A. INCOME FROM SALE OF EQUITIES BY FIIS TAXABLE AS CAPITAL GAINS

B. GEPT REVIEW PETITION REGARDING TAX LIABILITY DISMISSED

C. EMPLOYEES TRAVELLING OVERSEAS FOR 180 DAYS TO BE TREATED AS NON-RESIDENTS

D. NON RESIDENT EMPLOYER LIABLE TO PAY FBT EVEN IF ITS INCOME IS NOT TAXABLE

E. WITHHOLDING TAX TO BE DEDUCTED FOR PURCHASE OF SOFTWARE FROM NON RESIDENT

F. OVERSEAS COMPANY'S CAPTIVE BPO IN INDIA NOT ITS PE & HENCE NOT TAXABLE

The Authority for Advance Ruling (AAR) has given a new dimension to the tax-treatment of income earned by Foreign Institutional Investors (FIIs) investing directly in Indian stocks. In a landmark ruling given to US- and Canada-based Fidelity Group, the quasi judicial authority has ruled that the income from sale of Indian equities by the 38-odd off-shore funds managed by this group will be treated as capital gains. What this implies is that the profits of these funds from investments in securities will be treated as capital gains and not as business income.

The AAR provides a ruling on the potential tax liabilities of foreign investors operating in India . The latest ruling could mean that foreign portfolio investors may have to pay a 10% capital gains tax, if they off-load shares within one year of holding them. Investments in stocks, if held for a year or more, are exempt from long-term capital gains tax.

The ruling will, however, not have any impact on FIIs routing investments through Mauritius or Singapore. Mauritius does not tax capital gains and Mauritius-based FIIs are exempted from paying capital gains tax here. This benefit has now been extended to Singapore-based FIIs under the improved protocol on double taxation between India and Singapore , subject to certain conditions.

The AAR ’s ruling comes as a blow to several US-based FIIs, who were hoping to get a capital gains tax waiver. These FIIs were banking on an earlier ruling by the authority to Fidelity Series VIII. The AAR had held that the trading income of this company would be taxable only in the US and not in India as it did not have a permanent establishment (PE) here. After this ruling, around 38 FIIs of the Fidelity Group, having a similar structure and operating through sub-accounts, sought a ruling on the tax treatment on investments in shares in India . Although an advance ruling is binding only on the applicant and the tax department, it has a “persuasive” value as other taxpayers can quote this ruling.

Fidelty Advisor Series VIII was a business trust organised under the US law. It was registered with Sebi as a sub-account of an FII and had appointed an Indian custodian — a bank providing custodial and banking services to a number of clients. The trading operations were carried out through brokers in India . The company had approached the AAR to specifically determine whether gains accruing from trading in Indian securities would be treated as business income or capital gains. The authority, which looked at the frequency of purchase and sale of shares, held that the gains were in the nature of “business income” and should be taxable according to the provisions of the Indo-US Tax Treaty. Since the company was executing the trades through a custodian in India , who was also offering similar services to several FIIs, the AAR held that the agent had an independent status and cannot be treated as a permanent establishment in India . In the absence of a PE in India , the trading income of Fidely Advisor Series VIII was held to be taxable only in the US and not in India .

Most of the FIIs come from countries that have a tax-treaty with India and most of them do not have a permanent establishment or a fixed place of business in India . In such cases, in view of the new ruling, if their income from sale of shares is categorised as capital gains, they will have to pay a 10% short-term capital gains.

Source: Economic Times

The Authority for Advance Ruling (AAR), a quasi-judicial body, last week dismissed a miscellaneous application by General Electric Pension Trust (GEPT) for reconsideration of an earlier ruling, which said the American trust has to pay tax in India .

The income-tax department has reopened a number of FII assessments, where the funds have invested in India directly from their respective home countries without routing through places like Mauritius , which has a double taxation avoidance pact with India .

The dismissal of the petition, if eventually upheld by higher courts, would result in the department imposing a 41.5% tax on FIIs’ net profit. This is the same rate that applies to the Indian branches of MNCs.

The miscellaneous application was against an earlier AAR order, delivered in 2005. While AAR rulings are binding only in specific cases, such orders often influence assessing officers. AAR , in its original order, had concluded the FII was not eligible to be considered a resident of the US for the purpose of taxation since it enjoys tax exemption in that country. Therefore, it is not entitled to tax benefits accorded under the double taxation avoidance treaty (DTAA) between the US and India . The ruling could apply to other entities, which enjoy tax-exempt status in the US .

In the present case, GEPT was ready to show that it was a tax resident of the US by producing a certificate from the Philadelphia revenue authorities. But since the certificate was originally procured to be produced in Australia , AAR said it could not recognise a third party evidence.

The question of permanent residence was raised by GEPT. It said it does not have a permanent residence and since what it earned from India was in the nature of “business income”, under the provisions of the India-US treaty, it was eligible for exemption from taxation in India .

Source: Economic Times

In an order that would provide great relief to corporate executives going abroad for 182 days or more, the Authority for Advance Ruling (AAR) has decided that tax is not leviable on the salary they receive in India since they will be considered as non-residents during the year.

AAR , a quasi judicial body on tax matters, gave this verdict on a petition filed by British Gas. AAR was clarifying the doubts over the issue whether a person can be considered non-resident Indian if he travels outside India for more than 182 days in a year even as his travel is linked to his employment in India.

A person who travels outside India to take up a job is a non-resident and hence not taxable in India . However, the issue before AAR was whether a person travelling overseas for more than 182 days in connection with his employment in India was entitled to pay tax or not. The Income Tax Department sought to levy tax on the income of such executives who travelled abroad for more than 182 days by denying them the status of a non-resident. The department sought to deny the non-resident status on the ground of having been employed in India .

In the case of a British Gas employee who was deputed to the UK for two years from May 25, ’05 , the department took a stand that tax was leviable in India because he stayed in India for 88 days. The department was relying on a provision in the Income Tax Act by which one can be considered a resident of India even if he stays in the relevant year only for 60 days but has been in India all the days in the four previous years.

AAR said there are two requirements in Section 6 (1) which defines residence of an individual in India . (1) If the individual is in India in the relevant year for 182 days or more. Second, he can be construed a resident even if he stays only for 60 days but has been in India all days for the previous four years. Now in a new explanation in the Income-tax Act, the provision of 60 days has been replaced by 182 days. This change implies that if a person is not in India for more than 182 days in a given year, he could not be construed as resident in India and hence the income generated outside India during this period would not attract tax in India . According to the explanation, this is the case even if the person’s employment is in India .

The AAR gave effect to this explanation in deciding the case of the British Gas employee. According to the AAR , a careful reading of the explanation (a) to section 6 (I) of the I-T Act would show that the requirement of the explanation is not leaving India for employment outside India .
For the purpose of the explanation an individual need not be an unemployed person who leaves India for employment. Therefore, the fact that the person was already an employee at the time of leaving India is hardly material or relevant. For all these reasons, the AAR held that he was not a resident in India in Financial Year 2006.

Source: The Economic Times

The Authority for Advance Rulings (AAR) has ruled in the case of The Population Council Inc (PCI)., that a foreign employer is liable to pay Fringe Benefit Tax (FBT) in India even if no income-tax is payable on its total income computed in accordance with the provisions of the Income Tax Act (the Act).

PCI, a resident of USA , an international non-profit and non-governmental organization had a regional office and a country office in India . It carried on charitable, scientific and educational activities and it enjoyed tax exemption from Federal Income-tax. The expenses incurred by it in India which included fringe benefits provided to the employees were met by remittances from its head office in New York .

PCI contended that it was not liable to pay FBT under section 115WA of the Act since FBT could be levied only when an employer was chargeable to income-tax. It further contended that it was not chargeable to income-tax in India in view of Article 1(2) of the Double Tax Avoidance Agreement between India and USA (DTAA).

The Commissioner contended that as per section 2(17)(ii) of the Act, the status of PCI was that of a company incorporated by the laws of a country outside India and was therefore, a ‘company’ as given in article 3(f) of the DTAA. Article 1(2) of the DTAA could not be interpreted to mean that the other contracting state was also bound to grant tax exemption under its domestic laws to a tax exempted resident of a contracting state. The article, however, did not provide any exemption from FBT to an organization like PCI and the provisions thereof had no relevance to the question raised by PCI. PCI was an ‘employer’ for FBT under section 115WA(1) of the Act. PCI could claim exemption under sections 10(23C) or 12AA of the Act, however, it did not claim to have been notified or approved for the purpose of exemption under the said provisions. PCI had a Permanent Establishment in the form of its regional office in India . The Commissioner further relied on Circular No. 8 of 2005 dated 29 August 2005, where it was provided that foreign companies which had employees based in India were liable to pay FBT even if their income was exempt under the DTAA.

After considering the contentions of both the parties, the AAR ruled that PCI could not contend that since its total income could not be computed in accordance with the provisions of the Act, no FBT would be payable by it as an ‘employer’. Such an interpretation would be contrary, not only to the intention of the Parliament, but also to the plain language of the provision and the basic principles of interpretation. The AAR therefore held that PCI was liable to pay fringe benefit tax under section 115WA of Act even if no income-tax was payable in India .

In the case of Headstart Business Solutions Private Limited ('HBSPL'), The Authority for Advance Rulings (AAR) has held that there exists a legal obligation on the part of HBSPL to withhold taxes whilst making payment for the software purchased from MRSC.

Facts of the case:

Microsoft Regional Sales Corporation, Singapore ('MRSC') is a non-resident company based in Singapore had entered into a Solution Provider Agreement ('SPA') with HBSPL for supplying packaged business software solutions. The product is delivered in physical form through a compact disc accompanied by a software licence key, which is delivered electronically through e-mail over the internet. The software licence key that is purchased from MRSC always bears the name of the client to whom the software is to be delivered.

HBSPL, in its application before the AAR raised only one question as to whether there exists a legal obligation on the part of HBSPL to withhold taxes whilst making payment for the software purchased from MRSC.

Contentions of the parties:

HBSPL argued that the payments for software are taxable as royalty only if the software imported is accompanied by the copyrights enabling the importer to replicate it and relied on decisions of ITAT in case of Motorola Communications Inc., Ericsson Radio Systems AB, Nokia Networks OY. The company has also referred to the cases of Lucent Technologies and Samsung Electronics Company Ltd. in its submission. The company has further stated that its agreement with MRSC is without any copyrights and it grants only distribution rights. Therefore, the remittance made by the company to MRSC does not require withholding of taxes. The claim of the assessee does not appear to be correct. From a perusal of the agreement enclosed by the company, it is seen that it can make copies of the software purchased from MRSC by taking prior permission from MRSC {as per clause 4.9 of Solution Provider Agreement (SPA)} and further the company can customize the softwares for its clients according to their need. Thus, the MRSC appears to be providing technical know-how by providing licensed software and other assistance to the company. In view of this, the payments to be made to the MRSC will also include an element of royalty and, therefore, the tax will be deductible from such payments."

The jurisdictional Commissioner contended that as per the terms of the agreement entered into by HBSPL, it can make copies of the software purchased from MRSC by taking prior permission from MRSC and further the company can customize the softwares for its clients according to their need. Thus, the Commissioner contended that MRSC appears to be providing technical know-how by providing licensed software and other assistance to the company. In view of this, the payments to be made to the MRSC will also include an element of royalty and, therefore, the tax will be deductible from such payments."

HBSPL, during the hearing, contended that the SPA along with the Addendum clearly and unambiguously classifies the agreement to be in the nature of a purchase of software without any copyright associated with the purchase. As provided under Article 4.1 and 5 of the SPA, HBSPL has obtained only a right to provide licensed software directly to the customers, with no additional distributionship rights being granted. It further contended that the SPA expressly prohibits assignment of any of the intellectual rights vested with MRSC to be HBSPL under Article 5(a) and it does not give HBSPL any right to commercially exploit the product. It also pointed out that the Income Tax Appellate Tribunal (ITAT) has in several cases laid down that the buyer of software is liable to pay royalty only when the copyright is transferred to it. It further contended that the income arising in India to MRSC from the sale of software is business income and in the absence of any linkage to the PE of MRSC in India , the same cannot be brought to tax.

Ruling of the AAR :

The AAR held that the arguments advanced by HBSPL with regard to there being no royalty income or the statement that MRSC has no PE in India are beyond the scope of consideration and subject matter of this application. The question raised by HBSPL does not require it to examine the nature of the payment or to give a finding whether any element of income arises in India for the purposes of taxation under Income-tax Act, 1961. The question raised is only with regard to the liability to withhold taxes while payment is being made to a non-resident company (MRSC).

The AAR pointed out that the expression "any other sum chargeable under the provisions of this Act" would mean a sum on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. The only consideration would be whether payment of the sum to the non-resident is chargeable to tax under the provisions of the Act. The sum may or may not be income or income hidden or otherwise embedded therein. The scheme of tax deduction at source applies not only to the amount paid which wholly bears "income" character but also to gross sums, the whole of which may not be income or profits of the recipient. The AAR approvingly quoted the judgement of the Supreme Court in the case of Transmission Corporation of A.P.Ltd. vs. Commissioner of Income-tax (239 ITR 587) that "The purpose of sub-section (1) of section 195 is to see that the sum which is chargeable under section 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, in any manner, adversely affected. Further, the rights of the payee or recipient are fully safeguarded under sections 195(2), 195(3) and 197. The only thing which is required to be done by them is to file an application for determination by the Assessing officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of certificate authorizing the recipient to receive the amount without deduction of tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at the appropriate rate could be deducted at the source. If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such "sum" to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source.”

The AAR, following the principle laid down by the Hon'ble Supreme Court, held that the expression "any other sum chargeable under the provisions of this Act" in section 195(1) contemplates not only amounts, the whole of which is taxable without deduction, but also amounts of a mixed composition, a part of which only might turn out to be taxable income, as well as other disbursements which are of the nature of gross revenue receipts, are yet sums chargeable under the provisions of Act and come within the ambit of section 195(1) of the Act. Therefore, the AAR ruled that in view of the provisions of section 195(1) there exists a legal obligation on the part of HBSPL to withhold taxes whilst making payment for the software purchased from MRSC.

The Authority for Advance Ruling (AAR) has held in the case of Morgan Stanley that the company’s captive BPO in India is not its permanent establishment (PE) and consequently, the profits attributable to the PE will not be taxable in India in the hands of the foreign entity.

FACTS OF THE CASE:

Morgan Stanley has a captive BPO in India — Morgan Stanley Advantage Services (MSAS) — which provides support services such as IT support, account reconciliation and research among others.The parent company had sought a ruling on various issues including whether the captive BPO will be construed as its Permanent Establishment (PE). If Indian tax authorities were to hold that such activities would tantamount to a PE, the profits attributable to the PE will be taxable in India at the rate of 41% in the hands of the foreign entity.

DECISION OF AAR :

The AAR has ruled that no PE comes into existence if the activities are “contractually outsourced”. Normally an entity becomes a PE, if it has a fixed place of business or is a dependent agent. However, the AAR has said that MSAS does not fit into the definition of a PE. AAR has held that the company’s captive BPO in India is not its PE. This means the income of the parent company will not be liable to tax here in respect of profits attributable to its BPO. This decision is with a caveat: the AAR has ruled that MSAS will be regarded as a PE if the parent company were to send some of its employees to India on deputation for a period of more than 90 days in a financial year.

The judgment given by AAR , Delhi , is binding on Morgan Stanley as well as on the Revenue authorities but the benefit of the same cannot be taken by other assessees except that it will have a persuasive value in their cases if facts are similar. This decision will be welcomed by the BPO industry, which has approached the Government of India seeking exemption for foreign companies that outsource BPO work to India from filing tax returns.