Studycafe.

in

Overview of
International Taxation & DTAA

CA Avinash Gupta
LLM (Vienna), FCA, LLb, B. Com. H (SRCC)
President, Tax Research Foundation

APT & Co LLP

Chartered Accountants
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INDEX

UNDERSTANDING
CONCEPT

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Sharing of Tax Revenue

INDIA Korea Japan Singapore US

Marketing
Strategy
Sales
Global Representatives
Manufacturing Marketing &
Global HQ Warehouse
Unit Advertising Marketing &
Centre Business
Shifting of Development
Product Planning Manufactured Goods
& from Factory to an Delivery of Products
Technical Designs APAC Warehouse Customers

Product Supply Agreement

Payment for products

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CONCEPT

 What is “International Taxation”?

 Which income is to be taxed and where?
 Categories of International Tax
 Cross Border Trade in Goods and Services
 Cross Border Manufacturing by MNCs
 Cross Border Investments
 Taxation of Individuals working outside country
 System of Taxation
 Territorial System (For e.g. France, Singapore, Hong Kong, Panama)
 Global Tax System or Worldwide Tax System (like India, UK)
 Citizen Based Taxation (only in USA, Now India also)

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CONCEPT

 Source Vs Residence Rule

 Need for Double Tax Relief
 Bi-lateral Relief – DTAA
 Unilateral Relief
 Tax Residency Certificate Vs Incorporation Certificate
 Tax Heavens
 Need for Transfer Pricing

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Section 195 – Overview applicability

Section Provisions
195(1) Scope and conditions for applicability

195(2) Application by the ‘Payer’ for determining sum chargeable

195(3) Application by the ‘Payee’ for lower or Nil withholding

195(4) Validity of certificate issued by the AO u/s 195(3)

195(5) CBDT empowered to make Rules in respect of sec 195(3)

195(6)* CBDT empowered to provide forms in which information to be furnished for

all payments made non-resident or a foreign company whether taxable or
not
195(7) CBDT empowered to specify class of persons or cases (where recipient is
NR) who will be mandated to furnish application to AO for determination of
withholding rate

* Amended by Finance Act, 2015, applicable from 1st June 2015

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Section 195(1) – Scope and applicability

– Applicable on any sum (other than salary)

– All types of payments covered unlike domestic WHT provisions wherein specific
payments are covered

– payable by any person to a non-resident

– Transactions between Resident to Non-Resident as well as between Non-Resident &
Non-Resident also covered

– which is chargeable to tax in India

– Provisions of the Act or DTAA, whichever is beneficial shall apply

– Deduction at the time of credit of payment, whichever is earlier

– at rates in force
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Determination of ‘Any sums chargeable

to tax’…

• Charge of Income Tax – Section 4

• Scope of Total Income – Section 5

– Accruing or deemed to accrue
– Received or deemed to receive

• Residential Status – Section 6

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DTAA and Domestic Law

Nature of Income Income Tax Act Treaty/DTAA

Business/Profession Section 9(1)(i): Concept of Article 5;7; 14: Concept of PE
Business Connection or Fixed Base
Salary Income Section 9(1)(ii) Article 15

Dividend Income Section 9(1)(iv) and section 115A Article 10

Interest Income Section 9(1)(v) and section 115A Article 11

Royalties Section 9(1)(vi) and section 115A Article 12

FTS Section 9(1)(vii) and section 115A Article 12

Capital Gains Section 9(1)(i) and section 45 Article 13

Provision of Act or DTAA, whichever is beneficial shall apply

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Furnishing TRC mandatory

requirement
• Furnishing of TRC made mandatory to avail treaty benefits
• Notification 57/2013 dated 1 August 2013 issued by CDBT, which
mandates submission of following information in Form 10F:
– Status (individual, company, etc) of the assessee
– Nationality or country or specified territory of incorporation or registration
– Assessee’s tax identification number in the country or specified territory of
residence and in case there is no such number, then, a unique number on the
basis of which the person is identified by the Government of the country or the
specified territory of which the assessee claims to be a resident;
– Period for which the residential status, as mentioned in the certificate referred to
in sub-section (4) of section 90 or sub-section (4) of section 90A, is applicable;
and
– Address of the assessee in the country or specified territory outside India, during
the period for which the certificate, as mentioned in (iv) above, is applicable.
• Declaration not required, if TRC contains above particulars
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Section 206AA Vs DTAA

 Facts of the Case

 Rate as per Income Tax Act is 10.4% (u/s 115A)
 Rate as per DTAA is 10%

 Situations (Rate of Withholding)

 Non-resident has TRC and PAN
 Non-resident does not have TRC and PAN
 Non-resident have TRC but does not have PAN
 Non-resident does not have TRC but have PAN
 Non-resident have TRC but no PAN and Rate as per DTAA is NIL
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Model DTAA –
OECD Model /
UN Model
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articles
Articles - Classification
Application Definition
provision
Anti Avoidance Elimination of Miscellaneous
provisions double taxation provisions
Article 1 – Article 3 – Article 9 – Article 23 – Article 24 –
Applicability General Associated Elimination of Non
definition enterprise double taxation discrimination

Article 2 – Article 4 – Article 26 – Article 28 –

Taxes covered Residence Exchange of Diplomats
information

Article 30 – Article 5 – Article 27 – Article 25 –

Entry into force Permanent Assistance for Mutual
Establishment collection of tax agreement

Article 31 – Article 29 –
Termination Territorial
extension
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Article 6 Distributive articles

Income from immovable property
Article 7 Business Profit
Article 8 Shipping, inland waterways transport and air transport
Article 10 Dividends
Article 11 Interest
Article 12 Royalties / Fee for Technical Services
Article 13 Capital Gains
Article 14 Independent personal services
Article 15 Income from employment
Article 16 Director’s Fees
Article 17 Artistes and Sportsmen
Article 18 Pensions
Article 19 Government Service
Article 20 Students
Article 21 Other Income
Article 22 Capital
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Provisions

 Section 9 of Income Tax Act, 1961

 Business Connection
 Interest
 Royalty
 Fee for Technical Services
 Rates of Tax under Income Tax Act, 1961
 DTAA
 Article 7 Business Profits read-with Article 5 of PE
 Article 11 Interest
 Article 12 Royalties
 Article 13 Fee of Technical Services
 Rates as per DTAA

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Interest, Royalty
and
Fee for Technical Services

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Interest

 Section 9(1)(v) of Income Tax Act, 1961

 Income by way of Interest payable by

 The Government or
 A person who is a resident, except where the interest is payable in
respect of any debt incurred or money borrowed and used, for the
purpose of a business or profession carried on by such person outside
India or for the purpose of making or earning any income from any
source outside India or
 A who is a non-resident, where the interest is payable in respect of any
debt incurred, or money borrowed and used, for the purpose of a
business or profession carried on by such person in India

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Interest

 DTAA - Article 11 Interest

Interest arising in a Contracting State and paid to a resident of the other

Contracting State may be taxed in that other State.

• However, such interest may also be taxed in the Contracting State in which it
arises, and according to the laws of that State, but if the recipient is the
beneficial owner of the interest, the tax so charged shall not exceed 10 per cent
of the gross amount of the interest.

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Interest

 DTAA - Article 11 Interest

• The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a
resident of a Contracting State, carries on business in the other Contracting State in which the interest
arises, through a permanent establishment situated therein, or performs in that other State independent
personal services from a fixed base situated therein, and the debt-claim in respect of which the interest
is paid is effectively connected with such permanent establishment or fixed base. In such case, the
provisions of article 7 or article 14, as the case may be, shall apply.

• Interest shall be deemed to arise in a Contracting State when the payer is a resident of
that State. Where, however, the person paying the interest, whether he is a resident of a
Contracting State or not, has in a Contracting State a permanent establishment or a fixed
base in connection with which the indebtedness on which the interest is paid was incurred,
and such interest is borne by such permanent establishment or fixed base, then such
interest shall be deemed to arise in the State in which the permanent establishment or
fixed base is situated.

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Interest

 Meaning of Interest

Section 2 (28A) of the Act

"interest“ means interest payable in any manner in respect of any moneys borrowed or
debt incurred (including a deposit, claim or other similar right or obligation) and includes
any service fee or other charge in respect of the moneys borrowed or debt incurred or in
respect of any credit facility which has not been utilised.

Article 11 of DTAA
• The term “interest” as used in this Article means income from debt-claims of every kind,
whether or not secured by mortgage and whether or not carrying a right to participate in
the debtor’s profits, and in particular, income from Government securities and income from
bonds or debentures, including premiums and prizes attaching to such securities, bonds or
debentures. Penalty charges for late payment shall not be regarded as interest for the
purpose of this Article.

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Royalty under Income Tax Act

Payable by Exception/Condition
The Government
A resident except where the royalty is payable in respect of any right, property or
information used or services utilised for the purposes of a business or
profession carried on by such person outside India or for the purposes of
making or earning any income from any source outside India
A non-resident where the royalty is payable in respect of any right, property or
information used or services utilised for the purposes of a business or
profession carried on by such person in India or for the purposes of
making or earning any income from any source in India

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FTS under Income Tax Act

Payable by Exception/Condition
The Government
A resident except where the fee is payable in respect of services utilised in a
business or profession carried on by such person outside India or for the
purposes of making or earning any income from any source outside India
A non-resident where the fee are payable in respect of services utilised in a business or
profession carried on by such person in India or for the purposes of
making or earning any income from any source in India

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FTS -Definition

Meaning under the Act

• Consideration for the rendering of any
– managerial services; or
– technical services; or
– consultancy services
– (including the provision of services of technical or other personnel)
• Exclusion - consideration for
– any construction, assembly, mining or like project or
– income chargeable under the head “Salaries”

Meaning under DTAA

• Same as given under Income Tax Act except in case of “make available”
clause

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Payment of FTS – Application of
“Make Available” Concept

- Payment of Fees for Technicians’ Services do not constitute Fees for Technical
Services (FFTS) under Article 12(4)(b) of the Indo-Singapore DTAA dated
24.01.1994, as such services do not make available technical knowledge,
experience, skill, knowledge or processes, which enable the person acquiring
the services to apply the knowledge contained therein, as held by the Kolkata
Bench of the Income-tax Appellate Tribunal in the case of DCIT v/s. ITC Ltd.
(2002) 82 ITD 239 (Kol) and many other Judicial Decisions.

- The same is also not taxable in India as Business Income under Article 7 of the
Indo-Singapore DTAA as it has been represented to us that the Beneficiary does
not have a Permanent Establishment in India in terms of Article 5 of the said
DTAA.

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Royalty & FTS under DTAA

1. Royalties or fees for technical services arising in a Contracting State and paid to
a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties or fees for technical services may also be taxed in the
Contracting State in which they arise and according to the laws of that State, but
if the beneficial owner of the royalties or fees for technical services is a resident
of the other Contracting State the tax so charged shall not exceed 10 per cent of
the gross amount of the royalties or fees for technical services.

3. (a) The term “royalties” as used in this Article means payments of any kind
received as a consideration for the use of, or the right to use, any copyright of
literary, artistic or scientific work including cinematograph films or films or tapes
used for television or radio broadcasting, any patent, trade mark, design or
model, plan, secret formula or process, or for the use of, or the right to use,
industrial, commercial or scientific equipment, or for information concerning
industrial, commercial or scientific experience.

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Royalty & FTS under DTAA

3.(b) The term “fees for technical services” as used in this Article means payments
of any kind, other than those mentioned in articles 14 and 15 of this Convention
as consideration for managerial or technical or consultancy services, including
the provision of services of technical or other personnel.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the
royalties or fees for technical services being a resident of a Contracting State,
carries on business in the other Contracting State in which the royalties or fees
for technical services arise, through a permanent establishment situated therein,
or performs in that other State independent personal services from a fixed base
situated therein, and the right or property in respect of which the royalties or fees
for technical services are paid is effectively connected with such permanent
establishment or fixed base. In such case the provisions of article 7 or article 14,
as the case may be, shall apply.

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Business Profits
Article 7

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Business Profits

• The profits of an enterprise of a Contracting State shall be taxable only in that

State unless the enterprise carries on business in the other Contracting State
through a permanent establishment situated therein. If the enterprise carries on
business as aforesaid, the profits of the enterprise may be taxed in the other
State but only so much of them as is attributable to that permanent
establishment.

• Subject to the provisions of paragraph 3, where an enterprise of a Contracting

State carries on business in the other Contracting State through a permanent
establishment situated therein, there shall in each Contracting State be
attributed to that permanent establishment the profits which it might be expected
to make if it were a distinct and separate enterprise engaged in the same or
similar activities under the same or similar conditions and dealing wholly
independently with the enterprise of which it is a permanent establishment.

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Permanent Establishment

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Permanent Establishment

• Concept of PE is important for different articles of a tax treaty, especially

Article 7 (Business profits are taxable only if there is a PE)
• The concept of PE is used to determine the right of the Source State to
tax the Business profits of the foreign enterprise
• Article on PE
– Para 1 – PE means fixed place through which business is carried on
– Para 2 & 3 - Specific instances of PE
– Para 4 - Exclusionary clause
– Para 5 & 6 - Agency PE
– Para 7 - Subsidiary PE

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Permanent Establishment

• Article 5(1)
– For the purposes of this Convention, the term
“permanent establishment” means a fixed place of
business through which the business of an enterprise is
wholly or partly carried on.

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Permanent Establishment

• Specific Inclusions Article 5(2)

– A place of management
– A branch
– An office
– A factory
– A workshop
– A mine, an oil & gas well, a quarry or any other place of
extraction of natural resources

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Permanent Establishment

• Building and Construction PE - Article 5(3)

– Building site or construction or installation project
constitutes a PE only if it lasts more than twelve / six
months
• Installation project - Includes the installation of new
equipment
• Building site: not only the construction of buildings but also
the construction of roads etc, renovation

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Permanent Establishment

► Service PE (India-UK Treaty)

• the furnishing of services including managerial services, other than those taxable under Article 13
(Royalties and fees for technical services), within a Contracting State by an enterprise through
employees or other personnel, but only if:

(i) activities of that nature continue within that State for a period or periods aggregating more than 90 days
within any twelve-month period; or

(ii) services are performed within that State for an enterprise within the meaning of paragraph 1 of Article 10
(Associated enterprises) and continue for a period or periods aggregating more than 30 days within any
twelve-month period:

Provided that for the purposes of this paragraph an enterprise shall be deemed to have a permanent
establishment in a Contracting State and to carry on business through that permanent establishment if it
provides services or facilities in connection with, or supplies plant and machinery on hire used or to be
used in, the prospecting for, or extraction or production of, mineral oils in that State.

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Permanent Establishment

► Agency PE
• where a person — other than an agent of an independent status - is acting in a
Contracting State on behalf of an enterprise of the other Contracting State, that enterprise
shall be deemed to have a permanent establishment in the first-mentioned State, if :

(a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the
enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised
through a fixed place of business, would not make that fixed place of business a permanent
establishment under the provisions of that paragraph ;

(b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or
merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and
some additional activities conducted in the State on behalf of the enterprise have contributed to the sale
of the goods or merchandise ; or

(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise.

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Permanent Establishment

• Exclusions from the definition of PE (Article 5(4))

► use of facilities solely for the purpose of storage or display of goods or
merchandise belonging to the enterprise
► maintenance of a stock of goods or merchandise belonging to the enterprise
solely for the purpose of storage or display
► maintenance of a stock goods or merchandise belonging to the enterprise
for the purposes of processing by another enterprise
► maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise or of collecting information, for the
enterprise
► maintenance of a fixed place of business solely for the purpose of carrying
on for the enterprise any other activity of a preparatory or auxiliary character

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Some Terms Generally Used

► LOB Clause
► Non-discrimination Clause
► MFN Clause
► GAAR
► Treaty Abuse
► Force of attraction rule
► CFC Legislation

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Recent Judgments

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Issues

 Duty to deduct tax at source u/s 195 does not arise unless
the remittance contains wholly or partly taxable income.
 GE India Technology Centre Pvt Ltd v CIT 327 ITR 456 (SC)
 Where Tax authorities has accepted the fact that the NR is
not liable to pay any tax in India, the payer is not liable to
deduct TDS u/s 195.
 Van Oord ACZ India (P) Ltd v COIT 36 DTR 425 (Del)
 Maharishi Housing Development Finance Corporation Limited
 Liability to deduct tax for Sale of property arises when Sale
deed clearly showed that seller is NR.
 Mrs. Meena S. Patil v ACIT 30 ITR 317 (Bang Tri)

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Issues

 Machinery imported along with design and

commissioning. Whether payment is towards royalty or
purchase. Hence, TDS is deductible or not.
 CIT v Neyveli Lignite Corporation Ltd. 243 ITR 459 (Mad)
 Commission Income received by a non-resident for
negotiating with prospective customer for participation of
show in India. Right to receive commission arises in
India. Hence, taxable in India.
 Rajiv Malhotra 155 Taxman 101 (AAR-Delhi)
 Commission paid to NR for promoting products outside
India is not taxable if there is no PE of NR in India.
 ACIT v Modern Insulators Ltd. 56 DTR 362 (JP Tri)

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Issues

 Discounting charges paid to NR who does not have any PE

in India cannot be treated as interest. Hence, no need to
deduct TDS u/s 195.
 CIT v Cargile Global Trading (I) Pvt Ltd. 56 DTR 188 (Del)
 Fee collected by resident on behalf of NR for imparting
distance education is not taxable in India if no PE in India.
 FICCI 320 ITR 124 (AAR)
 CIT v Illinois Institute of Technology (India) P Ltd 321 ITR 79
 Sponsorship to popular sports events is sales promotion
expenditure. It cannot be treated as royalty. Hence, no TDS.
 DIT v Sahara India Financial Corporation Ltd 321 ITR 459 (Del)

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Issues
 Software maintenance services provided by NR from
outside India and does not have PE in India. It is not taxable
in India.
 Airport Authority of India 299 ITR 102 (AAR)
 Payment for cost sharing of R&D Expenses is not treated as
FTS or royalty. Hence, no TDS is to be deducted.
 ABB Limited (2010) TIOL 94 ARA-IT dt. 15.03.2010
 Routine Data Processing services and document handling
services provided by a NR who is not having any PE in India
is not taxable.
 RR Donnelley India Outsourcing Pvt Ltd 56 DTR 1(AAR)

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Issues
 Telecommunication facility provided by a NR outside India is
not regarded as FTS. Hence, no TDS.
 Wipro Ltd. v ITO 133 Taxman 149 (Bang Tri)
 Software Technology Parks of India v ITO 3 SOT 529 (Bang Tri)
 Other charges reimbursed along-with royalty payment by a
resident hotel company to US NR is not chargeable under
Royalty under India-US DTAA. It is taxable in India only if
NR have PE in India.
 Six Continents Hotels Inc. v DCIT 11 taxmann.com 332 (Mum Tri)
 Payment for Database maintained outside India by NR is
not taxable in India if NR does not have PE in India.
 Gartner Ireland Ltd. v DCIT 42 SOT 21

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Issues

 Referral fee paid to NR is not taxable in India.

 Cushman and Wakefield Pte Ltd. 305 ITR 208 (AAR)
• Reimbursement salaries & living allowances to deputees
-Held salaries of technicians:
– HCL Infosystems (274 ITR 261 – Delhi)
– CIT Vs. BHEL (252 ITR 218 – Delhi)
– Held as FTS & salaries:
– AT & S India (P) Ltd. (287 ITR 421 (AAR))
– Verizon Data Services P.Ltd.(AAR) (May 2011)

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Export Commission
For:
• Circular No. 23 dt. 23.7.1969
• Circular No. 786 dt. 07.02.2000.

This view is also supported by

• Supreme Court in CIT v/s. Toshuku Ltd. (1980) 125 ITR 525 (SC).
• Delhi High Court in CIT v/s Eon Technology P. Ltd.(Nov. 2011)
• AAR in Spahi projects P.Ltd. 315 ITR 374 (AAR)

However there is a contrary ruling in case of Wallace Pharmaceuticals P. Ltd. 278 ITR 197 (AAR)

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Reimbursement of Expenses
For:

• Lucent Technologies (82 TTJ 163)

• TCS (271 ITR 401)
• Nokia, Erricson and Motorola (95 ITD 269)
• Sonata Information Technologies (103 ITD 324 (Bang))
• Hewlett Packard (India)(P) Ltd[(2006)5 SOT 660(Bang)]
• Metapath Software Inernational Ltd [(2006)9 SOT 305]

Against:
• Samsung Electronics Co.Ltd. (Karnatka High Court )(Oct. 2011)
• Airports Authority of India Vs. DIT[304 ITR 216(AAR)]

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Reimbursement of Expenses
For:
• CIT Vs. TELCO (245 ITR 823 (Bombay))
• DECTA v CIT (237 ITR 190 (AAR))
• CIT Vs. Industrial Projects (202 ITR 1014-Delhi)
• Sedco Forex International inc. vs. CIT (299 ITR 238 (Uttarakhand))
• Clifford Chance 82 ITD 106-Mumbai)
• Mahindra & Mahindra Ltd. (10 SOT 896 (Mum))
• Dolphin Drilling Ltd. vs. ACIT 121 TTJ 433 (Del))

Against:
• Cochin Refineries (222 ITR 354 (Ker))
• Hindalco (278 ITR 125 (AT))
• CIT Vs. Dunlop (142 ITR 493 (Cal))
• Ashok Leyland Ltd. vs. DCIT (119 TTJ 716 (Cal))
• Danfoss Ind. (268 ITR 1 (AAR))

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Questions ???

Let’s Discuss
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APT & Co LLP

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