Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: ACCOUNTING STANDARD :: ARTICLES ON INPUT TAX CREDIT IN VAT :: cpt :: TAX RATES - GOODS TAXABLE @ 4% :: due date for vat payment :: VAT Audit :: articles on VAT and GST in India :: VAT RATES :: Central Excise rule to resale the machines to a new company :: form 3cd :: ACCOUNTING STANDARDS :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: list of goods taxed at 4% :: TDS :: empanelment
 
 
News Headlines »
 GST Council fails to break deadlock over indirect tax regime, next meet on Dec 11 and 12 to hammer out differences
 Invoking Writ Jurisdiction For Income Tax Matters
 How to file income-tax returns online
 How Income Tax Returns Are Scrutinised
 All About New Income Disclosure Scheme to make Demonetisation successful
 Your deposit may draw income tax notice
 Accepting payment under IDS 2016
 New disclosure scheme could see 50% tax and 4-year limit on cash use for unaccounted deposits
 Pay 50% tax on unaccounted deposits, or 85% if caught, says Modi government
 Deadline to pay property tax in old currency extended
 Cabinet clears amendments to Income Tax Act

Set principles for income attribution
December, 25th 2007

Close on the heels of the Morgan Stanley decision of the Supreme Court, the Delhi Income Tax Appellate (Tribunal) has rendered two landmark rulings in the case of Rolls Royce and Galileo International Inc, dealing with constitution of permanent establishment (PE) and income attribution principles.
 
Attribution of profits has been a vexed question in international law, and in terms of complexity, the question of determination of PE may be considered as its second cousin. Simply stated, income of a non-resident foreign company is taxed if it has a PE in India.
 
Having established that the foreign company has a PE, the important determination to be made is what portion of the income should be attributed to such PE. The definition of what constitutes PE is a subject matter of interpretation under each treaty. In the absence of a treaty, the Revenue resorts to business connection rule for bringing the non-residents income to tax in India.
 
Recently, the Apex Court attempted to clarify the law on attribution principles in the Morgan Stanley case. The industry, particularly IT and ITEs, breathed a sigh of relief as the Court ruled that no attribution of profits was required where the Indian arm of a foreign company was compensated at arms length i.e. after due consideration of the functions performed and the risks borne in India. The two recent tribunal decisions, though rendered solely on facts, have again brought the issue to forefront in so far as determination of PE and attribution is concerned.
 
Rolls Royce (RR) case
RR, manufacturers of aircraft engines, operates a liaison office in India. The Liaison Office did not comply with return filing requirement since its operations were non-income generating or, at best, the activities were classified as preparatory and auxiliary for India-UK treaty purposes, which are specific exclusions from constitution of PE. However, Revenue took the view that the Liaison Office constituted a dependant agent PE of the UK entity.
 
On the basis of a survey undertaken by the Revenue in the premises of the liaison office, the Revenue was able to vindicate its stand that Rolls Royce constituted a PE in India. As a fact finding authority, the Tribunal recorded a finding based on documents unearthed in the course of the survey
 
The Tribunal ruled that though contracts were signed outside India, the negotiations took place in India and hence, marketing profits arose from Indian operations residing within RRs liaison office. Applying the principle of apportionment laid down by the Apex Court in the 1950s in the Ahmedbhais case, the Tribunal directed the Revenue to charge to tax 35 per cent of profit.
 
While reduction of attribution from 75 to 35 per cent is welcome, it is viewed arbitrarily high and appears no less perplexing. Tax experts have questioned the justification for 35 per cent attribution without regard to arms length principle and use of scientific transfer pricing methodology.
 
Galileo Case
Galileo International Inc is in the business of maintaining and operating the system for providing electronic global distribution services to airlines and tour operators by connecting travel agents with the assistance of Computerised Reservation System (CRS). Galileo appointed an independent Indian agent as Distributor to market and distribute CRS services to travel agents in India.
 
The distributor, in turn, enters into Subscriber Agreements with travelling agencies with access codes, equipment, communications link and support services. The travel agent has an option to access Galileos CRS or may chose to access other CRS.
 
Galileo is remunerated outside India by the airlines and does not receive any remuneration from travel agents. Galileo pays fees for acting as a distributor and providing communication services. The distributor in turn charges fees from the travelling agents.
 
The Revenue held that income arose to Galileo as a result of hardware and systems installed in India. Further, profit on each segment booked through computers installed (in India) constitute a PE and that the distributor was an agent under India-US treaty.
 
In summary, the Tribunal held that a computer hardware with its operating systems constituted a PE, particularly since the distributor was an agent acting on behalf of Galileo.
 
It is for the Tribunal to find facts and for the high courts and the Supreme Court to lay down the law applicable to such facts.
 
In RRs case, the Revenue department relied on survey findings for latter years to arrive at conclusion for earlier years. This is clearly a subject matter of debate. In the well reasoned Galileo order, whether a computer can constitute a PE or not is clearly debatable.
 
Well, if the European tax courts have adjudicated on whether a pipeline or vending machine is a PE, Indian courts will now adjudicate on computer constituting a PE. I have no doubt that substantial question of law arises in both cases, besides complex e-commerce cross border tax issue in Galileos case.
 
Income from international cross-border trade and investment may be taxed either in the source country or the country of residence. Residence taxation is based on the principle that tax payers should contribute towards the public services provided by the country where they are residents. Source taxation is justified by the view that the country which provides an opportunity to generate income should have the right to tax.
 
The degree of source versus residence tax depends on each treaty; capital-exporting richer countries prefer the OECD model treaty; which is favourable to residence, while capital-importing developing countries tend to favour the UN model treaty, which is more favourable to source.
 
With India no longer a predominant capital importer, but rather, a significant capital exporter, it is time that India reviewed its model treaty. It appears that we shall shift more towards a residence model. If we dont, we shall run the risk of being meted stricter source-based interpretation in countries that follow source rules. It will be interesting to see how our treaty model goes through a change as we embark on path to become a OECD member.
 
Mukesh Butani
The author is a partner of BMR & Associates. Views expressed are personal
 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
SEO Company Search Engine Optimization Company US SEO Local SEO Company Website SEO Company Alabama SEO Company Alaska SEO Company Arizona SEO Company Arkansas SEO Company California SEO Company Colorado SEO Company Connecticut SEO Company Delawa

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions