Taxmann's Cross-Border Transactions under Tax Laws & FEMA

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About the Authors

Dr. G. Gokul Kishore i s a n Adv oc at e a nd i ndi r ect t ax e x pert w i t h mor e t ha n 28 ye ars of e x peri e nce. He r e pr es e nt s i nd ust r y bef or e a dj udi c ati ng & a ppell at e a ut hori ti es a nd H i g h Co urt. He a dvi s es me mbers of i nd ust r y o n GS T , Cust o ms, F E MA , Le gal Met r ol ogy, I P R a nd Cor por at e l a ws. He was part of a Ti er- 1 l a w fir mf or ni ne ye ars aft er ha ndli ng e di t ori al assi g n me nt s i n Exci s e La w Ti mes & Ser vi ce Tax Re vi e w f or five ye ars. He wor ke d i n t he Ce nt r al Exci s e De part me nt f or t wel ve ye ars.

Dr. Gok ul K i s hor e has wri tt e n ext e nsi vel y a nd p ubli s he d over 300 arti cl es i n pri nt a nd o nli ne me di a li ke Fi na nci al Ex pr ess, Tax ma nn, Taxi ndi ao nli ne, VI L GS T , ELT a nd S T R . He r e g ul arl y deli vers l ect ur es as part of t r ai ni ng s essi o ns f or bot h de part me nt al of ficers a nd t ax payers. He hol ds doct or at e f or r es e ar c h i n i ndi r ect t axati o n. He e di t s R . K . J ai n ’ s GS T La w Ma n ual besi des bei ng c o- a ut hor of t he book “ GS T – I nvesti - gati o ns, De ma nds Adj udi c ati o n a nd Appe al s” p ubli s he d by Tax ma nn.

R. Subhashree i s a n Adv oc at e s peci ali zi ng i n I nc o me Tax l a w . She r e pr es e nt s i nd ust r y bef or e ass essi ng & a ppell at e a ut hori ti es a nd I TAT . She f oc us es o n bot h do mesti c a nd i nt er nati o nal t axati o n besi des GS T a nd has a dvi s e d i nd ust r y o n st r uct uri ng, r esi de nc y, w i t hhol di ng o bli - gati o ns, F TS , r oyal t y a nd a ppli c a bili t y of DTAA . Her a dvi s or y i ncl udes I P R , Co nt r act s a nd Co mmer ci al l a ws. She was ass oci at e d w i t h a Ti er- 1 l a w fir mf or ni ne ye ars.

Subhas hr ee i s a r e g ul ar wri t er o n di r ect t ax c ha nges a nd maj or r uli ngs f or t he past 15 ye ars. Her arti cl es have bee n p ubli s he d i n Fi na nci al Ex pr ess, Tax ma nn, VI L GS T a nd Taxi ndi a o nli ne. She i s t he c o- a ut hor of t he book “ GS T – I nvesti gati o ns, De ma nds, Appe al s a nd Pr os ec uti o n” p ubli s he d by Tax ma nn.

Preface to Third Edition

Industry and businesses regularly import and export both goods and services. Such cross-border transactions often attract the scrutiny of the tax department. The Income Tax Department raises questions on arm’s length price as per transfer pricing provisions under Income Tax Act when the transactions are between associated enterprises. Creation of Permanent Establishment (PE) when personnel from one company come to work in India for providing services or when an entity operates as an agency for a foreign company poses formidable challenges for both the companies and the tax department. Achieving tax efficiency and being fully compliant without losing the benefit under the relevant Double Taxation Avoidance Agreements (DTAAs) is one of the major concerns of industry.

The Income Tax Department is focussed on avoiding shifting of profits and therefore, seeks to effectively lower the price adopted for payment to overseas parties. On the other hand, the Customs department is concerned over undervaluation of imports and seeks to load the declared value of imported goods with various costs and expenses besides the ground of value being influenced by relationship wherever the importer and exporter are related persons as per Customs Valuation Rules.

GST law through IGST Act plays crucial role on crossborder services. Place of supply, export of service, services provided between establishments of same entity in different

jurisdictions, intermediary service and special dispensation for online service providers require rigorous examination for both availing export benefits as well as ensuring optimal compliance. Companies with trans-border operations also need to comply with withholding obligations under Income Tax Act which again is dependent on DTAA provisions and passing the stringent test of taxability in case of certain incomes like royalty and FTS.

Applicability of international taxation, adoption of appropriate transfer pricing, valuation of both imported and exported goods under Customs law and treatment of import and export of services under IGST Act are major areas requiring clarity.

Exemptions from customs duties for imported goods either through customs notifications generally or in particular, under export promotion schemes provided in Foreign Trade Policy are often availed by companies. This book through a dedicated chapter focusses on such exemptions and export incentives.

As payment and receipt of consideration is one of the key elements in both direct and indirect tax laws, Foreign Exchange Management Act (FEMA) along with rules, regulations and RBI’s master directions and master circulars provide the regulatory framework. It further intersects with IT Act by regulating establishment of branch office or liaison office of foreign companies in India and this inter-section assumes great significance from the point of view of companies undertaking business involving India through their establishments or using them only as communication channel. The interplay is more pronounced when export of service is examined under IGST Act between establishments of the same legal entity in different jurisdictions and when services like intermediary is considered. Therefore, this book includes not only a separate chapter on FEMA but also references to it in other chapters wherever necessary.

We find that a comprehensive work covering at one place cross-border transactions of goods and services from the perspective

or applicability of Income Tax Act, Customs Act, IGST Act and FEMA is not available to stakeholders. This books endeavours to fill this void.

We have tried to provide practical guidance based on judicial interpretation of the law and rules along with easyto-understand commentary on the provisions along with departmental clarifications. We hope this book is useful to the industry in comprehending cross-border tax implications and in providing technical inputs to practitioners, judges and assessing officers by highlighting finer nuances of both the statutory provisions as well as interpretation of the same by the department and the judiciary and tribunals. This third edition is updated with developments as on date – statutory changes and orders/judgments.

We are indebted to our parents for sacrificing whatever they had to ensure we have access to the best education without which this book could not have been a reality. We are grateful to Mr. V. Lakshmikumaran, Advocate for the learnings and Taxmann – the tax publishing industry leader for encouraging us by providing continued support to this book. We thank members of our families, professional colleagues and friends for their constant support.

May, 2023

Chennai

Email: advgokulsubha@gmail.com

G. Gokul Kishore

R. Subhashree

APPENDICES

( Del hi - Tri b ) 283, 284, 378 I nt er nati o nal Ti r e Engg. Res o ur ces LL C , In re [ 2009] 185 Tax ma n 209 ( AA R)

I nt err a I nf or mati o n Tec hnol ogi es ( I ndi a) ( P . ) Lt d. v. Dy. CI T[ 2012] 27 t ax ma nn c o m 1/[ 2013] 55 S OT 585 ( Del hi - Tri b )

I r un way I ndi a Pri vat e Li m i t e d v. De p ut y Co mm i ssi oner of I nc o me-

I s hi ka waj ma- Hari ma He avy I nd ust ri es Lt d. v. DI T [ 2007] 158 Tax ma n 259 ( S C)

I s pat I nd ust ri es Lt d. v. CC , Mu mbai [ 2006] 2006 t ax ma nn. c o m 285/( 202) ELT 561 ( S C)

3.1 TAXING POWERS AND SOURCE OF INCOME

The ge ner al underst a ndi ng of po wer t o t axi nc o me ari si ngi n a parti c ul ar c o unt r y wo ul d be t hat t he c o unt r y of s o ur ce wo ul d have t he ri g ht t o t ax t he s a me. A nati o n i s s over ei g n i n r es pect of i t s t erri t or y a nd he nce a t r a ns acti o n whi c h t a kes pl ace w i t hi n i t s t erri t or y, i nv ol vi ng us e of t he nati o n ’ s r es o ur ces - be i t pl ace, p ur c hasi ng po wer, c o ns u mpti o n by t he g over n me nt, et c - s ho ul d i de all y be w i t hi n t he j uri s di cti o n of t he St at e.

I n cr oss- bor der t r a ns acti o ns t her e wo ul d be o ne or mor e act ors who ar e not r esi de nt s ( f r o m a t ax pers pecti ve) or ci ti z e ns of a St at e a nd he nce t he ho me St at e of r esi de nce or ci ti z e ns hi p wo ul d al s o ass ert i t s ri g ht t o t ax t he i nc o me ari si ng t o s uc h pers o n (i ndi vi d ual, c or por at e e nti t y, et c). I n a s ce nari o wher e bot h ( or ma ny nati o ns) ass ert t hei r ri g ht t o t ax t he i nc o me, t he pers o n wo ul d be s ubj ect t o do ubl e t axati o n. I n or der t o all e vi at e t hi s b ur de n o n t he pers o n, nati o ns r es ol ve t o det er m i ne t hei r t axi ng ri g ht s t hr o ug h bil at er al i nst r u me nt s or t he Do ubl e Taxati o n Av oi da nce Agr ee me nt s ( DTAAs).

An i mport a nt as pect of t axati o n of no n- r esi de nt by t he s o ur ce St at e i s t he li nk bet wee n t he i nc o me e ar ne d/ari si ng t her ef r o m a nd t he acti vi - t y undert a ke n or s o ur ce l oc at e d i n t he St at e. Let us s ay, a pay me nt i s ma de t o a no n- r esi de nt t hr o ug h a ba nk i n I ndi a. The pay me nt may be i n r es pect of g oo ds p ur c has e d by t he pers o n i n Lo ndo n. It wo ul d be arg ue d t hat o nl y t he s o ur ce of pay me nt i s i n I ndi a a nd I ndi a c a nnot have a ny ri g ht t o t ax t he pay me nt. I n a not her s ce nari o, a s ubsi di ar y may s ell g oo ds i n I ndi a whi c h ar e ma n uf act ur e d usi ng t ec hnol ogy s uppli e d by a no n- r esi de nt. T wo i nc o mes may ari s e f r o mt hi s t r a ns acti o n - pay me nt of r oyal t y t o t he no n- r esi de nt f or t he t ec hnol ogy a nd i nc o me f r o ms al e of s uc h pr o d uct s. The no n- r esi de nt may f urt her be e nti tl e d t o a r unni ng

r oyal t y o n t he g oo ds s ol d. Ho we ver, wo ul d i t be c orr ect t o s ay t hat t he no n- r esi de nt i s li a bl e t o t ax i n I ndi a f or s al e of t he g oo ds al s o?

I n CIT v. R. D. Aggarwal & Company

1 t he Supr e me Co urt pl ace d e mp hasi s o n r e al a nd i nti mat e c o nnecti o n bet wee n t he b usi ness c arri e d o n a nd t he acti vi t y i n t he t axa bl e t erri t or y. Th us, wher e t he age nt o nl y assi st e d i n i nvi ti ng off ers whi c h t he no n- r esi de nt was not o bli ge d t o acce pt, t her e was no b usi ness c o nnecti o n.

“ A busi ness c o nnecti o n i n S . 42 i nv ol ves a r el ati o n bet wee n a busi ness carri e d o n by a no n- r esi de nt whi c h yi el ds pr ofi t s or gai ns a nd s o me acti vi t y i n t he t axa bl e t erri t ori es whi c h c o nt ri but es di r ectl y or i ndi r ectl y t o t he ear ni ng of t hos e pr ofi t s or gai ns. It pr e di cat es a n el e me nt of c o nti nui t y bet wee n t he busi ness of t he no n- r esi de nt a nd t he acti vi t y i n t he t axa bl e t erri t ori es a st r ay or i s ol at e dt r a ns acti oni s nor mall y not t o be r egar de d as a busi ness c onnecti on. Busi ness c o nnecti o n may t a ke s ever al f or ms i t may i ncl ude carr yi ng o n a part of t he mai n busi ness or acti vi t y i nci de nt al t o t he mai n busi ness of t he no n- r esi de nt t hr o ug h a n age nt or i t may mer el y be a r el ati o n bet wee n t he busi ness of t he no n- r esi de nt a nd t he acti vi t y i n t he t axa bl e t erri t ori es, whi c h f acili t at es or assi st s t he carr yi ng o n of t hat busi ness. ”

The pr of essi o nal r el ati o ns hi p of a no n- r esi de nt s oli ci t or, w i t h a n I ndi a n fir m will al s o be a b usi ness c o nnecti o n. I n

Barendra Prosad Ray v. ITO 2, t he Co urt hel d t hat t her e was a c o nnecti o n bet wee n t he I ndi a n fir ma nd t he Bri ti s h s oli ci t or whi c h was r e al a nd i nti mat e a nd not j ust a c as ual o ne a nd t he f ees e ar ne d by t he s oli ci t or was o nl y t hr o ug h t hi s c o nnec - ti o n, a nd he c o ul d not have do ne s o w i t ho ut ass oci ati ng hi ms el f w i t h t he fir m . Th us, t he i nc o me e ar ne d by t he s oli ci t or was s ubj ect t o t ax i n

I ndi a, a nd paya bl e by t he fir m as age nt s of t he s oli ci t or. It was opi ne d t hat t he c o nt e xt i n whi c h t he e x pr essi o n “ b usi ness c o nnecti o n” i s us e di n s ecti o n 9( 1) cl e arl y s ho ws t hat t her e i s no warr a nt f or gi vi ng a r est ri ct e d me a ni ng t o i t by e xcl udi ng “ pr of essi o nal c o nnecti o ns” f r o mi t s s c ope.

Sal e of c a pi t al ass et s l oc at e d o ut si de I ndi a a nd whi c h ha d no c o nnecti o n w i t h b usi ness oper ati o ns i n I ndi a wo ul d not be t axa bl e i n I ndi a d ue t o a bs e nce of b usi ness c o nnecti o n. I n CIT v. Quantas Airways Ltd. 3 i t was hel d t hat t ho ug h c a pi t al gai ns was part of dee me d i nc o me si nce t he Parli a me nt s peci fic all y i ncl ude d i nc o me ( a ) t hr o ug h or f r o m a ny pr op - ert y i n I ndi a, (b ) t hr o ug h or f r o m a ny ass et or s o ur ce of i nc o me f r o m I ndi a a nd ( c ) t hr o ug h or f r o m s al e of c a pi t al ass et si t uat e i n I ndi a, s al e of c a pi t al ass et s si t uat e d o ut si de I ndi a wo ul d not be c over e d.

Source of income

The oft q uot e d des cri pti o n of s o ur ce i s “

ascertaining of

actual

Thi s i s a pass age f r o m I ngr a m ’ s wor k o n I nc o me- t ax, q uot e d by Mr. J usti ce de Villi ers a nd a ppr ove d by Pri vy Co uncil i n Rhodesia Metals Ltd. (Liquidator ) v. Commissioner of Taxes 4 .

I n Anglo-French Textile Co. Ltd v. CIT 5, t he Supr e me Co urt hel d t hat wher e pr o fit s wer e r ecei ve d wholl y i n I ndi a i n r es pect of s al es ma de partl y i n I ndi a a nd partl y i n Bri ti s h I ndi a, t he s a me wo ul d be t axa bl e i n I ndi a a nd i t c a nnot be s ai d t hat t he i nc o me ar os e o ut si de I ndi a. I n t he i nst a nt c as e all t he c o nt r act s i n r es pect of t he s al es i n Bri ti s h I ndi a wer e e nt er e d i nt o i n Bri ti s h I ndi a a nd deli veri es wer e ma de a nd pay me nt s wer e r ecei ve d i n Bri ti s h I ndi a e ve n i n r es pect of s al es o ut si de Bri ti s h

I ndi a t ho ug h age nt s.

The H i g h Co urt of Del hi i n CIT v. Havells India Ltd. 6 , e xa m i ne d t he c o n - t e nti o n of t he ass ess ee t hat t esti ng f ees pai d t o a n age nc y o ut si de I ndi a t o o bt ai n a certi fic ati o n whi c h was t he r e q ui r e me nt of t he l oc al l a ws s o t hat t he g oo ds c o ul d be e x port e d t o t hat c o unt r y was not t axa bl e i n I ndi a. The ass ess ee ar g ue d t hat t he s o ur ce of i nc o me, na mel y t he e x port s was o ut si de I ndi a a nd he nce, t ec hni c al f ee pai d f or e ar ni ng of i nc o me o ut si de I ndi a was not t axa bl e i n I ndi a a nd t her ef or e no t ax was r e q ui r e d t o be de d uct e d at s o ur ce. The ass ess ee r eli e d o n CIT v. Anglo French Textiles Ltd. 7, wher ei n t he r e ve n ue a ut hori ti es uns uccessf ull y ar g ue d t hat i mport e nti tl e me nt s e ar ne d by t he ass ess ee who e x port e d g oo ds f r o m Po ndi c herr y pri or t o i t s mer ger w i t h I ndi a was t axa bl e whe n i t was e nc as he d aft er s uc h mer ger. The H i g h Co urt hel d t hat t he pers o n ma ki ng t he pay me nt f r o m o ut si de I ndi a i s not t he s o ur ce a nd i t i s t he e x port acti vi t y li nke d w i t h t he b usi ness c arri e d o n i n I ndi a whi c h i s t he s o ur ce.

Income accruing or arising in India and deeming fiction in Section 9 of

Income

Tax Act

The a ns wer t o t he i ss ue of est a bli s hi ng t he li nk bet wee n i nc o me a nd c o unt r y of s o ur ce c a n be f o und i n Secti o n 9 of t he I nc o me- t ax Act, 1961 (‘ t he I T Act’ ) whi c h e ns hri nes t he c o nce pt of b usi ness c o nnecti o n a nd dee ms cert ai n i nc o me t o accr ue or ari s e i n I ndi a. I ndi a will s ee k t o t ax t hos e i nc o mes whi c h have a li nk w i t h I ndi a ei t her t hr o ug h a pl ace,

4. [ 1941] 9 I. T . R . ( Suppl. ) 45, 52 ( P . C . ).

5. 1953 S C R 454.

6. [ 2012] 21 t ax ma nn. c o m 476/208 Tax ma n 114 ( Del hi ).

7. [ 1993] 199 I T R 785.

Source means not a legal concept but something which a practical man would regard as a real source of income; the

the

source is a practical hard matter of fact.”

a pers o n or by me a ns of si g ni fic a nt ec o no m i c pr es e nce. Secti o n 9 pr o

vi des t hat cert ai n i nc o mes ar e dee me d t o accr ue or ari s e i n I ndi a. As per Secti o n 4 of t he I T Act, i nc o me t ax s hall be c har ge d o n i nc o me of t he pr e vi o us ye ar. Secti o n 5 c o nt ai ns t he s c ope of t ot al i nc o me a nd pr ovi des t hat i t s hall c o mpri s e of i nc o me r ecei ve d, or dee me d t o be r ecei ve d i n I ndi a, i nc o me ari si ng or accr ui ng i n I ndi a or dee me d t o accr ue or ari s e i n I ndi a a nd i nc o me accr ui ng or ari si ng t o a pers o n ( r esi de nt) o ut si de I ndi a. A r esi de nt i s t h us t axe d o n gl o bal i nc o me whil e a no n- r esi de nt c a n be t axe d o nl y i n r es pect of i nc o me r ecei ve d dee me d t o be r ecei ve d or i nc o me accr ui ng or ari si ng or dee me d t o accr ue or ari s e i n I ndi a.

An e x posi ti o n of t he wor ds “ accr ue a nd ari s e” was gi ve n by t he Supr e me Co urt i n CIT v. Ahmedbhai Umarbhai & Co. 8

“ Whet her t he wor ds ‘ deri ve ’ a nd ‘ Pr o duce’ ar e or ar e not s y no ny mo us w i t h t he wor ds ‘ accr ue ’ or ari s e i t ca n be s ai d w i t ho ut hesi t ati o n t hat t he wor ds

‘ accr ue ’ or ‘ ari s e ’ t ho ug h not defi ne d i n t he Act ar e cert ai nl y s y no ny mo us a nd ar e us e d i n t he s e ns e of ‘ bri ngi ng, i n as a nat ur al r es ul t’. St ri ctl y s pea ki ng, t he wor d ‘ accr ue ’ i s not s y no ny mo us w i t h ‘ ari s e ’ , t he f or mer c o nnoti ng i dea of gr o wt h or acc u mul ati o n a nd t he l att er of t he gr o wt h or acc u mul ati o n w i t h a t a ngi bl e s ha pe s o as t o be r ecei va bl e. Ther e i s a di sti ncti o n i n t he di cti o nar y mea ni ng of t hes e wor ds, but t hr o ug ho ut t he Act t hey s ee m t o de not e t he s a me i dea or i deas ver y si mil ar a nd t he di ff er e nce o nl y li es i n t hi s t hat o ne i s mor e a ppr opri at e whe n a ppli e d t o a parti c ul ar cas e. I n t he cas e of a c o mposi t e busi ness, i. e., i n t he cas e of a pers o n who i s carr yi ng o n a nu mber of busi ness es, i t i s al ways di ffi c ul t t o deci de as t o t he pl ace of t he accr ual of pr ofi t s a nd t hei r a pporti o n me nt i nt er s e. For i nst a nce, wher e a pers o n carri es o n ma nuf act ur e, s al e, ex port a nd i mport, i t i s not possi bl e t o s ay t hat t he pl ace wher e t he pr ofi t s accr ue t o hi mi s t he pl ace of s al e The pr ofi t s r ecei ve d r el at e fi rstl y t o hi s busi ness as a ma nuf act ur er, s ec o ndl y t o hi s t r a di ng oper ati o ns, a nd t hi r dl y t o hi s busi ness of i mport a nd ex port. ”

The wor d‘ accr ue ’ was i nt er pr et e d by t he Supr e me Co urt i n

E.D. Sassoon & Company Ltd v. CIT 9 wher ei n t he i ss ue was whet her t he c o mm i ssi o n whi c h was as cert ai ne d at t he e nd of acc o unti ng peri o d ha d i n f act accr ue d o n t he dat e of t r a nsf er of t he age nc y d uri ng t he ye ar a nd he nce no i nc o me was t axa bl e i n t he ha nds of t he t r a nsf er or. The ass ess ee ar g ue d t hat t he ver y s o ur ce of i nc o me - t he ma nagi ng age nc y ha d bee n t r a nsf err e d a nd o n dat e of t r a nsf er no i nc o me accr ue d t o t he mf or t he br oke n peri o d. The Supr e me Co urt hel d t hat as per t he t er ms of t he Ma nagi ng Age nc y Agr ee me nt, t he c o mm i ssi o n bec a me d ue aft er t he net pr o fit s wer e as cert ai ne d a nd no i nc o me accr ue d t o t he ass ess ee f or t he br oke n peri o d f or whi c h s er vi ces ha d bee n r e nder e d d uri ng t he ye ar.

“It i s cl ear t her ef or e t hat i nc o me may accr ue t o a n ass ess ee w i t ho ut t he act ual r ecei pt of t he s a me. If t he ass ess ee ac q ui r es a ri g ht t o r ecei ve t he i nc o me, t he i nc o me ca n be s ai d t o have accr ue d t o hi m t ho ug h i t may be r ecei ve d l at er o n i t s bei ng as cert ai ne d. The basi c c o nce pti o n i s t hat he must have ac q ui r e d a ri g ht t o r ecei ve t he i nc o me. Ther e must be a de bt o we d t o hi m by s o me bo dy Ther e must be as i s ot her w i s e ex pr ess e d de bi t u mi n pr es e nti, s ol ve ndu mi n f ut ur o; ”

A c o mbi ne d r e a di ng of Secti o n 4 a nd Secti o n 5 of t he I T Act r e ve al s t hat I ndi a ass ert s i t ri g ht t o t ax a no n- r esi de nt i n c as e of t he f oll o w i ng:

( a ) I nc o me whi c h i s r ecei ve d or i s dee me d t o be r ecei ve d i n I ndi a i n s uc h ye ar by or o n be hal f of s uc h pers o n or

(b ) accr ues or ari s es or i s dee me d t o accr ue or ari s e t o hi mi n I ndi a d uri ng s uc h ye ar.

Th us, i f r ecei pt, ari si ng or accr ual i s i n I ndi a or i s dee me d t o be i n I ndi a, t he i nc o me wo ul d be t axa bl e. The c o nce pt of act ual r ecei pt, ari si ng or accr ual i s r el ati vel y e as y t o underst a nd si nce i t c a n be t r ace d t o a s o ur ce or e ve nt. For i nst a nce, s al ar y r ecei ve d i n a ba nk acc o unt i n I ndi a, s al e of i mmova bl e pr opert y si t uat e d i n I ndi a, pr of essi o nal f ee f or s er vi ces r e nder e d i n I ndi a, i nt er est e ar ne d o n mo ne y l e nt i n I ndi a a nd s o o n. Accr ual, underst oo d as ri g ht t o t he i nc o me c a n al s o be t r ace d si mil arl y. For i nst a nce, c o ns ul t a nc y s er vi ces r e nder e d i n a ye ar wher ei n pay me nt i s r ecei ve dt hr ee mo nt hs aft er r e nderi ng of s er vi ce. Thei nc o me bec o mes d ue t o t he s er vi ce pr ovi der bef or e i t s act ual r ecei pt. I f e ar ni ng of t he i nc o me i s li nke d t o I ndi a, accr ual wo ul d al s o be t axa bl e. Ho we ver, wher e t he li nk i s not r e a dil y i de nti fia bl e, t he dee m i ng pr ovi si o ns have t o be t a ke n i nt o acc o unt. Secti o n 9 pr ovi des t he vari o us i nc o mes whi c h ar e dee me d t o accr ue or ari s e i n I ndi a. Th us, i nt er est pai d o n a l oa n e xce pt wher e i t r el at es t o a b usi ness o ut si de I ndi a wo ul d be t axa bl e.

Specific exclusions in Section 9

Cert ai n i nc o mes li ke s hooti ng of ci ne mat ogr a p h fil m or r unni ng of magazi ne by no n- r esi de nt ar e s peci fic all y e xcl ude d f r o m t he s c ope of dee me di nc o me. Th us, i n r es pect of b usi ness t r a ns acti o ns t he c o nce pt of b usi ness c o nnecti o n i s i mport a nt. I nc o me ari si ng t hr o ug h or f r o m a ny pr opert y si t uat e d i n I ndi a or s o ur ce si t uat e d i n I ndi a i s al s o i ncl ude d i n t he s c ope of Secti o n 9. The li nk w i t h i nc o me whi c h r el at es t o a s peci fic ass et or pl ace li ke i mmova bl e pr opert y or i nvest me nt i n s har es of a n I ndi a n c o mpa ny i s e as y t o est a bli s h a nd underst a nd. Ho we ver, i n t he c o nt e xt of b usi ness t r a ns acti o ns whi c h may s pr e a d over mul ti pl e j uri s - di cti o ns, i t i s r el ati vel y di f fic ul t t o est a bli s h or di s pr ove t he c o nnecti o n.

Explanation 2 t o t he s ecti o n decl ar es t hat b usi ness c o nnecti o n will i ncl ude acti vi ti es c arri e d o ut t hr o ug h a pers o n. Secti o n 2( 13) of t he I T Act de fines b usi ness i n a w i de ma nner t o i ncl ude a ny acti vi t y, t r a de,

ma n uf act ur e or c o ncer n i n t he nat ur e of t r a de, c o mmer ce, et c. Ther e i s no t hr es hol d or att ri b ut e de fine d f or ‘ c o nnecti o n ’ For i nst a nce, t he pr ovi si o ns of Secti o n 92( A) l ay do wn t he t est of c o nt r ol, parti ci pati o n i n ma nage me nt or c a pi t al or dee ms de pe nde nce f or t ec hnol ogy or r a w mat eri al t o c o ncl ude t hat t wo pers o ns ar e r el at e d or ‘ ass oci at e d e nt er pri s es ’ .

Secti o n 9 does not pr es cri be a ny s uc h t hr es hol d. Cert ai n c o ndi ti o ns ar e pr es cri be d i n t he c as e of a n age nt as me nti o ne d e arli er i n

Explanation

2 a nd Explanation 2A o n Si g ni fic a nt Ec o no m i c Pr es e nce ( S EP) i ns ert e d by Fi na nce Act, 2018 w i t h eff ect f r o m 1- 4- 2019 l ays do wn t hat a t hr es h - ol d may be pr es cri be d. By Fi na nce Act, 2020 t he pr ovi si o ns r e gar di ng S EP have bee n o m i tt e d a nd will be r ei nt r o d uce d f or AY 2022- 23. A ne w Explanation 3A has bee n i ns ert e d w . e. f. 1- 4- 2021 i n t er ms of whi c h i nc o me att ri b ut a bl e t o t he oper ati o ns c arri e d o ut i n I ndi a, as r ef err e d t o i n Explanation 1 , s hall i ncl ude i nc o me f r o m

(i ) s uc h a dverti s e me nt whi c h t ar get s a c ust o mer who r esi des i n I ndi a or a c ust o mer who access es t he a dverti s e me nt t hr o ug h i nt er net pr ot oc ol a ddr ess l oc at e d i n I ndi a;

(

(

ii ) s al e of dat a c oll ect e d f r o ma pers o n who r esi des i n I ndi a or f r o m a pers o n who us es i nt er net pr ot oc ol a ddr ess l oc at e di n I ndi a; a nd

iii ) s al e of g oo ds or s er vi ces usi ng dat a c oll ect e d f r o ma pers o n who r esi des i n I ndi a or f r o m a pers o n who us es i nt er net pr ot oc ol a ddr ess l oc at e d i n I ndi a;

By Noti fi cati on No. 42/2021, dat e d 3- 5- 2021, ne w Rul e 11 UD was i ns ert e d a nd t he t hr es hol dli m i t s f or det er m i ni ng S EP wer e pr es cri be d as f oll o ws:

i.

I NR 2 cr or es i n c as e of t r a ns acti o n i n r es pect of a ny g oo ds, s er - vi ces or pr opert y c arri e d o ut by a no n- r esi de nt w i t h a ny pers o n i n I ndi a i ncl udi ng pr ovi si o n of do wnl oa d of dat a or s oft war e i n I ndi a. The li m i t will a ppl y f or pay me nt or aggr e gat e of pay me nt s i n r es pect of s uc h t r a ns acti o n( s).

ii.

Thr ee l a k h us ers have bee n pr es cri be d f or s yst e mati c a nd c o n - ti n uo us s oli ci ti ng of b usi ness acti vi ti es or e ngagi ng i ni nt er acti o n w i t h us ers.

Th us acti vi t y, pers o n a nd s o ur ce of i nc o me ar e i mport a nt t o deci de whet her a b usi ness c o nnecti o n i s c o nsti t ut e d. I n t he a bs e nce of a ny t hr es hol d or o bj ecti ve par a met ers q uesti o ns li ke whet her t he acti vi t y c o nt ri b ut es si g ni fic a ntl y t o t he b usi ness of t he no n- r esi de nt, d ur ati o n of t he acti vi t y will not ma ke mat eri al di ff er e nce s o l o ng as a li nk c a n be est a bli s he d w i t h a s o ur ce i n I ndi a.

Di vi de nd, i nt er est, r oyal t y a nd f ee f or t ec hni c al s er vi ces ( F TS) ar e s pe - ci fic all y i ncl ude d i n Secti o n 9 of t he I T Act.

Gi ve n t he e x pa nsi ve c over age of Secti o n 9, i t i s i mport a nt t o underst a nd ho wt he s c ope of t axati o n has bee n de fine d/agr ee d t o by t he c o unt ri es i n t he r el e va nt DTAAs. The DTAAs bet wee n c o unt ri es l ar gel y f oll o wt he OEC D Mo del Tax Co nve nti o n ( OEC D MT C) or t he UN Mo del Do ubl e Taxati o n Co nve nti o n ( UN MT C). The US has a s e par at e mo del. I n all mo del s what i s r el e va nt i s t he det er m i nati o n of t he t axi ng ri g ht bas e d o n whet her t he no n- r esi de nt or r at her hi s i nc o me has a li nk i n t he s o ur ce St at e. Ho we ver, t he DTAAs i nc or por at e vari o us c o ndi ti o ns i n or der t o pr ovi de t he cri t eri a t o det er m i ne s uc hli nk. I n a DTAA c o nt r acti ng St at es may al s o ce de a part of t hei r t axi ng ri g ht s.

3.2 CONCEPT OF PERMANENT ESTABLISHMENT

Arti cl e 5 of t he OEC D Mo del Tax Co nve nti o n as al s o of UN MT C i s r el

e va nt f or t hi s di s c ussi o n. DTAAs ge ner all y i nc or por at e s peci fic Arti cl es s etti ng o ut t he j uri s di cti o n of t he si g nat or y t o t ax parti c ul ar i nc o mes li ke di vi de nd, i nt er est et c. As r e gar ds b usi ness i nc o me, t he host c o unt r y wher e cert ai n acti vi ti es of t he e nt er pri s e may be c arri e d o ut wo ul d get t he ri g ht t o t ax o nl y i f t her e i s e xi st s a per ma ne nt est a bli s h me nt of t he f or ei g n e nt er pri s e i n t he host c o unt r y. The c o nce pt of ‘ per ma ne nt es - t a bli s h me nt’ or P E as de fine d/agr ee d t o bet wee n t he si g nat or y nati o ns i n t he DTAA will det er m i ne whi c h St at e a nd whe n i t will have t he ri g ht t o t ax. Br oa dl y, a si mpl e underst a ndi ng of P E i s t he pl ace [i n t he host c o unt r y] t hr o ug h whi c h t he b usi ness of a n e nt er pri s e i s c arri e d o n. Th us, a P E has t o have s o me de gr ee of per ma ne nce s o t hat s oli t ar y or f e wi s ol at e d t r a ns acti o ns ar e e xcl ude d a nd t he b usi ness of t he f or ei g n e nt er pri s e must have a r e al li nk t o s uc h pl ace i n t he host st at e. As per t he OEC D c o mme nt ar y o n Arti cl e 7, t he c o nce pt of P E r e flect s t he i nt er na - ti o nal c o ns e ns us t hat until a n e nt er pri s e of o ne St at e has a per ma ne nt est a bli s h me nt i n a not her St at e, i t s ho ul d not pr operl y be r e gar de d as parti ci pati ng i n t he ec o no m i c li f e of t hat ot her St at e t o s uc h a n e xt e nt t hat t he ot her St at e s ho ul d have t axi ng ri g ht s o n i t s pr o fit s. The c o nce pt of P E was f urt her e x pa nde d f r o m ‘ pl ace ’ t o i ncl ude ‘ pers o n ’ [ Arti cl e 5( 6)] a nd no w nati o ns ar e deli ber ati ng o n i nc or por ati ng t he c o nce pt of ‘ vi rt ual’ li nk t o bri ng di gi t al t r a ns acti o ns w i t hi n t he a mbi t of DTAAs. As di s c uss e d l at er, t he t est of per ma ne nce e nvi s ages a cert ai n peri o d of acti vi t y or pr es e nce. Ye ar 2020 w i t ness e d t he s pr e a d of C OVI D- 19 pa nde m i c a nd he nce f or ce d pr es e nce of pers onnel i n vari o us c o unt ri es a nd t he necessi t y t o c arr y o ut t he acti vi ti es - b usi ness acti vi t y, ma nage me nt, a dvi s or y et c., f r o mc o unt ri es wher e t he y wer e not r esi de nt nor i nt e nde d

t o st ay f or a l o ng ti me. Of c o urs e, t hi s e xt r a or di nar y si t uati o n was not

c o nt e mpl at e d i n t he l e gi sl ati o n a nd t r e ati es. The t est of P E or b usi ness

c o nnecti o n may t h us be fi ne- t une d acc or di ngl y i f nati o ns r e ac h a

c o ns e ns us.

The de fini ti o n of ‘ b usi ness c o nnecti o n ’ i n t he do mesti c l a w a nd P E i n t he DTAAs have ma ny par all el s a nd t he cri t eri a of pers o n ( age nt) bei ng a b usi ness c o nnecti o n or P E or si g ni fic a nt ec o no m i c pr es e nce as i nt r o - d uce d by Fi na nce Act, 2017 ar e not a bl e.

The Supr e me Co urt i n

Ishikawajma-Harima Heavy Industries Ltd . v. DIT 10 opi ne d t hat b usi ness c o nnecti o n a nd per ma ne nt est a bli s h me nt ar e di ff er e nt c o nce pt s:

“ 69 It i s, t her ef or e, i n o ur opi ni o n, t he c o nce pt s pr ofi t s of busi ness c o nnecti o n a nd per ma ne nt est a bli s h me nt s ho ul d not be m i xe d up Wher eas busi ness c o nnecti o n i s r el eva nt f or t he p ur pos e of a ppli cati o n of s ecti o n 9; t he c o nce pt of per ma ne nt est a bli s h me nt i s r el eva nt f or ass essi ng t he i nc o me of a no nr esi de nt under t he DTAA Ther e, ho wever, may be a cas e wher e t her e ca n be over-l a ppi ng of i nc o me; but we ar e not c o ncer ne d w i t h s uc h a si t uati o n The e nti r e t r a ns acti o n havi ng bee n c o mpl et e d o n t he hi g h s eas, t he pr ofi t s o n s al e di d not ari s e i n I ndi a, as has bee n c o nt e nde d by t he a ppell a nt Thus, havi ng bee n excl ude d f r o m t he s c ope of t axati o n under t he Act, t he a ppli cati o n of t he Do ubl e Taxati o n Tr eat y wo ul d not ari s e ”

Charge of tax

To det er m i ne t ax li a bili t y, t wo f act ors ar e i mport a nt - s ubj ect matt er of t axati o n a nd who will di s c har ge t he li a bili t y i f i t ari s es. As per Secti o n 4 of I nc o me- t ax Act, 1961, i nc o me t ax will be c har ge d o n t ot al i nc o me of a pers o n. Secti o n 4 s ays i nc o me t ax will be c har ge d i n r es pect of t he t ot al i nc o me of t he pr e vi o us ye ar of e ver y pers o n. I de all y, t he c har ge of t ax wo ul d be ‘ o n ’ t he i nc o me of a pers o n. V . S . Sundar a mi n hi s s e m i nal wor k o n The La w of I nc o me Tax i n I ndi a, a c o mme nt ar y o n I ndi a n I nc o me Tax Act, 1922, p ubli s he d by Butt er wort h & Co. ( I ndi a) Lt d], not es t hat ‘ i n r es pect of’ r e all y me a ns ‘ o n ’ a nd r ef ers t o Kennard Davis v. Commissioner of Inland Revenue 11. Th us, t he c har ge will be o n t he e nti r e i nc o me whi c h i s c har ge a bl e t o t ax i n t er ms of t he I T Act. The s ubj ect matt er of t axati o n i s ‘ i nc o me ’ . I n si mpl e t er ms, i nc o me i s underst oo d as a n e ar ni ng, a n a ddi ti o n or r ecei pt as oppos e d t o a n i nheri t a nce, a w i ndf all gai n, a c o mpe ns ati o n f or acci de nt, da mages cl ai me d i n t ort a nd s o o n. I nc o me c a n have ma ny a c ol o ur, c o nt o urs a nd c o nnot ati o ns. As a s ubj ect matt er of t axati o n i t i s i ndee d di f fic ul t t o de fine. An i nt er esti ng e x posi ti o n i n t he c o nt e xt of di vi de nd i s f o und i n Eisner v. Macombar 12 t hat i nc o me i s not mer e gr o wt h or i ncr e me nt i n val ue i n a c a pi t al i nvest me nt, i t i s ess e nti all y a gai n or pr o fit i n i t s el f of e xc ha nge a bl e val ue, pr ocee di ng f r o m c a pi t al, s e ver e d f r o m i t a nd r ecei ve d by t he t ax payer f or hi s s e par at e us e, be ne fit a nd di s pos al. Ent r y 82 i n t he Uni o n Li st i n Sc he d ul e VII of t he Co nsti t uti o n of I ndi a r e a ds as ‘

Taxes on income other than agricultural income ’ . The po wer

10 [ 2007] 158 Tax ma n 259 ( S C)

11 8 Tax Cas es 341, ( 1923) 1 K B 370

12 ( 1920) 252 U S Re port s 189 [ Sundar a m ]

t o t ax agri c ul t ur al i nc o me i s w i t h St at es. ‘ Agri c ul t ur al i nc o me ’ e xt e nds t o i nc o me f r o m agri c ul t ur al oper ati o ns a nd l etti ng of l a nd f or agri - c ul t ur al p ur pos es. I nc o me f r o m s al e /t r a nsf er of agri c ul t ur al l a nd i s, ho we ver, e xi gi bl e t o i nc o me t ax. I nc o me whi c h i ncl udes agri c ul t ur al a nd no n- agri c ul t ur al c o mpo ne nt s i s t axe d by a s e par at e s c he me of t axati o n under t he I T Act.

The I nc o me- t ax Act, 1961 e xt e nds t o t he whol e of I ndi a. As per Secti o n 2( 25 A) of t he I T Act, I ndi a i ncl udes t he l a nd mass, t erri t ori al wat ers, s e a be d, s ubs oil, c o nti ne nt al s hel f, e xcl usi ve ec o no m i c z o ne ( EEZ) a nd ot her s uc h mari ti me z o nes. Thi s t erri t ori al e xt e nt or a mbi t of t axati o n i s q ui t e e as y t o c o mpr e he nd a nd underst a nd i n de fine d poli ti c al s p her e. Ho we ver, i nc o me by nat ur e ari s es f r o mvari o us s o ur ces a nd t he si t us of s uc h s o ur ce i s di f fic ul t t o det er m i ne i n i nt a ngi bl e as pect s f or i nst a nce b usi ness acti vi t y c arri e d o ut i n t wo di ff er e nt c o unt ri es, r e nder e d wholl y f r o m or i n a not her c o unt r y a nd s o o n. The s o ur ce of t he i nc o me a nd si t us of t he r eci pi e nt f or me q uall y g oo d or c o mpeti ng bas es f or t axati o n by a parti c ul ar c o unt r y.

Illustration : I f A Lt d r e nders c o ns ul t a nc y s er vi ces f r o m Fr a nce t o B Lt d i n I ndi a, t he acti vi t y of r e nderi ng s er vi ce i s undert a ke n o ut si de I ndi a b ut t he pay me nt i s f r o mI ndi a a nd s er vi ce wo ul d be us e d i n I ndi a. Logi c al ar g u me nt s c a n be ma de by bot h I ndi a a nd Fr a nce t o t ax t he f ee f or c o ns ul t a nc y s er vi ces.

Legislation with extra-territorial effect

Ani mport a nt as pect whi c h ari s es f or c o nsi der ati o ni s whet her I ndi a c a n l e gi sl at e i n r es pect of matt ers not f alli ng w i t hi n i t s t erri t ori al li m i t s a nd t hos e whi c h have a li nk ( s ubst a nti al or m i ni mal ) w i t h e ve nt s or matt ers whi c h may be w i t hi n i t s j uri s di cti o n. Ca n I ndi a r e q ui r e /e nf or ce pers o ns not w i t hi n i t s t axi ng j uri s di cti o n t o c o mpl y w i t h i t s l a w?

I n GVK Industries Ltd v. ITO 13 t he Supr e me Co urt of I ndi a hel d t hat I ndi a c a n l e gi sl at e i n r es pect of matt ers whi c h have a li nk w i t h t he t erri t or y of I ndi a. I nt er pr eti ng Arti cl e 245 of t he Co nsti t uti o n wher ei n Arti cl e 245( 2) l ays do wn t hat a l a w ma de by t he Parli a me nt s hall not be dee me d t o be i nvali d o n acc o unt of t he f act t hat i t has e xt r a- t erri t ori al oper ati o n, t he Supr e me Co urt r ef err e d t o Arti cl e 245( 1) whi c h st at es t hat Parli a me nt may ma ke l a ws ‘ f or ’ t he whol e or a ny part of t he t er - ri t or y of I ndi a. Ho we ver, I ndi a c a nnot l e gi sl at e f or a f or ei g n t erri t or y. Th us, t he po wers of t axati o n s o f ar as t he y r el at e t o or have a li nk w i t h I ndi a c a n be e xer ci s e d e ve n i f t he y i nv ol ve f or ei g n oper ati o n or may have eff ect o ut si de I ndi a.

An i nst a nce of s uc h a pr ovi si o n w i t h e xt r a- t erri t ori al eff ect c a n be s ee n i n Secti o n 195.

Explanation 2 t o Secti o n 195( 1) st at es t hat t he o bli gati o n

t o de d uct t ax o n pay me nt of a ny s u m c har ge a bl e t o t ax i n I ndi a wo ul d e xt e nd t o all pers o ns r esi de nt or no n- r esi de nt whet her or not t he pers o n has a li nk t o I ndi a t hr o ug h a pl ace of r esi de nce or b usi ness or t he pr es - e nce. A si mil ar o bli gati o n has bee n c ast o n s uppli er of s er vi ce l oc at e d o ut si de I ndi a whe n s er vi ce i s pr ovi de d t o no n- t axa bl e o nli ne r eci pi e nt i n r es pect of Onli ne I nf or mati o n a nd Dat a bas e Access or Ret ri e val Ser vi ce ( OI DA R) under I GS T Act a nd t hi s i s di s c uss e d i n t he c ha pt er o n I GS T . The c har ge of i nc o me t ax i s o n t he t ot al i nc o me. Br oa dl y, I ndi a s ee ks t o t ax a ny i nc o me t he s o ur ce of whi c h c a n be t r ace d t o I ndi a. The s c ope of t ot al i nc o me i n c as e of a r esi de nt e xt e nds t o hi s gl o bal i nc o me - i nc o me f r o m a ny s o ur ce s o l o ng as i t i s r ecei ve d by hi m or accr ues or ari s es ( or dee me d t o be s o) w i t hi n or o ut si de I ndi a. A no n- r esi de nt i s li a bl e t o pay t ax o n all i nc o me s o ur ce d f r o m I ndi a as al s o i nc o mes dee me d t o be r ecei ve d, accr ui ng or ari si ng i n I ndi a.

Secti o n 9 of t he I T Act de ali ng w i t h i nc o me dee me d t o accr ue or ari s e i n I ndi a i s i mport a nt f r o mt he pers pecti ve of no n- r esi de nt s. The e x pr essi o n ‘ b usi ness c o nnecti o n ’ t r aces i t s ori gi n t o pr e- I nde pe nde nce Bri ti s h I ndi a a nd has bee n s ubj ect t o myri a d i nt er pr et ati o ns. Acc or di ng t o Ka nga a nd Pal k hi val a i n “ The La w a nd Pr acti ce of I nc o me Tax” ( 7t h e di ti o n; p ubli s he d i n 1976), “ the categories of business connection are incapable of exhaustive enumeration”

Secti o n 9 may be underst oo d i n 2 part s ( a ) i nc o me ari si ng t hr o ug h or f r o m a ny b usi ness c o nnecti o n or pr opert y or ass et or s o ur ce of i nc o me i n I ndi a a nd (b ) s peci fic i ncl usi o ns li ke r oyal t y, f ee f or t ec hni c al s er vi ces ( F TS), s al ar y, i nt er est a nd di vi de nd. The me a ni ng a nd s c ope of t hes e i nc o mes i n do mesti c l a w a nd t he DTAA have bee n di s c uss e d i n t he s ubs e q ue nt c ha pt er.

Business connection and permanent establishment

Let us no w t r y t o underst a nd b usi ness c o nnecti o n a nd i t s i nt er pl ay w i t h t he c o nce pt of ‘ per ma ne nt est a bli s h me nt’ si nce wher e ver t her e i s a DTAA bet wee n I ndi a a nd a not her c o unt r y, t he t er ms of t he DTAA will pr e vail t o t he e xt e nt t he y ar e mor e f av o ur a bl e t o t he no n- r esi de nt ( t ax r esi de nt of t he ot her St at e). Secti o n 90( 2) of t he I T Act pr ovi des f or t hi s r eli ef. To t hi s e xt e nt, i t c a n be s ai d t hat I ndi a ce des s o me of i t s t axi ng ri g ht under t he DTAA a nd i n eff ect r est ri ct s t he a ppli c a bili t y of c har ge of i nc o me t ax. Wher ei n t he i nc o me of a no n- r esi de nt w i t h whos e c o unt r y I ndi a does not have a DTAA , i s t o be ass ess e d, r eli ef i s avail - a bl e t o t he e xt e nt of t ax pai d o ut si de I ndi a o n i nc o me whi c h accr ues or ari s es o ut si de I ndi a.

The c o nce pt of b usi ness c o nnecti o n i s w i der t ha n t hat of P E a nd i n - cl udes pr opert y si t uat e i n I ndi a, dee me d accr ual a nd s o o n. Ty pi c all y, t he DTAAs wo ul d have a s e par at e Arti cl e t o t ax i nc o me f r o mi mmova bl e

pr opert y si t uat e d i n a St at e, r oyal t y et c. The c o nce pt of P E i s r el e va nt f or b usi ness i nc o me.

Place where business is carried out and source of payer establishes business connection

So ur ce St at e wo ul d i ncl ude t he pl ace wher e c o mmer ci al nee d ar os e. Ref erri ng t o t he deci si o n of t he Supr e me Co urt i n GVK Industries v. ITO [ 2015] 371 I T R 453 ( S C) wher ei n t he Aut hori t y f or Adva nce Rul - i ngs i n Sea Bird Exploration FZ LLC, In re 13a hel d t hat wher e t he vess el s f or undert a ki ng s ei s m i c s ur ve y wer e oper ati ng i n Bo mbay H i g h a nd payer was a n I ndi a n c o mpa ny, s uf fici e nt ne x us was est a bli s he d w i t h t he t erri t or y of I ndi a a nd i nc o me ar os e t o t he no n- r esi de nt i n I ndi a a nd was t axa bl e. The ar g u me nt of t he a ppli c a nt t hat c o nt r act s wer e si g ne d o ut si de I ndi a as a Bar e Boat Chart er a nd vess el s wer e deli ver e d o ut si de I ndi a t o off s et t axa bili t y was not acce pt e d. The f act t hat t he a ppli c a nt was i n Bo mbay H i g h was st at e d t o est a bli s h s o ur ce i n I ndi a. The o bs er vati o n of t he I TAT i n Birla Corporation Ltd . v. Asstt. CIT 14 f oll o w i ngAsstt. CIT v. EPCOS AG 15 pr ovi des a pers pecti ve o n t he i nt er - pl ay bet wee n t axati o n under t he do mesti c l a w a nd DTAA . The I TAT , J a bal p ur q uot e d: “ ... t he q uesti o n of deali ng w i t h t he t ax t r eat y pr ovi si o ns bec o mes r el eva nt o nl y whe n t he fi rst bri dge i s cr oss e d i. e. whe n t axa bili t y under t he do mesti c l a w i s est a bli s he d. On a c o nce pt ual f r a me, ho wever, t hi s a ppr oac h may not have ma ny noti cea bl e meri t s ot her t ha n o ur c o mf ort l evel s. I n o ur c o nsi der e d vi e w , i n a cr oss- bor der t ax si t uati o n (i. e. i n a si t uati o n i n whi c h ec o no m i c acti vi ti es l ea di ng t o ear ni ng a n i nc o me ar e carri e d o ut i n mor e t ha n o ne j uri s di cti o n, or i n whi c h t he s o ur ce of i nc o me a nd r esi de nce of t he pers o n ear ni ng s uc h a n i nc o me ar e i n t wo di ff er e nt t ax j uri s di cti o ns), fi rst t hi ng t o be as cert ai ne d i s t he ri g ht s of t he t axi ng j uri s di cti o ns over t axa bili t y - f ull or parti al - of t hat i nc o me. As t he Speci al Be nc h of t hi s Tri bunal, i n t he cas e of Motorola Inc. v. Dy.

CIT 16 ( s upr a) a ppr opri at el y o bs er ves, a t ax t r eat y cert ai nl y does not c o nsti t ut e a n exe mpti o n s yst e m . St ri ctl y s pea ki ng, a t ax t r eat y may not eve n c o nsti t ut e al t er nati ve t axati o n r egi me, f or t he el e me nt al r eas o n t hat no t ax t r eat y or DTAA , what ever o ne call s i t, ca n ever i mpos e t axes. A vi e w i s t hus i ndee d possi bl e t hat t her e ca nnot be a n al t er nat e t axati o n r egi me whi c h does not i mpos e t axes. Yet, a t ax t r eat y ca n be s ai d t o be a n al t er nat e t axati o n r egi me i n t he s e ns e t hat i t all ocat es t axi ng ri g ht s of t he c o mpeti ng t ax j uri s di cti o ns. As f ar as t he r el at e d t ax j uri s di cti o ns ar e c o ncer ne d, a t ax t r eat y, fi rst a nd f or e most, all ocat es t he ri g ht s of t axati o n of t he t ax j uri s di cti o ns over a t ax o bj ect ”

13a [ 2021] 124 t ax ma nn c o m 56 ( AA R - Ne w Del hi )

14 [ 2015] 53 t ax ma nn c o m 1/153 I T D 679 ( J a bal p ur - Tri b ) 15 [ 2009] 28 S OT 412 ( Pune- Tri b )

16. [ 2005] 147 Tax ma n 39 ( Mag. ) /95 I T D 269 ( Del hi ) ( S B).

Cross-Border Transactions under Tax Laws & FEMA

AUTHOR : G. GOKUL KISHORE, R. SUBHASHREE

PUBLISHER : TAXMANN

DATE OF PUBLICATION : MAY 2023

EDITION : 3RD EDITION

ISBN NO : 9789357780148

NO. OF PAGES : 842

BINDING TYPE : HARDBOUND

Description

This book provides practical guidance based on judicial interpretation of the law and rules. It also provides an easy-to-understand commentary (with departmental clarifications) on cross-border transactions with respect to the following laws:

 Income Tax ( including International Tax & Transfer Pricing )

 Goods & Services Tax (GST)

 Customs

 Foreign Exchange Management Act (FEMA)

This book will be helpful for practitioners, members of the bar & bench and industry, and assessing officers.

The Present Publication is the 3 rd  Edition, amended by the Finance Act 2023 and updated till 1 st May 2023. This book is authored by Dr. Gokul Kishore & R. Subhashree, with the following noteworthy features:

 [ Easy-to-Understand Practical Commentary ] covering:

 Income Tax ( including International Tax & Transfer Pricing )

 Implications of International Transactions

 Adoption of Appropriate Transfer Pricing (TP)

 Comprehending the Creation of Permanent Establishment (PE) and Double Taxation Avoidance Arrangements (DTAA)

 Ensuring Compliance with Withholding Obligations when payment is made to nonresident

 Issues relating to Royalty & Fees for Technical Services (FTS), Tax Residency and Foreign Tax Credit (FTC)

 GST

 Examination of Cross-Border Services by applying Place of Supply & Export of Service provisions under the Integrated Goods and Services Tax Act (IGST), besides analyzing benefits to exporters

 Customs

 Valuation of Imported Goods under Customs Valuation Rules, when transaction value as declared by importer is not accepted

 Availing Customs Duty Exemptions

 Duty Remission and Rewards under various Export Promotion Schemes as provided in Foreign Trade Policy 2023

 FEMA

 Compliance with Provisions of FEMA on Receipts and Payments for Export and Imports

 [Exhaustive Discussion on both Basic Concepts and Issues faced by the Industry] combined with essential commentary on statutory provisions and the jurisprudence.

 [Cross-references to other Chapters] wherever implications need to be understood

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Rs. 2095 | USD 61