations
for right to use of literary,
scientific or artistic work.
Gains from alienation of
movable and immovable
property
Income from professional
service such as doctor lawyer
etc
Income by the way of salaries
etc

Article 16

Directors fees

Fees derived by the member

of the board.

Article 17

Artistes &
Sportsmen
Pension

Income by theater artist,

entertainer and sportsmen.
Covers pension and
other similar payment
in consideration of past
employment.
Citizen of one country
renders services on behalf of
government of that country in
other country e.g. salary
Students/trainees who are
resident of host country only
for the purpose of education
or training.

Article 18

Article 19

Government
Services

Article 20

Students

Article 21

Other Income

Residuary article

Transfer pricing rules are

applied as per the Domestic
Law.

Article 22

Capital

Primary right to tax is for the

country of which the recipient
is resident.
Primary right to tax is for the
country of which the recipient
is resident.

Article
23A

Exemption
method

Right to tax is for the country

of which the recipient (i.e. the
licensor) is resident.
Right to tax is for the country
where property is located
Right to tax is for the country
of which the recipient is
resident.
Right to tax vests with the
country of the residence of
person employed
Right to tax is for the country
in which the company in
which person is director is
residence.
The income is derived in the
source country.
Relates to pension and similar
payments.

Salaries wages paid by the

government of one country to
individual resident to another
country
Payment received by the
student for his maintenance
education for outside the
country are exempt from tax
in the host country.
Income taxed only in the
country of residence

Article
23B

Article 24

Article 25

Article 26

Article 27

Article 28

Taxation of capital (movable/

immovable property) owned
by resident of one state in
another state
Method for granting relief for
Doubly Tax income

Tax on immovable property

will be imposed by the
country in which it is located.

Method by which the

resident state exempt the
tax resident from taxing the
income already taxed by the
contracting state.
Credit method
Method for granting relief for Method by which the resident
Doubly Tax income
state allows deduction from
the domestic income tax to
the extent of the taxes paid
in the relation to the same
income in other contracting
state.
Tax credit method Non Discrimination of nonNational of one country
resident/ non-citizens in
shall not be subject in other
either of the contracting state country to any taxation which
is more burdensome as
compared to the nationals of
other country.
Mutual
Reference of case to the
Where taxation is not in
Agreement
competent authority
accordance of this convention,
Procedures
the case may be presented
to the competent authority,
where the competent
authority of the both the
states would try and resolve
the matter.
Exchange of
Between two contracting
The competent authority shall
information
states to facilitate better tax
share the specific information
administration.
for carrying out the provision
of the DTAA or domestic laws
of contracting states.
Assistance in tax
Mutual co-operation for
The contracting state shall
collection
enforcement of compliance
lend assistance to each other
with tax laws.
for collection and recovery to
taxes.
Members of
Privileges to members of
Nothing in this convention
diplomatic
diplomatic mission to remain. shall affect the fiscal privileges
mission
of the members of the
diplomatic mission under the
general rules of international
law.

Article 29

Article 30

Territorial
Extension

Entry in to force

Scope to extend applicability

of the treaty

Effective date of the treaty

2.2 UN Model: The United Nations Model of Double Taxation Convention between Developed
and Developing Countries (the United Nations Model Convention) forms part of the
continuing international efforts aimed at eliminating double taxation.

Chapter 3

The applicability of the state

may be extended to any
territorial of either of the
states which has specifically
been excluded or for which
either of the state shall be
responsible for internationally
relations.
Treaty provision becomes
effective in respective
contracting states on the
dates specified in relevant
treaty.

The UN Model Convention generally favors retention of greater so called source country
taxing rights under a tax treaty - the taxation rights of the host country of investment -as
compared to those of the residence country of the investor. This has long been regarded
as an issue of special significance to developing countries, although it is a position that
some developed countries also seek in their bilateral treaties.

Concept of Withholding Tax

3.1

There has been a phenomenal increase in cross border transactions both for trade as well
as investment due to the flattening of the world.Due to this, the importance of Section
195 of the Income Tax Act, 1961 is increasing since it impacts every commercial venture
dealing in any cross border transactions. The objective is to ensure, as best as possible,
that the tax liability on the income element, on the amount paid, should be deducted at
source itself so that the department is not put to the hassles of recovering it from a nonresident whose connections with India may be transient or whose assets in India may not
be sufficient to meet the tax liability. It is very pertinent to note that this section is wider
in scope than all the other TDS sections in so far as all payers are covered and there is also
no threshold exemption.

3.2

Procedure for remittance-

Step 1 Check if payment is covered under 195

Step 2 Verify the factual and basic documents

Step 3 Make classification of transaction on the basis of nature of income i.e. Passive
Income or Active Income

Step 4 Check taxability under domestic tax

Step 5 Check taxability as per DTAA along with the availability of Tax residency certificate.

Step 6 Check the rates of TDS applicable

3.3

Snapshot of Section 195

Sec 195(1): Liability on payer to deduct tax on payments made to non-residents
Sec 195(2): Application by payer for lower / Nil withholding
Sec 195(3): Application by payee for Nil withholding
Sec 195(4): Validity of certificate of lower/ nil deduction
Sec 195(5): Empowers CBDT to notify rules
Sec 195(6): Empowers CBDT the manner of furnishing information
Sec 195(7): CBDT to specify class of persons or cases where application to AO is compulsory
Sec. 195A: Income payable net of tax

10

11

3.3.1

Scope & Chargeability [Section 195 (1)]

3. Salary paid by government to citizen of India for services rendered by him outside
India

Deduction under this section is to be made on earlier of credit or payment of sum

chargeable to tax at the rates in force on payments made.

4. Interest payable by government or resident to NR in respect of debt incurred or

money borrowed and used for the purpose of business & profession carried on by
such person in India.

Exception:

5. Dividend Paid by Indian Company outside India

Section

Description

Sec 192

Salary

Sec 194LB

Interest payable by an Infrastructure Debt Fund referred u/s 10(47)

Sec 194LC

Interest on approved foreign currency loans obtained by an Indian

company

Sec 194LD

Income by way of interest on certain bonds and Government securities

Sec 115O

Dividend referred in Dividend Distribution Tax

Foreign Company means a company which is not a domestic company (domestic company
means an Indian company, or any other company which, in respect of its income liable to tax
under this Act, has made the prescribed arrangements for the declaration and payment, within
India, of the dividends (including dividends on preference shares) payable out of such income).

As per Section 5, Non-residents (including NRIs) are chargeable to tax only on income which is
received or deemed to be received in India or which accrues or arises or deemed to accrue or arise
to him in India.

However, scope of WHT obligation u/s 195 extended to all persons including non-residents
irrespective of them having a residence or place of business or business connection or any other
presence in India. There is obligation to withhold tax even without any territorial nexus.

6. Royalty payable by government or resident to NR in respect of services utilized for the

purpose of business or profession in India or for earning any income from any source
in India
7. Fees for technical services payable by government or resident to NR in respect of
services utilized for the purpose of business or profession in India or for earning any
income from any source in India
The sum paid to a non-resident should be chargeable under the provisions of the Act, for deduction
of tax at source u/s 195
The words Chargeable under the provisions of the Act used in the section qualify both interest
as well as any other sum. Hence, if both are not chargeable to tax, then there is no requirement
to deduct tax u/s 195.

3.3.2

Payers application for lower/ NIL WHT certificate [Sec 195 (2)]
Application to be made to tax officer by the payer to determine portion of payment
chargeable to tax and thereof determined tax shall be deducted under sub-section (1)
only on proportion of sum which is so chargeable.

3.3.3

Payees application for lower/NIL WHT certificate [Sec 195 (3)]

Payee may make an application in the prescribed form to the AO for the grant of a
certificate authorising him to receive such interest or other sum without deduction
of tax under that sub-section, and where any such certificate is granted, then payer
so long as the certificate is in force, may make payment of such interest or other sum
without deducting tax thereon.
Application can be made in prescribed format:

Section 9 deems the following income as accruing or arising in India:

1. Any income accruing or arising, directly or indirectly from any business connection
in India or through any property in India or through any asset or source of income in
India or through the transfer of capital asset situated in India

Form No 15C prescribed in case of banking company

Form No 15D in other cases
Conditions for grant of license prescribed in Rule 29B

2. Income under the head salary chargeable if earned in India

12

13

3.3.4

Validity and rules for grant of certificate [Sec 195 (4)]

Certificate granted u/s 195(3) valid till specified period or till cancellation by AO whichever
is earlier.

3.3.5

Applicability of Surcharge: Rates prescribed under the Act has to be increased by

Surcharge and Education Cess & SHEC at the prescribed rates. However, if the payment is
as per DTAA rates, no requirement to increase by Surcharge or EC or SHEC.
3.5

For the purpose of TDS on any income payable in foreign currency, the rate of exchange to
be used shall be telegraphic transfer buying rate of such currency as on the date on which
tax is required to be deducted at source.

Power of CBDT to issue notifications [Sec 195(5)]

Board may make rules specifying the cases in which, and the circumstances under which,
an application may be made for the grant of a certificate under sub section (3) with the
specified conditions.

Telegraphic buying rate means the exchange rate adopted by State Bank of India for buying
such currency.
3.6

3.3.6

Furnishing information [Sec 195 (6)]

Tax Residency Certificate (TRC)

Rule 37BB introduced

PAN card copy

Information to department in Form 15CA

Self declaration relating to Permanent establishment

CA Certificate to be obtained before payment Form

Information to be furnished electronically.

Moreover, Section 195(6) has been amended in the Finance Act 2015 and which states
thatForm 15CA / CB needs to be necessarilyfiled for all remittances, whether chargeable
to tax in India or not.All the assessees requested for submission of Form 15CA/CB for all
outward cross border remittances including those against imports with effect from 1st
June 2015.

Conditions & procedure to avail DTAA benefit by NR:

The Non Resident deductee has to submit the following documents with deductor to avail
the benefit of lower TDS rates as per DTAA:

Requires the payer to furnish payment related information

Ref: Circular no. 4/2009 dated 29-06-2009 providing the manner for submitting and
processing the details of payment.

Exchange rate for TDS on non-resident:

3.7

TRC Concept:
Tax Residency certificate (TRC) is the certificate duly verified and issued by the Tax
Department or Government of the country of which NR claims to be a resident for
the purpose of tax. The TRC certificate can be obtained from the Government or Tax
authorities of the particular country of Non-Resident.
A TRC should contain the following details
I. Name of the assessee
II. Status of the assessee (Individual, Firm, Company Etc.)

3.3.7

3.4

14

Power of CBDT to specify class of persons or cases where application to AO u/s 195(2) is
compulsory: [Sec 195 (7)]

III. Nationality
IV. Country

Board empowered to notify class of persons (payees) required to apply to tax officer for
determination of WHT, irrespective of whether payment is taxable in India or not .

V. Assessee Tax Identification or Unique Identification number of the relevant

Country

TDS Rates :

VI. Residential status for the purpose of tax

Relevant rate in force as per chapter XVII-B. In case payee not having valid PAN, then TDS
rate prescribed chapter XVII-B (Finance Act) or 20% whichever is higher will apply. While
calculating TDS rates, we need to consider the provisions under DTAA for the relevant
country if any. In case payee fulfilling all the conditions as prescribed in the DTAA then
rates as per DTAA will apply.

VII. Validity Period of the certificate

VIII. Address of the applicant
If any detail is missing in TRC, the declaration from the NR to be taken in Form 10F.

15

3.8

Form 15CA and Form 15CB

I. Remitter to obtain certificate of a Chartered Accountant in Form 15CB
Some focus area in issuing Form 15CB:
Nature of the income FTS, Royalty, Interest, etc.

Tax withheld not paid

Penalty u/s 271C

Penalty, not exceeding the amount

Tax not withheld or short
of tax not withheld can be withheld
withheld
by Joint Commissioner.

Whether payee has a PE in India? If yes, attributable profit.

Whether TRC is sufficient evidence for claiming treaty benefit?
II. Remitter to access the income tax e-filling website and electronically upload the
remittance details in Form 15CA. After filling, remitter is required to take a print of the
filled undertaking (Form 15CA) with system generated acknowledgement number.
III. The duly signed paper Form 15CA (undertaking) and Form 15CB (certificate) is then
submitted in duplicate to the RBI / authorized dealer
IV. RBI / authorized dealer to remit the amount

Penalty, not exceeding the amount

of tax not paid can be levied by AO.

Penalty u/s 221

Penalty of INR100 per day of default subject to maximum of tax deductible

Penalty u/s 272A

Failure to file TDS return

Penalty u/s 271-I

Non-furnishing of information or furnishing of incor- PenaltyofINR 1,00,000 per transrect information under sec- action
tion 195(6)

Prosecution
276B

u/s

Failure to pay tax deducted

Minimum: 3 months
Maximum: 7 years

V. A copy of Form15CA & Form15CB is forwarded by RBI / Authorized Dealer to the

concerned Assessing Officer

3.9

Consequences of Non Compliance of TDS:

Where any person, who is required to deduct any sum in accordance with Income Tax Act
but does not deduct, or does not pay or after deducting fails to pay shall deemed to be
assesse in default and the assessee shall be liable for interest and penalty.

Applicable Section Nature of Default

Consequence

40(a)

Withholding tax not deduct- Disallowance of expenses in comed or not deposited within putation of taxable income of payer;
prescribed time
deduction in year of payment

201(1)

Tax not withheld/ deposited Recovery of tax not withheld/ deappropriately

posited or short withheld/ deposited

Interest
u/s 201(1A)

16

Interest @ 1% per month or part of

the month for non-deduction. FurTax not withheld/ deposited ther, interest @ 1.5% per month
appropriately
is payable from the date of deduction till the date when tax is actually
paid.

17

Chapter 4

Bosch Ltd. v. ITO (2013) 141 ITD 38/155 TTJ 354 (Bang.)(Trib.)
Facts: Manufacturing company enters into a repair contract with its foreign suppliers for
which payments were made net of taxes.

Overview of section 206AA & Grossing up

4.1

Sec 206AA
The provisions of Section 206AA of the Income tax Act, 1961 have been reproduced
hereunder:(1) Notwithstanding anything contained in any other provisions of the Act, any person
entitled to receive any sum or income or amount, on which tax is deductible under Chapter
XVIIB shall furnish his Permanent Account Number (PAN) to the person responsible for
deducting such tax, failing which tax shall be deducted at the higher of the following rates,
namely:

4.2

Held:
Sec 206AA applies to all income recipients whose income is taxable under Income Tax Act
Should grossing up be done at applicable rates in force or at 20%?
While grossing-up u/s 195A, rates in force should apply and not the higher rate of 20% u/s
206AA.

i. at the rate specified in the relevant provision of this Act; or

Other Issues:

ii. at the rate or rates in force; or

a) Whether sec 206AA overrides the treaty rates?

iii. at the rate of 20%.

In case of Non-residents covered by tax treaties following further issues may arise on
applicability of sec 206AA:
1. Whether sec 206AA applies where TDS Rates as per treaty is NIL?

Section 195A: Concept of Grossing up/ Income to be paid Net of tax

Grossing up for computing TDS to be done in cases where the payer bears the tax liability.
The grossing up is to be done with the rates in force.

For example 1: A Ltd want to send Rs. 1000 to a Non-resident company net of taxes. The
rate of TDS as per IT Act is 10%, effective rate turns out to be 10.5575% after including
surcharge & cess, then grossing up will be done at 10%.
PARTICULARS

Rs.

Net payment

1,000

Rate in force as per section 2(37A)

10%

Grossed amount [Rs. 1,00,00,000 100 100 10]

1,111.11

Tax deductible under section 195 at rates in force i.e 10%

111.11

Issues
:
Whether grossing up would be required to be done in case payment is made net of tax
to a foreign company which does not have a PAN in India, considering the provisions of
section 206AA??

18

Issue:
Rate applicable for grossing up in absence of PAN for Non resident

2. Whether provisions of section 206AA cannot operate to override treaty rates?

The similar matter came to be decided recently before a Pune bench of ITAT in case
ofSerum Institutewherein what was to be decided was whether a resident who has to
deduct the TDS of non-resident u/s 195 who does not have PAN can deduct tax at the rate
prescribed in DTAA if the same is beneficial applying the provisions of Section 90(2) of the
Act or whether Sec 206AA would apply which states that TDS is to be deducted at rates in
force or rates specified in relevant provisions or 20 % whichever is higher.
Pune Bench in its order considered the decision of Bangalore tribunal which had stated
that 206AA overrides the Income Tax Act, 1961. But whether treaty was also overridden
by the provisions of 206AA was not before the Bangalore bench of tribunal.
The DTAA is entered into between 2 countries for the purpose of Avoidance of Taxation
and whether machinery provisions of TDS under Chapter XVII-B could decide the rate
of withholding as against what has been decided by the countries mutually under the
agreement. It was held that section 206AA of the IT Act would not override provisions of
a DTAA to the extent that the latter is more beneficial to a taxpayer.
4.2.1 Case Study:
For grossing up provision u/s 195A, tax chargeable shall be grossed up at the rates in
force. Rates in force is defined in Sec. 2(37A) as the Rates of income-tax specified in the
Finance Act or the rates specified in the DTAA, whichever is lower will be applicable rates
in force by virtue of Section 90 or Section 90A.

19

Case 1: When PAN is available

(i) at the rate specified in the relevant provision of IT Act i.e.10.5575%

Example 1: When rates of both Income tax & treaty are same but effective tax under income tax
comes out be greater because of applicability of surcharge & cess:

(ii) at the rate or rates in force; i.e. lower of 10.5575% or 15%

Suppose rates as per IT Act is 10%, effective rate turns out to be 10.5575% after including
surcharge & cess and the treaty rate is 10% (rates of treaty are not to be increased by
surcharge & cess), then grossing up will be done at 10%.
PARTICULARS

Rs.

Net payment

1,000

Rate in force as per section 2(37A)

10%

Grossed amount [Rs. 1,00,00,000 100 100 10]

1,111.11

Tax deductible under section 195 at rates in force i.e 10%

111.11

(iii) at the rate of twenty percent. i.e. 20%

i.e. at 20 % in this case
PARTICULARS

Rs.

Net payment

1,000

Rate in force as per section 2(37A)

10.5575%

Grossed amount [Rs. 1,00,00,000 100 (100 10.5575)]

1,118.037

Tax deductible under section 195 read with section206AAat the rate of
20 per cent

223.607

Example 2: When effective rates under Income Tax is lower than rates under treaty
Suppose rates as per IT Act is 10%, effective rate turns out to be 10.5575% after including
surcharge & cess and treaty rate is 15% (rates of treaty are not to be increased by surcharge
or education cess), then grossing up will be done at 10.5575%
PARTICULARS

Rs.

Net payment

1,000

Rate in force as per section 2(37A)

10.5575%

Grossed amount [Rs. 1,00,00,000 100 (100 10.5575)]

1,118.037

Tax deductible under section 195 at rates in force i.e. 10.5575%

118.037

Case 2: When PAN is not available

Suppose rates as per IT Act is 10%, effective rate turns out to be 10.5575% after including
surcharge & education and treaty rate is 15 %( rates of treaty are not to be increased by
surcharge or cess), then grossing up will be done at 10.5575%. Consequently, the payment
will be grossed up by applying the rate of 10.5575 %. Deduction will be at rate higher of:

20

21

Chapter 5
Residential Status, Duet Residence & concept of POEM for Companies
5.1

Chart for Determination of Residency of Dual Resident by Tie Breaker Rules

NON RESIDENT INDIVIDUAL : As per section 6, Individual will be Non Resident if he does
not satisfy any of the two basic conditions:
(i) Stay in India for 182 days or more during relevant previous year; or
(ii) Stay in India for 62 days or more during relevant previous year and 365 days or more
during 4 previous years immediately preceding relevant previous year.
However, in following cases, the 2nd basic condition will not be checked. If individual
satisfies 1st basic condition, then he will be resident, otherwise non-resident.

(a) Indian Citizen - going abroad for employment purposes during relevant previous year.
(b) Being a crew member of an Indian Ship - coming on a visit to India during relevant
previous year.
(c) Person of Indian Origin (Person who himself, his parents or his grandparents were
born in undivided India) - coming on a visit to India during relevant PY.

5.2

NON RESIDENT COMPANY :

A foreign company (company which is not registered in India) can be non-resident when
the place of effective management is not situated in India.

5.3

Concept of Residence : Concept of residence can be classified into 2 parts:

5.3.1 For Individuals:An Individual is liable to tax by virtue of his domicile, residence, place of
incorporation, place of management, etc. but excludes one who is liable to tax in respect
only of income from source in that state.

By applying above principle, one can conclude that a person has to be a resident of one or
both the contracting states and then only, provisions of treaty will apply.

But sometimes a person becomes resident of two or more states under the domestic law
of that state. This creates confusion as to who will tax the global income and various issues
arises to its taxability. A person who is resident of two states by virtue of domestic law is
known asDual Resident.The residency of such dual resident is known asDual Residency.

This dual residency needs to be broken and the individual needs to assign residency of
one of the states. Hence, to determine residency the Tie-breaker test needs to be applied.
This is explained in below mentioned chart:

5.3.2 For Legal Entities/Corporations:

For Legal entities the test applied for its residency is place of its incorporation or place of
effective management.
Legal entities are resident of that state in which it has its incorporation. Place of

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23

Chapter 6

incorporation is certain and preferable test as place of incorporation does not change
from time to time and provides simplicity in determination of residency. Many countries
used this as a basis of determining the residential status of corporations.
Place of effective management is less certain as now a days business is controlled from
many countries. This creates confusion and complications.
5.4

POEM : Place of Effective Management

In respect of a person being a company the conditions of residency are contained in clause
(3) of section 6 of the Act. Under the said clause previously, a company was said to be
resident in India in any previous year, if
(i) It is an Indian company; or
(ii) During that year, the control and management of its affairs is situated wholly in India.
The concept of control and management is now replaced with the concept of Place of
Effective Management (POEM) which is an internationally accepted concept (OECD and
tax treaties use POEM for determining tax residency of a corporate entity).
Explanation For the purposes of this clause place of effective management means
a place where key management and commercial decisions that are necessary for the
conduct of the business of an entity as a whole are, in substance made.

OECD Definition of POEM:

OECD defines POEM as The place of effective management is the place where the key
management and commercial decisions that are necessary for the conduct of the entitys
business are in substance made.
US Model Convention to POEM:
The UN Model Commentary in paragraph 45 on article 1 states POEM as follows:

6.1

Business Connection:
The expression business is defined in the Act as any trade, commerce, manufacture
or any adventure or concern in the nature of trade, commerce or manufacture, but the
Act contains no definition of the expression business connection. The expression
business connectionundoubtedlymeanssomething morethanbusiness.
A business connection in section 9 involves a relation between a business
carried on by a non-resident which yields profits or gains and some activity in
the taxable territories which contributes directly or indirectly to the earning of those
profits orgains.It predicatesan element of continuity between the business ofthe nonresidentandthe activityinthe taxableterritories. An isolated transaction is normally not
to be regarded as a business connection.
A relation to be a business connection must be real and intimate, and through
or from which income must accrue or arise whether directly or indirectly to the nonresident.[CIT v R.D.Aggarwal & Co. andothers 56ITR20(SC) and Barendra Prasad Roy
v ITO129ITR295(SC)]. The business connection is the Indian equivalent of PE and also
broader in connotation and is used effectively to tax the income of Non-Residents in
India. Any profit of non-resident which can be reasonably attributable to such part of
operations carried out by its business connection in India are deemed to be earned in
India. [Explanation 1 to Section 9].
SECTION 9(1)(i):Section 9(1)(i) provides that income is deemed to accrue or arise in India
if it accrues,directly or indirectly
through or from any business connection in India or
through or from any property in India or

the mere fact that meeting of BODs of a company take place in a country is not sufficient
to conclude that this is where the company is effectively managed. Also, some countries
have replaced para 3 of Article 4 (tie breaker rule), which deals with the cases of dual
residence of legal persons on the basis of their place of effective management, by a rule
that leaves such cases of dual residence to be decided under the mutual agreement
procedure.

through or from any asset or source of income in India or

Further UN commentary after considering the OECD commentary provides to establish

POEM circumstances which may, interalia be taken into account as follows:

Existence of close, real and intimate relationship

The place where the company is actually managed & controlled

The place where the decision making at the highest level on the important policies
essential for the management of company takes place

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Business Connection u/s 9(1)(i)

The place that plays a leading part in the management of a company from an economic &
functional point of view
The place where most important accounting books are kept.

through the transfer of a capital asset situate in India

The landmark judgment of the Andhra Pradesh High Court inGVK Industries Ltd. v. ITOhas
laid down following principles which needs to be satisfied in order to constitute BC:

Commonness of interest
Continuity of activity or operation
A stray or isolated transaction is not enough to establish a business connection [Anglo
French Textile Co Ltd v CIT
Business connection shall include any business activity carried out through a person
who, acting on behalf of the non-resident,

25

(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the
nonresident, unless his activities are limited to the purchase of goods or merchandise for the
nonresident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from
which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that nonresident and other non-residents controlling, controlled by, or subject to the same common
control, as that nonresident:

However, such business connection shall not include any business activity carried out
through a broker, general commission agent or any other agent having an independent
status, if such broker, general commission agent or any other agent having an independent
status is acting in the ordinary course of his business. Further, an agent working mainly
for Non-Resident or, that Non-Resident and other Non-Residents who exercise control
over one another or are under common control is not regarded as having an independent
status.
Income not to be treated as arising from or through Business Connection:
(a) Income reasonably attributable to the operations carried out in India will be deemed to accrue
or arise in India in case all the operations of a business are not carried out in India;

If the income from Indian operations cannot be definitely ascertained, then, the same may be
computed by apportionment:

i. at such percentage of Indian turnover as determined by the Assessing Officer;

ii. Taxable profits = Total profits Receipts accruing/arising in India/Total receipts of
business

from the expression business as defined under the Act. However, in each case the
question whetherthereisa business connectionfromor through which income arises or
accruesmustbe determinedupon the facts and circumstances of that case.
In case of NR one needs to see that whether entire operations is situated in India or not :

If the entire operations are carried out in India, the entire amount will be taxable in India.

When operations are carried out partly in India & partly outside India then, only that portion
of the income that can be attributed to the operations carried out in India, will be taxable.

If the operations are carried out entirely outside India, no taxability will arise in India.

From thereading of above provisions, it can be concluded that fora relation tobetreated
asbusinessconnection, followingconditions needs to be satisfied:

a business in India

a connection between non-resident and that business

a non-resident has earned an income through such connection

continuity about the business connection

Itmay be noted that Supreme Court in case ofCarborandum Co. v CIT reported in 108
ITR 335has taken a view that in order to rope in the income of a non-resident under the
deeming provision, it must be shown by the department that some of the operations
were carried out in India in respect of which the income is sought to be assessed. Taking
into consideration the decision of the apex court, it can be said that onusof proof is on
revenue to show that the operations werecarried out in India.

iii. in any other manner as considered suitable by Assessing Officer

(b) Income of a Non-Resident in respect of operations confined to purchase of goods in India for
the purpose of export;
(c) Non-Resident engaged in business of running a news agency/publishing newspapers,
magazines, journals, income arising through and from activities confined to collection of news
and views in India for transmission out of India shall not be deemed to accrue or arise in India.
(d) Income arising through or from operations confined to shooting of any cinematograph films in
India to a Non-Resident being:

i. An Individual who is not an Indian citizen

ii. A firm not having a partner who is either an Indian citizen or Resident in India; and
iii. A company not having any shareholder who is either Indian citizen or Resident in
India
In the case of Blue Star Engineering Co. (Bom) Pvt. Ltd. Vs CIT,it was held that the expression
Business connection is an expression of wide and indefinite import and is different

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27

Chapter 7

PE is generally classified into six categories:Fixed place PE ;

Permanent Establishment
7.1

Deemed PE

Concept :

Construction PE (building site or construction);

Permanent Establishment (PE) under DTAA is to be understood with reference to the

definition of Permanent Establishment provided in Article 5 in the relevant DTAA. Under
the DTAA, right of the contracting States to tax the business profits of an enterprise of
other contracting State arises only if the enterprise carries on its business in the first
mentioned State through a PE situated therein.
The PE concept is a measuring tool to determine the right of a country to tax the profits
of an enterprise which is resident of another country and is generally used in parlance of
cross border business and taxability of the income generated. PE may be defined as fixed
place of business through which activities of an organization are wholly or partially carried
on.
The most important issue in the treaty based international fiscal law is the concept of
Permanent Establishment (PE). All the model conventions namely, UN Model, OECD
Model and use PE as the main instrument to establish taxingjurisdictionover a foreigners
business activities.
According to the concept of PE, the profits of an enterprise of one Contracting State are
taxable in the other state, only if the enterprise maintains a PE in the later state and only to
the extent that profits are attributable to the PE. Thus, a legal concept, PE is a compromise
between source state and residence state for purposes of taxation ofbusiness profits. The
term must be understood so as to arrive at that degree of economic penetration, which
according to treaty partners, justifies a nation in treating a foreign person in the same
manner as domestic persons. Profit attributable to a PE, in the State of Source are either
exempted in State of Residence or the State of Residence allows credit of taxes paid by the
PE on such profits. To this extent, the taxing jurisdiction by the State of Residence is said to
be transferred to the State of Source, where the person needs to file his return of income
and comply with domestic tax laws.
Thus, the term PE has been exhaustively defined by Article 5(1), a PE exists if the following
conditions are satisfied:

There is an enterprise carrying on a business

There is a place of business

That place of business must be at the disposal of the enterprise

This place of business must be fixed

The business of the enterprise is carried on wholly or partly through this fixed place of business

According to the proposed OECD amendment, the above mentioned conditions should
be examined at each point of time whenever the question of determination of PE arises.

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Installation or assembly project PE (criteria duration of each installation project);

Service PE, i.e.;
Dependent Agency PE, i.e., the enterprise does not have any economic or functional
independence.

7.2

Fixed Place PE:

PE under domestic tax laws is inferred from business connection. In order to establish
business connection, a real and intimate relation must exist between trading activities
carried on outside India by a non-resident and activities within India and such relation
shall contribute, directly or indirectly, to earning of income by non-resident in his business.
A course of dealing or continuity of relationship and not a mere isolated or stray nexus
between business of non-resident outside India/ foreign country and activity in India
/ foreign country, would furnish a strong indication of business connection in India /
foreign country. However, mere existence of business connection / PE does not attract tax
liability since there should be income attributable to PE activities in the country where PE
exists.
The concept of fixed place of business under the Income tax Act is not different from
general provisions of Article 5(1) of the Model Conventions and other Indian tax treaties.
Various factors have to be taken into account to decide a Fixed place PE which interalia
include right of disposal over the premises. However, no strait jacket formula can be laid
down. The taxpayer should have the element of ownership, management and authority
over the establishment. It is not necessary that the place may be owned, rented or leased
by an enterprise; factual use or exercise of such right will have a greater bearing. Even if
the place is at the disposal of the foreign enterprise for its business purposes, i.e., the
foreign enterprise has the ability to exercise some right or domain or control over the
place, it will constitute a Fixed Place PE. Even illegal occupation can constitute a PE.
The concepts of fixed place PE are:a) There must be a fixed place of business (situs test);
b) The business must be carried on from that place(business test);
c) The fixed place of business must be located in a certain territorial area (locus test);
All the above three tests (locus, situs and business activity) must be satisfied and the

29

presence should be visible in the other contracting state. Place of business covers premises
as well as tangible or intangible assets used for carrying on the business. Movable places
of business with a temporary fixed location will meet the locus test. Activities carried out
within a defined geographical location could constitute a PE; e.g., a diving offshore vessel
functioning within a defined area, dealer selling merchandise from a mobile van.

ii. Maintenance of stock of goods solely for the purpose of processing by another
enterprise;
iii. Maintenance of a fixed place of business solely for
a) Advertising;

A. The use of the fixed place of business must last for a certain period of time;

b) Supply of information;

No minimum threshold provided under the Indian law;

c) Scientific research;

An isolated activity cannot lead to establishment of a fixed place PE as the ingredients of

regularity, continuity and repetitiveness are essentially missing;

d) Other similar activities which have a preparatory or auxiliary character.

One of sine qua non of a fixed place PE is that fixed place through which business is
carried on should be at the disposal of the taxpayer and, in order to satisfy the disposal
test, the taxpayer must have element of ownership, management and authority over
establishment. The place has to be owned, rented or otherwise at the disposal of the
taxpayer. No formal legal right to use that place is required. For example, a PE can exist
even where an enterprise illegally occupied a certain location where it carried on its
business. Further, even the effective power to use that location as well indicates existence
of a PE. It is also not necessary that the place of business must be attached to the ground;
even equipment can constitute the PE.

If a non-resident is carrying its activities through a place which is exclusively available to

its business in India, then that place will be deemed to be its fixed place PE even if the
same is used for a day;
B. The taxpayer must have a certain right of use over the fixed place of business;
i. Place should be at the disposal of the foreign enterprise for the purpose of its business
activities;
ii. The foreign enterprise should have the ability to exercise some right or dominion or
control;
iii. The place may be owned, rented or leased;

The only criterion is that the place should be fixed and there must be certain degree of
permanence (Nimbus Sport International Pte Ltd. v. DDIT) in the context of the nature of
the business being carried out but no time period test is prescribed for permanence.

iv. Legal right to use need not be the sole determinant; factual use or exercise of such
right will have a greater bearing;

The disposal test also gets satisfied if the non-resident providing services render services
through the deputation of employees in the premises made available by the resident.

v. Even illegal occupation could constitute a PE.

Provision of professional or personnel services can also create a fixed place PE if the
professional services are exercised in the other country and the non-resident service
provider has the right to use the residents premises. The access given by the resident
company to the technical and professional personnel deployed to work in a given space
will give rise to a fixed place PE. In such a case the disposal test also gets satisfied.
A taxpayer, who is obliged to perform independent personal services without having a PE
of his own, is deemed to have a PE where he performs his services.

C. The activities performed through the fixed place of business must be of a business
character (business activity test)
i. The definition of PE requires that the business of the foreign enterprise, wholly or
partly, ought to be carried out through the fixed place;
ii. Place of business must serve the business activity and not be subject to it;
iii. The use of the premises by an agent for the purpose of the business of the principal
may lead to an inference that such premises are at the disposal of the principal and
therefore constitute a PE (Galileo International Inc v. DCIT (2009). Similarly, in ACIT
v. DHL Operations BV (2005) the office of a local courier company was considered to
constitute a PE for the foreign company engaged in providing courier services since
the foreign company delivered packages to the local courier company for onward
delivery to the addressee.
The following areexcludedfrom the definition of PE:
i. Use of facilities solely for storage or display of merchandise;

30

7.3

Deemed PE:

Following places will be considered as deemed PE under Article 5(2):

Branch,
Office,
Factory,
Workshop,
Warehouse,

31

 Sales outlet

7.5

If the subsidiary is substantially controlled and influenced in functional matters by the

foreign parent, i.e., it is not independent and do not bear any significant risk as ultimate
responsibility lay with the foreign parent, the subsidiary can be said to be a dependent
agent PE of the foreign parent company. Furthermore, where a wholly owned subsidiary
is created for purpose of attending business of a foreign parent in a particular country, it
will be treated as PE of the foreign parent. However, the subsidiary will not be a PE of its
foreign parent merely because they have a director in common (ITO v. Pubmatic India (P)
Ltd (2013).

Place of Management
7.4

Installation PE
The OECD Model Treaty Article 5 includes specific provisions in paragraph 3 that a
building site or construction or installation project constitutes a treaty permanent
establishment only where it lasts more than 12 months. Of course particular treaties
may vary from the model in this respect and indeed different durations are included
in many of the Indias treaties. And, for clarity in the model treaty, 12 months duration
has been taken to be a sufficient indication that the activity is a fixed place of business
permanent establishment.

7.6

The agent who is dependent and performs the following functions will be considered as a
PE of the foreign enterprise:

A site or project exists from when the contractor begins work, including any
preparatory work, in the country where the construction etc. is to be established. It
continues to exist until the work is completed or permanently abandoned. Temporary
discontinuation, seasonal or other temporary interruptions should be ignored.

i. Exercises an authority to conclude contracts on behalf of the foreign enterprise.

ii. Secures orders wholly or almost wholly for the foreign enterprise.
iii. Maintains the stock of goods or merchandise from which the agent regularly delivers
on behalf of the foreign enterprise.

Concept of Installation PE:

a) Building site or construction or installation project including the construction of
buildings, bridges or canals, excavating and dredging and the laying of pipelines;

c) Final assembling of moveable objects (e.g., airplanes) also covered by the above term;
d) Planning and supervision covered only if carried on by the building contractor himself;
e) Delivery of materials to a construction or assembly project is not itself a construction
or assembly project.
The permanence element of a PE is replaced by a test of minimum length of time. The
minimum period starts when the enterprise starts to perform business in connection with
the building or construction or installation project. India and its tax authorities do not
agree with the words the 12 month test applies to each individual site or project. It
considers that a series of consecutive short term sites or projects operated by a contractor
would give rise to the existence of a PE in the country concerned. However, judicial has
been that the 12 month test applies to each individual site or project.

32

Dependent agent or Agency PE (DAPE)

A dependent agent within Article 5(5) will constitute a PE (even if the requirements of
Article 5(1) are not satisfied by the enterprise). A dependent agent is legally separate
from the enterprise (principal to agency relationship) for whom it is acting. Agency PE
arises when the agent is empowered to enter into or conclude the contracts and carryout
jobs exclusively for its principal and take instructions from time-to-time and report. The
activities of a dependent agent may give rise to a PE for the principal. However, if the
enterprise carries on business through an independent agent such as a broker or general
commission agent such person will not constitute a PE of the enterprise.

If the non-resident is involved (directly or indirectly through subcontractors) in

more than one site or project, each should be considered as a potential permanent
establishment separately from the others. The 12 months or other duration test
applies to each site or project. A site or project should be regarded as a single
potential permanent establishment even if it is based on several contracts provided
that it forms a coherent whole commercially and geographically. If it appears that a
single site or project has been fragmented to avoid the appearance of being a PE the
facts of the original tendering should be investigated.

b) Installation project means putting together or re-grouping of pre-fabricated elements

such as the erection of steel scaffolding or units of production;

Subsidiary as PE

The above functional requisites for the Agency PE can in principle be captured in the
binding test and dependency test for the agent of the foreign enterprise in India.
7.7

Service PE
Under Article 5(2) / (3) Service PE is attracted by the foreign enterprise in India if the employees
of foreign enterprise furnish or perform services in India, other than services covered
under Royalties or Fees for Technical Services, for a specified period of time. Services may
be rendered to an associate enterprise (AE) of the service provider or a third party service
recipient. The permanence element of a PE is replaced by a test of minimum length of time
in the case of service PE as in case of installation PE. The number of days calculation is based
on man days. Service PE is included in the DTAAs between India and the following countries,
viz., Australia (Article 5(3)), Canada, Norway, Switzerland, USA (Article 5(2)(l)), China, UK
(Article 5(2)(k)), Singapore (Article 5(6)), Indonesia (Article 5(5)), Nepal (Article 5(2)(h)), etc.
Furnishing of Services is the most important check for attraction of Service PE. For
example in Indo-US DTAA, the specified period is 90 days within any twelve-month period.
The employment lien with the foreign enterprise has to be established for the employees
providing services, to constitute a Service PE.

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8.1

Chapter 8

Chapter 9

Capital Gains

Overview of Royalty & FTS

Taxability of Capital Gains under the IT Act:

As per Section 9(1)(i) of the IT Act, the following income is deemed to accrue or arise
in India: all income accruing or arising, whether directly or indirectly, ....through the
transfer of a capital asset situated in India

8.2

Overview of Capital Gains Article:

Article 13 of OECD MC and UN MC contains the details about taxability of capital gains.
The taxability of capital gains, derived on alienation of properties, is dependent on the
nature of asset alienated. The mode of computation is also not provided in the DTAA.
Accordingly, provisions of IT Act, dealing with sale consideration, cost of acquisition,
period of holding, rate of tax, etc. would be applicable. Capital Gains is also not defined
under the DTAA and needs to be interpreted as per IT Act [Section 2(14)]
As per the basic principle of International Taxation, a country of residence always has the
right to tax. The country of source may be given full/ partial/ or no rights to tax.

8.3

Criteria for Taxation of Capital Gains:

Taxation of capital gains depends on the types of assets sold. Brief overview of articles of
UN model:
Article 13(1) Immovable Property
Article 13(2) - Movable property of a PE
Article 13(3) Ships, aircrafts, boats etc
Article 13(4) Shares of Real Estate Companies

9.1

Royalty & its insights:

Royalties, sometimes simply referred to as royalty, is typically the sum of money paid
to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived,
or sought to be derived, by the user (the Licensee) through the exercise of such rights.
Royalties may be paid for the use of copyright, patent, trademark, industrial design,
procedural knowledge or a combination of them. However, the term has also a much
wider application and can cover mining royalties, performance of art royalties, etc. The
exclusivity of the right in relation to the thing for which royalty is paid should be with the
grantor of that right. That was what Mr. Justice Jayasimha Babu observed in a ruling in CIT
Vs. Neyveli Lignite Corporation Ltd (2007) 243-ITR-459. Blacks Law Dictionary defines [r]
oyalty as compensation for the use of property, usually copyrighted material or natural
resource, expressed as a percentage of receipts from using the property or as an account
per unit produced . Thus, the salient feature of a royalty payment is that it is given as
a compensation for the use of some property.
The definition of the term royalty, as provided in Explanation 2 to section 9(1)(vi), states
that
For the purposes of this clause, royalty means consideration (including any
lump sum consideration but excluding any consideration which would be the
income of the recipient chargeable under the head Capital gains) for (i)

the transfer of all or any rights (including the granting of a license) in respect of
a patent, invention, model, design, secret formula or process or trade mark or
similar property ;

(ii)

the imparting of any information concerning the working of, or the use of, a
patent, invention, model, design, secret formula or process or trade mark or
similar property ;

(iii)

the use of any patent, invention, model, design, secret formula or process or trade
mark or similar property ;

(iv)

the imparting of any information concerning technical, industrial, commercial or

scientific knowledge, experience or skill ;

(iva)

the use or right to use any industrial, commercial or scientific equipment but not
including the amounts referred to in section 44BB ;

(v)

the transfer of all or any rights (including the granting of a license) in respect
of a copyright, literary, artistic or scientific work including films or video tapes
for use in connection with television or tapes for use in connection with radio
broadcasting, but not including consideration for sale, distribution or exhibition
of cinematographic films ;

(vi)

the rendering of any services in connection with the activities referred to in subclauses (i) to (iv), (iva) and (v).

Article 13(5) Shares of Companies

Article 13(6) Residuary Provision

Immovable Property:
Basic rule as per Article 13(1) - Capital Gain earned by a resident of a Foreign Country
on sale of immovable property (situated in India), can be taxed in India. The Foreign
Country can also tax the Capital Gain. It is immaterial whether property is residential or
commercial. It is also immaterial whether immovable property is a capital asset, or stockin-trade.
For example.: X, a Non- resident Indian has a property in India. The purchase price of
which is INR 50,00,000 and the same was purchased on 10.10.2010. Now, he sells the same
for INR 80,00,000 on 10.10.2015 resulting in the capital gain arising to him amounting to
INR 30,00,000 subject to indexation will be taxable under the head of Capital gains as per
Section 9(1)(i) of the IT Act & Article 13(1) UN MC.

34

35

Explanation 3.For the purposes of this clause, computer software means any
computer programme recorded on any disc, tape, perforated media or other
information storage device and includes any such programme or any customized
electronic data

9.2.1 Make available clause:

FTS is taxable under the certain treaties only if services
Make available technical knowledge, experience, skill, know-how or process or consist of
the development and transfer of a technical plan or technical design.

Explanation 4.For the removal of doubts, it is hereby clarified that the transfer
of all or any rights in respect of any right, property or information includes and
has always included transfer of all or any right for use or right to use a computer
software (including granting of a licence) irrespective of the medium through
which such right is transferred.
Explanation 5.For the removal of doubts, it is hereby clarified that
the royalty includes and has always included consideration in respect
of any right, property or information, whether or not

The term make available means that the person acquiring the technical service is
enabled to independently apply the technology.The word enable is used in the sense
that the technical services should be such that they make the recipient able or wiser in
the subject matter. Thus, where the recipient of technical services does not get equipped
with the knowledge or expertise and the recipient would not be able to apply it in future
independently without support from the service provider, it will not be a case of technical
service having been made available.

(a)

the possession or control of such right, property or information is with the payer;

Examples of treaties with India having the make available clause

(b)

such right, property or information is used directly by the payer;

USA

(c)

the location of such right, property or information is in India.

UK

Explanation 6.For the removal of doubts, it is hereby clarified that

the expression process includes and shall be deemed to have always
included transmission by satellite (including up-linking, amplification,
conversion for down-linking of any signal), cable, optic fibre or by any
other similar technology, whether or not such process is secret

Canada
Australia
Netherlands etc
In case of CESC Ltd. v. CIT [275 ITR 15], the Kolkata Tribunal considered meaning of made
available in the context of fees for technical services as appearing in DTAA between
India- UK. It was observed that when the provisions are in pari-materia, there cannot be
different meanings assigned to the provisions, unless there is anything repugnant in the
context.

Exclusions: The following shall not be treated as royalty:

(a) Any consideration chargeable as income of recipient as Capital gains;
9.2

Fees for Technical Services & its insights:

Similar view has been taken by the various benches of ITAT, and also by the Authority for
Advance Ruling in a large number of cases including DCIT vs. Boston Consulting Group
P Ltd. [280 ITR 681] [Mum-ITAT], McKinsey & Co. Inc. (Philippines) [99 ITD 549] [Mum],
Raymond Ltd. [80 TTJ 120] [Mum], NQA Quality Systems Registrar Ltd. vs. DCIT [2 SOT
249], CESC Ltd vs. DCIT [275 ITR 15] [Kol-ITAT] and National Organic Chemical Industries
Ltd. [96 TTJ 765] [Mum].

The expression Fees for Technical Services is defined in Explanation 2 in section 9(1)(vii)
of the IT Act as under:
For the purposes of this clause, fees for technical services means any consideration
(including any lump sum consideration) for the rendering of any managerial, technical or
consultancy services (including the provision of services of technical or other personnel)
In the case of Skycell Communication Ltd. [(2001)251-ITR-53(Mad)], The popular
meaning associated with technical is involving or concerning applied and industrial
science.
Exclusions: Consideration for any construction, assembly, mining or like project undertaken
by the recipient or consideration which would be income of the recipient chargeable
under the head Salaries, shall not be treated as FTS.
Normally, FTS is taxable at 10% plus applicable Surcharge & cess u/s 9(1)(vii) read with Sec
115A of IT Act

36

9.3

Basis of Taxation of Royalty/FTS for non residents :A number of foreign companies or

other non-resident entities run their business in India. Their income straightway are
accrued or received in India. In some other cases, the income though not straightway
accrued or received in India, may be deemed to accrue or deemed to be received in India.
Whatever be the case , if the earning of the foreign entity is from royalty or for providing
technical services, the payer of such royalty or FTS generally enter into some agreements
with the foreign entity. The payer or the user of the royalty or recipient of the technical
service, may be the government or any other Indian concern. If the agreement is an
eligible one, such income is taxed at a lower, preferential tax rate. Royalty/FTS for nonresidents are taxable in India if it is sourced/utilised in India. Apart from payments which
are obviously taxable, there are still other situations where royalty/FTS are taken to be
taxable, on the premise that is sourced in India.

37

Chapter 10
WHT Liability on Some Common Transactions
10.1

This chapter aims at discussing few common transactions with non-residents and
applicability of withholding tax on the same:

10.1.1 Import of Materials:

As per Sales of Goods Act, 1930, sale is defined as under:
A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer
the property in goods to the buyer for a price. There may be a contract of sale between
one part-owner and another.

Import of material can be on:

FOB basis
CIF basis

Case 1: Import of material on FOB and there is no PE in India

A sale is deemed to be completed when the property in goods and risk & rewards of the
goods passes on to the buyer. In case of import of material or capital goods on FOB basis,
the same is not taxable in India as the property in goods and risks & rewards are deemed
to be transferred once the seller hands over the material to the port authorities outside
India and no income accrues or arises in India.

Case 2: Import of material on CIF and there is no PE in India

Under this case, there are two types of transactions:Delivery/ Title of goods passed on to the importer before custom clearance
Delivery/ Title of goods passed on to the importer at Factory Gate

Delivery/ Title of goods passed on to the importer before custom clearance

In this case, the sale shall be treated as off-shore sale and is not taxable in India. The
relevant judicial interpretation are discussed as under:-

38

Where title to the goods passed?

As was held in case of POSCO Engineering & Construction Company Limited wherein
reliance was placed on the previous judgement of Ishikawajma Harima (supra) and it was
held by Delhi Tribunal that title to goods shall be considered to have passed outside India
when delivery was made on high sea and the payment was also received outside India and
hence same shall not be taxable in India.
Technip Italy Spa v. Addl CIT (2010-TII-133-ITAT-DEL-INTL) In case of offshore supplier,
since the entire transaction is completed on high seas, the profits on such sale are not
taxable in India. The fact that a contract is a turn-key contract by itself, is not of much
significance and for the purpose of taxability, it is not necessary that the contract is to be
considered as an integrated one. Hence in view of the above, revenue earned from offshore supply of equipment is not chargeable to tax in India
In case of Hyosung Corporation v. DIT (IT) 2009 -TII -14 -ARA INTL, AAR held that Since
the sale of equipment and materials took place outside the territories of India, the income
in relation thereto cannot be said to accrue or arise in India.
Delivery/ Title of goods passed on to the importer at Factory Gate
In this case, the sale may be treated as off-shore sale or on-shore sale.
If the property in goods or title of goods has been passed overseas but the risk passed at
the factory gate, the same is treated as off-shore sale and not taxable in India. The same
is held by Special Bench of Delhi Tribunal in case ofMotorola Inc. V.DCIT (2005) 95 ITD
269 (Del)(SB).It is held in this case that it is open to the parties to agree that even where
the property in the goods has passed, the seller may undertake the risk of deterioration in
the goods necessarily incident to the course of transit merely because the risk passed in
India, it cannot be said that the sale took place in India. Therefore, no income can be said
to have arisen in India.
If the property in or title of goods has been passed in India i.e. at the factory gate, the
same is treated as on-shore sale and is taxable in India as Income accrue or arise in India.
Case 3: Import of material on FOB or CIF and Exporter has PE in India
Generally, foreign exporters have offices or agents in India which may constitute PE in
India or business connection in India u/s 9(1)(i) of the Income Tax Act, 1961.
Under domestic law i.e. Income Tax Act, 1961, the import transaction is taxable in India in
all circumstances if there is a PE of non-resident exporter. Hence, we may claim the benefit
of DTAA, if available, but Tax Residency Certificate (TRC) of Non-resident is required for
the same.
If the benefit of DTAA is claimed or undertaken, the said transaction is covered under
Article 7 of the DTAA i.e. Business Profits. As per Article 7 of the DTAA, the income is
taxable in India only if the sale activity is attributable to the PE in India. If sale is not
connected to PE, then the same is not taxable in India.

39

For example: A Inc has PE in Delhi. A Inc exported goods to B in Delhi and C in Mumbai.
The sale to A is connected with the PE in India as the sale contract entered through the
PE in India. However, C has directly ordered goods to A Inc without the involvement of PE.

Lets understand the transaction with some no.

A, an importer, takes buyers credit for Import of goods from the Indian Bank lets say SBI
for Rs. 1,000. The goods are coming from UK.

If A Inc provides TRC and declaration for the same, the sale to B is taxable in India but sale
made to C is not taxable in India.

SBI engages CITI Bank for providing the credit but CITI further engages HSBC Bank for the
same. For arranging HSBC Bank, CITI Bank charges his commission of Rs. 1.

Hence, merely having PE in India does not attract taxability in India under DTAA. The only
exception to this rule is force of attraction rule in DTAA which will be discussed in later
mails.

HSBC Bank actually gives buyers credit of Rs. 1,000 for 30 days and charges interest of Rs.
10.
At the end, SBI charges Rs. 4 as his commission for the entire transaction and ask the
importer to pay Rs. 1,015 (1000 +10+1+4). SBI asks 15CA/ CB from the importer.

Rate of TDS if Import transaction is taxable in India

If sale is taxable in India, the TDS should be deducted @ 40% plus applicable Surcharge, EC
& SHEC on the value of Imports. No TDS is required on the value of Custom, Insurance or
Freight if shown separately. The importer or exporter may apply to the AO for lower rate
of TDS u/s 195(2) or (3)
Conclusion
Following important points should be considered in arriving at non- taxability of offshore
equipment:

Few common Q & A on this subject is given as follows:

Question 1:

When the interest is paid to foreign branch of Indian Bank, whether TDS is
deductible or not?

Answer:

In this case, foreign branch of Indian Bank is regarded as resident in India as it

just an extension of Indian Bank only. Hence, it is the transaction between two
residents and Section 195 is not applicable. Hence, it is covered u/s 194A and
there will be no TDS in this case because of specific exemption granted to Banks
u/s 194A.

If foreign branch of India Bank is a separate company (Only in some cases), then it
is to be treated as separate assessee like a normal non-resident and provisions of
Section 195 is applicable like a foreign bank.

Question 2:

How to prepare 15CB in case of payment of interest is made to foreign branch of

Indian Bank?

Answer:

There is no need to prepare 15CB in this case as Section 195 itself is not applicable.
But, if the bank insists for the same, the draft 15CB in this case is attached.

Question 3:

At what stage, 15CB should be given under Buyers Credit Transaction?

Answer:

Generally, 15CB to the extent of Value of Import should be given at the time of
taking of the buyers credit.

15CB for the interest and commission amount should be given when the actual
payment of the same is given to the bank at the end of credit period.

Question 4:

When the commission or bank charges is paid to foreign branch of Indian Bank,
whether TDS is deductible or not?

Answer:

The answer to this question is also same as question 1. This is the transaction
between 2 residents. Hence, Sec 195 is not applicable.

Ownership, title & property in goods transferred outside India to Owner

Payments remitted by owner directly to foreign country outside India.
Bill of entry in name of owner.
Goods imported by owner & customs duty paid by owner or his agent.
No activities undertaken in India for offshore supply contract.
Equipment shipped to owner preferably on FOB & not CIF basis
Risk of loss of equipment passes to owner outside India other than risk of deterioration
in the goods necessarily incident to the course of transit.
No PE or office in terms of DTAA nor any activities carried by PE, if any, related to
offshore supply contract.
No force of attraction rule present in Article 7 of the DTAA
10.1.2 Buyers Credit incase of imports:
Generally, every importer takes buyers credit for Import of goods from the Indian Bank.
Indian Bank do not give this credit directly but engages another bank for the same. The
corresponding bank may be a foreign bank or foreign branch of an Indian Bank. Then,
there may be a 3rd bank involved in the entire transaction which actually gives credit and
charges interest for the same. At the end, Indian bank charges the entire amount from the
Importer and asks 15CA/ CB from him.

40

41

10.1.3 Clearing and Forwarding (C & F) Charges:

10.1.5 Commission Agent outside India:

In the case of ACIT v Leaap International (P.) Ltd. 15 taxmann.com 251, The Chennai
Tribunal held that payment made to foreign companies partly towards freight charges
for moving the goods and partly for transportation for clearing/forwarding at the foreign
ports and the remittances were for services rendered outside India and the companies to
whom payments were made did not have any branches or PE in India and the payments
were made in accordance with the RBIs circular as also the CBDT Circular No. 10/2002
dated 9-10-2002 and, therefore, the payments were not liable for deduction of tax under
section 195.
10.1.4 Payment of Freight to Shipping Company:
Export Cargo Freight income accrues in India and so taxable under Domestic Law.
Import Cargo Freight income accrues outside India. So, It is taxable only if received in
India under Domestic Law.
Article 8 of the treaty reads as follows: Profits from the operation of ships or aircraft in
international traffic shall be taxable only in the Contracting State in which the residence/
place of effective management of the enterprise is situated
Article 8 also applies to the profits from the following:
participation in a pool;
a joint business;
an international operating agency.
As per the OECD Commentary, ancillary activities including leasing of ships, use,
maintenance and rental of containers, etc eligible for benefit of Article 8.
Most of the DTAAs provide that income of Foreign Shipping Companies (FSC) would be
taxable in the country of residence/ effective management of the FSC. If income is not
taxable in India based on tax treaty, a relief order is issued from the tax department. For
obtaining the order, an application has to be filed with tax authorities accompanied with
following documents:
Certificate of incorporation of the non-resident company
Details of effective management/ residence of the non-resident company
Details of holding company
Sample copy of the bill of lading, etc.
Agency agreement

42

CBDT issued circular no. 786 dt 23-07-2000 exempting commission paid to a non-resident
(NR) from tax in India. But, the circular was withdrawn on 22-10-2009 which leads to
confusion on Taxability of Overseas Commission paid to non-residents.
Commission paid to Non-resident may of 2 types
Commission for Commercial Service
Commission for Technical Service
Commission for Commercial Services
-

The said commission is taxable in India under Domestic Law only if

Income accrues to NR in India, or
Income is received by NR in India, or
NR is having business connection in India under Sec 9(1)(i), or
NR is having source of Income in India
-
Keeping the above conditions in mind, generally, NR agent satisfies one of the
above conditions. Hence, the commission paid to them is generally (Not in all cases) is
taxable in India under the Income Tax Act, 1961 (Domestic Law)
-

Now, we need to claim the benefit of DTAA in this case.

-
Commission paid to NR is regarded as Business Profits as referred under Article
7 of the DTAA. The business profits is taxable in India only if the NR agent is having PE, as
specified under Article 5 of the DTAA, in India.
-

Generally, NR do not have any PE in India. Hence, it is not taxable in India.

Commission for Technical Services

As per Delhi ITAT in case of Adidas Sourcing Limited (ITA/5300/Del/2010), it is held that
the commission is said to in the nature of Technical Service if it is necessary that some sort
of managerial, technical or consultancy services should have been rendered. If the same is
taxable then the rate will be 10.3% as described u/s 115A of Income Tax Act or applicable
DTAA rates whichever is more beneficial to the assessee.
10.1.6 Bandwidth Charges:
Overtime there has been lot of controversies involved on issue of taxability of bandwidth
charges paid to non-resident assessees especially after the amendment in definition of
the term Royalty by Finance Act, 2012. Definition of the term Royalty under section 9(1)
(vi) of the Act was amended vide Finance Act, 2012 with retrospective effect from 1-61976, to ensure that software services and payments by broadcasters to satellite television
content providers are regarded as income accruing or arising in India. The retrospective

43

amendment expanded the scope of and put to unrest the settled law that a mere payment
for service without any right to control the equipment is not royalty. (Asia Satellites case)
After the case of Verizon Communication Singapore Pte. Ltd (Madras High court ruling)
the issue gained more dissension wherein it was affirmed that in view of retrospective
amendment in Finance Act in 2012, the earlier decisions in favour of taxpayers which
supported the concept of non-taxability of bandwidth charges paid to Non-Residents as
royalty income are no longer are precedent and assessee cannot escape his tax liability by
claiming treaty benefit.
However, there are several judgements after Madras High Court Ruling where it was held
that treaty benefit cannot be denied to the assessee. Some of these cases are:

Payment for Link Charges: Non-taxable

Payment for Cargo communication facility: Non-taxable
Reimbursement of management expenses to parent company: Non-taxable
Per-Diem Allowance during employee stay abroad: Non-taxable
Reimbursement of technical expenses-Cost Allocation:Non-taxable
Reimbursement of relocation expenses of outbound employees : Non-taxable

CIT v. Davy Ashmore India Ltd.

Reimbursement of Audit fees: Taxable

Vishakhapatnam Port Trust

Reimbursement of Purchase service charges: Non-taxable

Antwerp Diamond Bank NV (Mumbai ITAT case)

Reimbursement for marketing services: Taxable

Sanofi Pasteur Holding SA,

Reimbursement of travelling expenses as FTS:Taxable

B4U International Holding Ltd

Reimbursement of Travelling Expenses: Non-taxable

Nokia Network OY & CIT vs. Seimens AG

Reimbursement of travelling expenses as FTS: Taxable

Moreover, since these amendments are not supported by a non-obstante clause, which
could have specifically expressed an intent for the amendment to override the provisions
of applicable tax treaties the same cannot deprive the assessee of treaty benefits.

Conclusion: If the main expenditure is not chargeable to tax in India either under IT Act
or DTAA, then reimbursement of such expenses will also be not chargeable to tax in India.
Similarly, if the main expenditure is chargeable to tax in India then the reimbursement of
the same shall also be chargeable.

The position of taxability of income as business income was made more clear in Flag
Telecom Group Ltd. v. Dy. CIT ((ITA Nos. 6254/Mum/2003, 1168) wherein it was made clear
that the sale of capacity in the undersea cable system for providing telecommunication
link to the Indian company does not arise through and from business connection in India
and therefore, the income is not deemed to accrue or arise in India.

10.1.8 Salary:
As per the explanations of section 9(1)(ii) dealing with income deemed to accrue & arise
in India following income falls under the head of salary if it is earned in India:

Crux: Treaty benefit cannot be denied on account of retrospective amendment in Indian

Income Tax Act. So, proper analysis needs to be done of tax treaty of India will the country
of Non-resident assessee in determining the tax implications & applicability of withholding
tax on bandwidth charges under the head Royalty.

i. Services rendered in India

Moreover, for treating any income as business income the non-resident company/assessee
should have business connection in India as in that case income will be deemed to accrue
or arise in India within the deeming provision of section 9(1)(i) of the Act.

As per clause 9 (1)(iii) income chargeable under the head salaries payable by the
government to a citizen of India for services outside India is taxable in India as it is
considered to be earned in India.

10.1.7 Reimbursement of expenses:

Generally, foreign company raise debit notes on their Indian subsidiary/ associate
companies for certain expenses paid by them on behalf of Indian Companies. If these
expenses would have been directly incurred or paid by Indian Company, the same may be
taxable in India, depending on the applicable Domestic Law provisions & DTAA provisions.

44

Some of these expenditures are:

ii. The rest period or leave period which is preceded & succeeded by services rendered
in India & forms part of service contract of employment

Section.195 specifically excludes Salary payment to non-resident as the same is covered

u/s 192 not u/s195.
10.1.9 Remuneration to directors:
Remuneration paid to Non-resident directors attracts tax withholding u/s sec 195 of
Income Tax Act.

45

Scope of directors fees as per Article 16 of DTAA is as follows:

Remuneration Include: Fees or other similar payments means any remuneration paid in connection with
supervision of the companys management by the member of board of directors
Director sitting fees
Payments made as percentage of profits
Share based incentives
Other benefits like club membership, health life insurance etc.
Tax Liability
If there is employer-employee relationship between the Director and the company, the
remuneration paid to Director will be taxable under Salary as discussed in para 10.1.8
If there is no such relationship or remuneration received towards professional, consulting
or like services, then such income will be taxed under Business Profession or as per
Article 16 of the DTAA.
10.1.10 Payment of College Fee to University:
Indian resident students go abroad for studies and they have to incur expenses on account
of payment towards fees to foreign university including accommodation charges. Payment
made towards college fees is non-taxable whether paid to government or non-government
instituteas in this case income is not deemed to accrue or arise in India.
DOMESTIC LAW:Section 10(16):- Section 10(16) of the Income-Tax Act, 1961, exempts
scholarships granted to meet the cost of education. Since it is intended only to cover the
cost of education, any savings made out of such grants may well be taxable (CIT vs. V.K.
Balachandaran (1984) 147 ITR 4)
Taxation of Education fees: DTAA provisions
UN MODEL:As per Article 20 of UN Model, Payments which a student or business trainee
or apprentice who is or was immediately before visiting a contracting state a resident
of the other contracting state and who is present in the first mentioned state solely for
the purpose of his education or training receives for the purpose of his maintenance,
education for training shall not be taxed in that state, provided that such income arise
from sources outside the state.
OECD MODEL: As per Article 20 of OECD, Payments which a student or business
apprentice who is or was immediately before visiting a contracting state who is present
and in the first mentioned state solely for the purpose of his education or training receives
for the purpose of his maintenance, education for training shall not be taxed in that state,
provided that such income arise from sources outside the state.

46

The exemption under Article 20 is intended for foreign students who are temporarily
present in the host state and not for those students who intend to remain permanently in
the host state (Qing Geng K Li Vs The Queen (1994) IBFD Case No. A-162-93)
Conclusion: Payment made towards education feesper se is not taxable.
10.1.11 Repatriation of money:
Repatriation of money happens when the non-resident transfers money from his NRO
account to his NRE account or when money is transferred from his NRO account to any
other account maintained by him in foreign country.
Under Liberalised Remittance Scheme (LRS) issued under FEMA Law, all resident individuals,
including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April
March) for any permissible current or capital account transaction or a combination of
both.
Repatriation of money per se does not attracts withholding tax as there is no income.
10.1.12 Payments to Conference Speakers:
Payment made to Conference Speakers are covered under FTS i.e. Sec 9(1)(vii) under
Domestic Law. But, the same is covered under Article 14 of the DTAA relating to
Independent Personal Services (IPS). Under Article 14 of the DTAA, the fee paid to these
persons are taxable only if the physical presence of these persons exceeds 183 days in
India. Generally, this condition is not fulfilled, hence, the payment is not taxable in India.
Travel expenses for both domestic and international conference speakers and panelists
are considered as non-taxable as per Article 14. Therefore, reimbursements for these
expenses are not considered to be income to the invited speakers.
10.1.13 E-commerce Transactions:
Some recent judgements /opinions on e-commerce transactions are as follows:
Yahoo India (P.) Ltd v. DCIT (46 SOT 105) (Mum ITAT): It was held in this case that payment
made by taxpayer to YHHL for services rendered for uploading and display of banner
advertisement of Department of Tourism of India on its portal was not in nature of royalty
taxable in India and, therefore, taxpayer was not liable to deduct tax at source from such
payment.
Pinstorm Technologies Private Limited v. ITO (54 SOT 78) (Mum ITAT): It was held that
payments are in the nature of business profit on which no tax was deductible at source
since the same was not chargeable to tax in India in the absence of any PE of Google
Ireland Ltd. in India. Decision of Mum ITAT in the case of Yahoo India was followed.
People Interactive (I) P Ltd. (ITA No. 2179,2180,2181 and 2182/Mum/2009) (Mum
ITAT):It was held that the assessee company could not operate or even does not have
physical access to the equipments system. Further, it is not using equipments but only
availing services provided by non-resident. Accordingly, payments cannot be treated as
royalty. Hence, no income is taxable in India.

47

Chapter 11

ebay International AG (2013) Mum AT: It was held that operation of India specific website
is not FTS under India-Swiss DTAA. Hence, it is not liable to pay any taxes in India.
Conclusion: Tax treaties seeks to tax profits on the basis of Permanent Establishment.
As per OECD, the PE of these companies are deemed to be located in the country where
servers of these e-commerce sites are physically installed. However, in most e-commerce
transactions, no establishment is required across the border to carry on business through
servers located in Tax Haven countries. E-commerce takes place through satellite and the
server can be in any part of the globe and in all probability in tax haven countries. Hence,
there is no withholding tax implications.
10.1.14 FTS for rendering consultancy outside India:
In the case of DCIT vs. Ajapa Integrated Project Management Consultants (P.) Ltd. [2012]
49 SOT 37 (Chennai)(URO)), assessee paid consultancy fee to consultants for carrying
out consultancy services in Nigeria. It was held that consultants were used in business
of assessee abroad, and, therefore, section 9(1)(vii)(b) would apply and income of such
non-residents could not be deemed to accrue or arise in India. Exclusion clause under
section 9(1)(vii)(b) is the most under utilised clause for arguing non-taxability of income
of non-residents for the purpose of business outside India. It offers a great tax planning
opportunity for reducing tax liability on foreign remittance.
10.1.15 Software Payments:

Secondment of employees
11.1 Secondment of personnel means movement of employees from one organization
to another for a definite period. Deputation as per Shorter Oxford Dictionary means
appointment, assignment to an office. Dictionary meanings of deputation and
secondment are different. However, in common practice, both these terms are used
interchangeably (Cholamandalam MS General Insurance Co In re 309 ITR 356].
11.2 Reasons for secondment:
Utilisation of technical as well as leadership skills of group entities for specific time
period/ projects
Integrating operations with group companies
Establishing global practices in new markets
Consistency in implementing global policies
Providing employees an opportunity of getting diverse international experience
Retaining control over the operations by seconding trusted employees

As held in Infrasofts case: What is transferred is neither the copyright in the software
nor the use of the copyright in the software, but what is transferred is the right to use
the copyrighted material or article which is clearly distinct from the rights in a copyright.
It is accordingly held that what has been transferred is not copyright or the right to use
copyright but a limited right to use the copyrighted material and does not give rise to any
royalty income.

11.3 Domestic Law treatment:

Thus the same shall come under the purview of royalty only when payment is made for
copyright or right to use copyright of software.

11.4 Taxation Rules under the treaty:

Scope of taxation under the IT Act depends upon residential status of an assessee.
Physical presence in a previous year in India determines the residential status of the
seconded employee.

General Rule
Article 15(1) of OECD Model Convention - Taxability in the State where employment is
exercised.
Article 15(1) of the OECD Model Convention Right of taxation of salary, wages and
other similar remuneration derived by a resident of a Contracting State in respect of an
employment rests with State of residence unless the employment is exercised in the other
State. If the employment is exercised in the other State then the said State has the right
of taxation.
The expression In respect of an employment denotes that only remuneration arising out
of employer-employee relationship would be covered under this Article.
Employment is exercised Connotation
OECD Model Commentary - Employment is exercised at the place where the employee

48

49

is physically present when performing the activities for which the employment income
is paid

Verizon Data Services India (P.) Ltd. V. AAR [2013] 33 taxmann.com 539 (Madras
HC)): It was held in this case that where employees of non-resident company were
seconded to assessee, an Indian company, reimbursement of salaries of seconded
employees by assessee to non-resident company would be income of non-resident
company which would be taxable in India and liable for TDS

US Model Commentary Employment exercised means services performed

Article 15(2):
Specific Rule

Article 15(2) of OECD Model Convention - Taxability arises only in State of residence
even if employment is exercised in the other State.

Article 15(2) facilitates short term secondment.

Conditions: the recipient is present in the other State for a period or periods not
exceeding in the aggregate 183 days in any 12 month period* commencing or ending
in the fiscal year concerned; the remuneration is paid by, or on behalf of, an employer
Who is not a resident of the other State; and the remuneration is not borne by a
permanent establishment or a fixed base which the employer has in the other State

Expeditors International (India) (P.) Ltd vs. ACIT [2008] 118 TTJ 652 (DELHI HC)) It was

a case of reimbursement of common expenses incurred by the parent company for

the benefit of all the group concerns including the assessee company which did not
attract any deduction of tax and there was no question of making any disallowance
by invoking the provisions of sec 40(a)(iii) for non-deduction of tax from such
reimbursement

AT&SIndia(P.)Ltd.,In re [2006] 287 ITR 421/157 Taxman 198 (AAR - New Delhi)
It was held by AAR that the payment towards reimbursement of salary cost of the
seconded employees is in the nature of Fee for Technical Services (FTS) and the fact
that the taxes are paid under the head Salaries is of no consequence. The seconded
employees working under the direct control or supervision did not militate against
the compensation paid toAT&S.

The moot question here shall be whether the arrangement of secondment of employees is a
contract of service or contract for service
11.5 Certain judicial pronouncements:

In the case of IDS Software Solutions India (P) Ltd (supra), the co-ordinate Bench of the
Tribunal held that reimbursements made to foreign company under the secondment
agreement are not liable for deduction of tax at source.

Hindustan Power Plus Ltd In re 271 ITR 433 (AAR), CIT v. Eli Lilly and Co (India) P. Ltd.
(SC) 312 ITR 225: It was held by honourable court that Home salary of an expatriate in
connection with rendition of services in India is deemed to accrue or arise in India.

Morgan Stanley International Incorporated vs. DDIT [2015] 53 taxmann.com 457

(Mumbai - Trib.): It was held by honourable tribunal that employees seconded by
assessee - company constituted its service PE in India and, therefore, payment made
by Indian entity to assessee on account of reimbursement of salary was to be taxed
under article 7 and not under article 12 of India-USA DTAA. Thus, payment received
by the assessee is to be treated as revenue receipt and any cost incurred has to be
allowed as deduction because salary is a cost to the assessee which is to be allowed.

Centrica India Offshore (P.) Ltd. v. CIT [2014] 364 ITR 336(Delhi)): It was held in

this case that amounts reimbursed by assessee to overseas companies in terms of

secondment agreement amounted to fee for technical services liable to tax in India
and, thus, assessee was required to deduct tax at source while making said payments.

ITO vs. AON Specialist Services (P.) Ltd. [2014] 64 SOT 78 (Bangalore - Trib.)): It was

held in this case that since assessee was real and economic employer of employees
seconded from UK Company and reimbursement of salary costs, etc. to UK Company
was without any profit element, it could not be regarded as income chargeable in
hands of UK Company. Therefore, reimbursement made by assessee to UK Company
was not liable for TDS

50

The tax implications are a consequence of key question of whether the secondment
arrangement in essence is provision of employees/secondment services or provision of
services through the secondees. It is inevitable that in case of secondment arrangement it
is the overseas entity that continue to be the legal employer of the secondees with certain
contractual obligations and rights as a legal employer. However in most case the host
entity to whom secondees are deputed would act as economic employer for the duration.
Thus, treatment varies from case to case based on the facts.
On whole:
If any employee of a foreign company is transferred to an Indian company on
secondment basis and salary is born by Indian company, it will be treated as an
economic employer though the foreign company remains the legal employer. If the
salary of the employee is reimbursed to foreign company on actual basis without
adding any markup, then it cannot be treated as FTS and will be reimbursement of
salary only. Hence, no liability to deduct TDS u/s 195 of Income Tax Act, 1961
On the other hand, the lump sum consideration charged by the foreign company for
seconding its employee to India and payment made by Indian company for the same
cannot be classified as reimbursement of salary cost. It is nothing but amount paid to
foreign company for rendering technical services as given in Explanation 2 to Section
9(1)(vii) of Income Tax Act, 1961.

51

Chapter 12:
Recent circulars & amendments

S.no. Section

1.

52

Section
Description

Circulars/
Notifications

Matter

Residence in
India

Circular No.
586/1990

Clarification regarding liability

of income tax in India &
deduction of tax at source in
relation to members of the crew
of foreign going Indian Ship

9(1)(iii)

Income deemed
to accrue &
arise in India

Circular No.
4/1969

Taxability of pension received

from abroad by pensioners
residing in India

Circular No.
21/1969

Norms & principles to be

applied in assessing foreign/
Indian Participants in technical
collaboration

28

PGBP

44BB

Profits & gains

in connection
with business of
exploration etc.
of mineral oils

44D

Special
provision for
computing
income by way
of royalties
etc. in case
of foreign
companies

90

Agreement with
foreign countries Circular No.
or specified
116/1973
territories

Income tax (Double taxation

relief) Rules , 1956 u/s 90 & 91
of the Act

Circular No.
728/1995

Deduction of TDS under

section 195 of Income tax
act,1961-Correct rates of taxes
applicable. Rates provided
in Finance Act or DTAA
whichever is beneficial to the
assessee.

Circular No.
495/1987

New provision for computing

taxable income from activities
connected with exploration of
mineral oils

Circular No.
202/1976

Special provisions for

computing income by way of
royalties & technical service
fees in case of foreign
companies

195

Notification No.
39/2012

12th Amendment Rule: Issue

of Form No. 10FA & 10 FB
for acquiring certificate of
residence for the purposes of
section 90 & 90A

Notification No.
90 & 91/2008

Where treaty provides that any

income of the resident may be
taxed in other country, such
income shall be included in the
total income of such resident
and relief shall be available as
per DTAA

TDS- Other
Circular No.
sums paid to NR 152/1974

Deduction of TDS for payments

made to NRs

Circular No.
155/1974

Deduction of TDS for payments

made to NR where tax is to be
borne by payer

Circular No.
7/2007

Procedure for refund of TDS

u/s 195 to the person deducting
the tax.

53

Chapter 13
FORM NO. 15CB

If any relief is claimed under DTAA-

(i)

Whether tax residency certificate is obtained from the recipient of remittance

No

(ii)

Please specify relevant DTAA

NA

(See rule 37BB)

Certificate of an accountant
Wehave examined the agreement Mr./Ms./M/s ABC India Pvt. Ltd and Mr./Ms./M/s
XYZPte Ltd. requiring the above remittance as well as the relevant documents and books of
account required for ascertaining the nature of remittance and for determining the rate
of deduction of tax at source as per provisions of Chapter XVII-B. We hereby certify the
following:

(iii) Please specify relevant article of DTAA

NA

(iv) Taxable income as per DTAA

NA

(v) Tax liability as per DTAA

NA

A
A
B

Name and address of the beneficiary of the remittance:

.., Singapore
1
2

Country to which remittance is made

Country: Singapore

Amount of payable

In foreign currency USD

1,000

Currency:
INR
In IndianRs.
63,000/-

Name of the bankState Bank of India

Branch of the bank Nehru Place Branch

BSR Code of the bank branch (7 digit)

0004298

5.

Proposed date of remittance (DD/MM/

YYYY)

15/06/2015

6.

Nature of remittance as per agreement/

document

Import of Material

7.

In case the remittance is net of taxes,

whether tax payable has been grossed
up?

No

8.

Taxability under the provision of the

Income Tax Act (without considering
DTAA)

B.

(a) Article of DTAA

NA

(b) Rate of TDS required to be deducted

in terms of such clause of the applicable
DTAA

NA

In case the remittance is on account of

business income, please indicate:(a) Whether such income is liable to tax
in India

No

(b) If so, the basis of arriving at the rate

of deduction of tax.

NA

(c) If not, please furnish brief reason

thereof specifying relevant article of
DTAA
C.

In case the remittance is on account of

capital gains, please indicate:

No

(a) amount of long term capital gain

NA

(b) amount of short term capital gain

NA

(c) basis of arriving at taxable income

NA

(a) The relevant section of the Act un-

Sec 4, 5 and 9

(b) The amount of income chargeable

NIL

(c) The tax liability

NIL

(a) please specify nature of remittance

(d) Basis of determining taxable in-

NA

(b) whether taxable in India as per

DTAA

der which the remittance is covered

to tax

come and tax liability

54

XYZ Pte. Ltd.

If the remittance is for royalties, fee for

technical services, interest, dividend,
etc, (not connected with PE) please
indicate:-

D.

In case of other remittance not covered

by sub-items A, B, and C

55

(c) If yes, rate of TDS required to be

deducted in the terms of such article of
the applicable DTAA
(d) If not, please furnish brief reason
thereof specifying relevant Article of
DTAA
In foreign currencyNIL

10. Amount of TDS

In INRNIL
As per Income Tax Act NIL

11. Rate of TDS

As per DTAANIL

12. Actual amount of remittance after TDS

In foreign currencyUSD 1,000

13. Date of deduction of tax at source

NA

Certificate No.:
Date : June 10, 2015

AVINASH GUPTA

Place: New Delhi

A P T &Co.
Chartered Accountants
(Firm Registration no. )
Address: A -2/ 89, Safdarjung Enclave,
New Delhi 110029
Membership No.

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or a formal recommendation. The document is made with utmost professional caution but in no manner guarantees the
content for use by any person. It is suggested to go through original statute / notification / circular / pronouncements
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