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6 INTERNATIONAL TAX & FINANCE CONFERENCE 2011

CA Pranav Sayta is a Partner in Ernst & Young, India (‘E&Y’) and is based in Mumbai. He is the national leader of the Tax practice for the TCE (Technology, Communication, Entertainment & Services) sector in E&Y India. He has played diverse roles in E&Y India & has been the national leader for the Transaction Tax practice in E&Y India. Previously he was national head of the tax litigation and controversy practice in E&Y, India and has also been a key part of the Knowledge and Solutions team. He has also been the national head of Tax Learning & Development at E&Y India

He is a Gold-Medalist Chartered Accountant (‘CA’) attaining first rank at All-India level. He was also awarded the prize for the Best paper on Direct Tax Laws by The Institute of Chartered Accountants of India.

He has more than 20 years of experience in the practice of Direct Tax Laws.

He has a wide range of experience in advising various large multinationals and leading Indian corporates, including various Fortune 500 companies on various international tax matters including cross border structuring, tax litigation & controversy & international tax policy. He specializes in advising on complex inbound and outbound transactions, cross border and domestic mergers, acquisitions & joint ventures, group financial and corporate restructuring, and international tax planning.

He has been consistently rated as one of the leading tax advisors in India by International Tax Review & by the Legal Media Group Guide to the World’s Leading Tax Advisers.

He is also well known as an active academic, having been a part-time lecturer on Direct Tax Laws for almost 15 years guiding students appearing for the final examination for Chartered Accountants in India. He is a regular contributor of articles and features on various tax and regulatory issues in leading publications and professional journals. He co-authored the Transfer Pricing Manual published by ‘Bombay Chartered Accountants’ Society and has been on the editorial board of International Fiscal Association’s (IFA) India newsletter. He is widely acknowledged in India for his thought leadership in the field of International Taxation.

He has addressed and presented papers at various seminars and conferences organized by various professional bodies including International Fiscal Association (‘IFA’), The Confederation of Indian Industry (‘CII’), Indo-American Chamber of Commerce (‘IACC’), The Indian Merchants’ Chamber (‘IMC’), The Institute of Chartered Accountants of India, Bombay Chartered Accountants’ Society and The Chamber of Tax Consultants..

He is presently a member of the Executive Committee of the IFA India Branch and a member of the Managing Committee of the Western Region Chapter of IFA India. He is also a member of the Direct Taxation Committee of the IMC.

Case Studies on International Taxation

International Tax & Finance Conference, 2011 1

Case Studies on International TaxationCA Pranav Sayta

CASE STUDY 1

Issues relating to Discounting of Bills of Exchange in International Trade1.1. F Co and E Co are companies incorporated in the United States of America (‘USA’) and

tax residents of USA. F Co is engaged in the business of providing financial services.

1.2. E Co is engaged in the business of manufacturing and selling of equipments. E Co sells equipment to buyers on cash or credit basis.

1.3. E Co enters into an agreement with F Co for purchase of Bills of Exchange (‘BEs’) drawn by E Co on its customers. As per the agreement, BEs executed by E Co with its customers are sold (less discount charges) to F Co and in turn, E Co receives immediate cash.

1.4. E Co sells equipment to I Co, a company incorporated in India (i.e. buyer) on six month credit. Thereafter, E Co draws a Bill of Exchange (BE) on I Co for the sale consideration with a maturity period of six months.

1.5. I Co also enters into an agreement with F Co, whereby I Co would directly make the payment to F Co on the due date for BE executed with E Co. Subsequently on the due date, F Co receives the entire invoice amount due from I Co.

1.6. The sale of BEs by E Co to F Co is without recourse which means F Co would bear the credit risk in case there is any default in payment by E Co’s customers (i.e. I Co) and F Co would have no recourse to E Co.

1.7. In case of default by I Co to make the payment (of BE) to F Co on the due date, I Co would be required to pay a default interest to F Co @ 8% pa.


2 International Tax & Finance Conference, 2011

1.8. Issues for consideration:

• Whether E Co or F Co would be subject to any Income-tax implication in India on account of the above transaction?

• What would be the nature of income for E Co or F Co from an Indian Income-tax perspective?

• Is any entity in the above transaction flow required to withhold Indian taxes on payments?

• What would be the tax implications on account of default interest for F Co?

Reference material1. Section 2(28A) of the Income-tax Act, 1961 (‘Act’)

2. Section 9(1)(v) of the Act

3. Circular Number 202 dated 5th July 1976 explaining the amendments of the Finance Act, 1976

4. Circular Number 65 [F. No. 275/97-ITJ], dated 2nd September, 1971 in relation to bill discounting by banks

5. Circular Number 647, dated 22nd March 1993 — Clarification regarding applicability of provisions of section 194A to commercial papers and certificates of deposits

6. Circular Number 2 of 2002 dated 15th February, 2002 - Clarifications regarding tax treatment of deep discount bonds and STRIPS (Separate Trading of Registered Interest and Principal of Securities)

7. Article 11 of the India-USA Double Taxation Avoidance Agreement

8. CIT Gujarat vs. Saurashtra Cement and Chemical Industries Limited 101 ITR 502 (Guj).

9. Viswapriya Financial Services and Securities Limited vs. CIT 158 ITR 496 (Mad) and 264 ITR (St) 144

10. Kanha Vanaspati Limited vs. ACIT (2007) (17 SOT 160) (Del)

11. CIT vs. Cargill Global Trading (Private) Limited (2011-TII-20-HC-DEL-INTL)

12. ITO vs. Kanha Vanaspati Limited 108 TTJ 816 (Del)

13. TVS Finance and Services Limited vs. JCIT 318 ITR 435 (Mad)

14. British Bank of The Middle East vs. CIT 233 ITR 251 (Bom)

15. Cargill Global Trading India (Private) Limited 126 TTJ 516 (Del)

16. Cargill Global Trading India (Private) Limited 2010-TIOL-184-ITAT-DEL

17. ABC International Inc (AAR No. 840 of 2010)

18. Adoni Ginning Factory vs. Secretary, A. P. Electricity Board AIR 1979 SC 1511



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CASE STUDY 2

Taxation issues relating to Payment of Legal Fees to UK LLP1.9. X LLP is a law firm based in the United Kingdom (‘UK’) and has 150 partners all based

in the UK. X LLP is a tax transparent entity in the UK.

1.10. I Co is a company incorporated in India and requires the assistance of lawyers. In this connection, I Co appoints X LLP for Project Everest. In connection with this project, 1 partner and 4 lawyers from X LLP visit India. Some work on Project Everest is also undertaken from the UK.

1.11. The team of lawyers is present in India for 30 days to advice on the project. On completion of the project, X LLP raises an invoice on I Co for the services provided.

1.12. Issues for consideration:

• Whether X LLP would be eligible for claiming treaty benefits in India under the India-UK Double Taxation Avoidance Agreement (‘India-UK Tax Treaty‘)

• Whether the payments made to X LLP are taxable in India under the:

• Income-tax Act, 1961

• India-UK Tax Treaty

• Would the answer to the above be different, if 1 partner and 4 lawyers are present in India for 100 days?

• Please advice on any other income-tax issues that should be considered?



Reference Material1. Section 9(1)(vii) of the Income-tax Act, 1961

2. Articles 1, 3, 4, 5, 7 and 15 of the India-UK Tax Treaty

3. The Application of OECD Model Convention to Partnerships

4. Clifford Chance vs. DCIT 318 ITR 237 (Bom.)

5. Linklaters LLP vs. ITO 9 ITR (Trib.) 217 (Mum.)

6. Canoro Resources Limited (2009-TIOL-10-ARA-IT)

7. Continental Construction 195 ITR 81 (SC)

8. Ishikawajima Harima Heavy Industries Limited 288 ITR 408 (SC)

9. DDIT vs. Set Satellite (Singapore) Pte Limited 108 TTJ 445

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CASE STUDY 3A

Tax implications of interest received/paid by a PE from/to a person in a Third State [Triangular Situation]3A.1 X Co is a company incorporated in R State and a tax resident of R State. X Co has set

up a Branch Office (‘BO’) in PE State.

3A.2 BO sells goods to Y Co, a company incorporated in S State. BO receives interest on account of receivables from the sale of goods. The entire income of the BO is taxed in PE State including interest from S State.

3A.3 Separately, BO pays interest on debt to Z Co, a company incorporated in S State. Y Co and Z Co are tax residents of S State.

3A.4 Tax rate on interest are as follows:

3A.5 Issues for consideration:

• Please advice on the tax implications in the relevant jurisdictions in respect of interest received by BO/paid by Y Co

• Please advice on the tax implications in the relevant jurisdictions in respect of interest received by Z Co/paid by BO

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CASE STUDY 3B

Taxation issues in respect of payment of dividends in cross border situations 3B.1 A Co is a company incorporated in R State. A Co has setup a Wholly Owned

Subsidiary (‘WOS’), B Co, in S State. The board meetings of A Co are held in P State and all the directors of A Co are residents of P State.

3B.2 A Co, in turn, is a WOS of H Co, which is a company incorporated in H State. H Co and B Co are tax residents of H State and S State respectively.

3B.3 B Co pays dividend to A Co and A Co pays dividend to H Co.

3B.4 Tax rates on dividend are as follows:

3B.5 Issues for consideration:

• Please advice on the Income-tax implications in relevant jurisdictions in respect of dividend payments by B Co

• Please advice on the Income-tax implications in relevant jurisdictions in respect of dividend payments by A Co



Reference Material1 Articles 1, 2, 3, 4, 5, 10, 11, 23A, 23B and 24 of the OECD Model Convention

2 OECD Model Commentary on the above Articles.

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CASE STUDY 4

Business of Operation of Cruises by a Foreign Co. – Indian Tax implications4.1 C Co is a company incorporated in the United Kingdom (‘UK’) and is a tax resident of

UK. C Co is engaged in the business of operation of cruises and is currently proposing to set up its operations in India.

4.2 C Co has obtained a cruise-liner on a bareboat charter basis from an UK based company U Co. Under the agreement, C Co can operate the cruise-liner globally. C Co would pay lease rentals to U Co. The lease would be in nature of operating lease and not a finance lease.

4.3 C Co is contemplating to setup a Branch Office (‘BO’) in India which would undertake marketing and selling activities for the different types of cruises.

4.4 One of the cruises which C Co proposes to engage into would be a round-trip cruise ie cruises which originates and terminates in India for eg Goa – Kochi - Colombo – Goa. No passengers would embark or disembark at the ports in between.

4.5 For the aforesaid round-trip cruises, C Co would take the vessel (cruise liner) obtained from U Co. The passengers travelling on cruise would be issued a single ticket for such round-trip journey.

4.6 Issues for consideration:

• Discuss the Indian Income-tax implications in the hands of C Co

• Discuss the Indian Income-tax implications in the hands of U Co

Reference Material1. Articles 3, 5, 7, 9 and 12 of the India-UK Double Taxation Avoidance Agreement

(‘India-UK Tax Treaty’)

2. OECD Commentary (2010)

3. Article 3 of USA Model Convention

4. P. No. 13 of 1995 228 ITR 487 (AAR)

5. Ishikawajima Harima Heavy Industries Limited 288 ITR 408 (SC)

6. Sumitomo Corporation 110 TTJ 302 (AAR)

7. Worley Parsons Services Pty Limited 312 ITR 273 (AAR)

8. ADIT (IT), Circle 2(1), Mumbai vs. Star Cruises India Travel Services Pvt. Ltd. 2011-TII-113-ITAT-MUM-INTL

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CASE STUDY 5

Tax implications of transfer of shares in an Indian Company between two non-residents4.7 I Co is a company incorporated in India and listed on the Bombay Stock Exchange. M

Co, a Global Business Licence 1 company incorporated in Mauritius, holds 12% shares in I Co.

4.8 M Co was holding a tax residency certificate issued by the Mauritius Revenue authorities. M Co, in turn, is a WOS of US Co, a company incorporated in the United States of America.

4.9 M Co sold the shares of I Co to P Co (a company incorporated in Singapore and a tax resident of Singapore) for a consideration of Rs 300 crores in off-market mode (not through a recognized stock exchange). Before making the payment to M Co, P Co approached the Indian Income-tax authorities for a withholding tax order under Section 195 of the Income-tax Act, 1961 (‘Act’).

4.10 The Indian Income-tax authorities had issued a NIL withholding tax order permitting

4.11 P Co to make payment to M Co without any deduction of tax. Accordingly, P Co made the payment to M Co without withholding any taxes on the same.

4.12 In a recent board meeting of P Co, the directors were discussing the open tax issues for the company and more specifically for the above transaction for the purpose of internal reporting.

4.13 Issues for consideration:

• Please advise on the possible Income-tax implications for P Co in this transaction of purchase of shares of I Co



Reference Material1 Sections 48, 90, 112, 162, 163 and 195 of the Act

2 Article of 13 of the Double Taxation avoidance Agreement between India and Mauritius

3 Circular Number 333 dated 2nd April, 1982

4 Circular Number 682 dated 30th March, 1994

5 Circular Number 728 dated 30th October, 1995

6 Circular Number 789 dated 20th April, 2000

7 Circular Number 1/ 2003 dated 10th February, 2003

8 E Trade Mauritius Limited 324 ITR 1 (AAR)

9 Union of India vs. Azadi Bachao Andolan 263 ITR 706 (SC)

10 Praxair Pacific Limited (AAR/ 855/ 2009)

11 DDIT vs. Saraswati Holding Corporation Inc (2009-TIOL-529-ITAT-DEL)

12 UASC Limited vs. DCIT (12 SOT 588) (Mumbai Tribunal)

13 DLJMB Mauritius Investment Company vs. CIT (228 ITR 268) (AAR)

14 Aditya Birla Nuvo (AB Nuvo), New Cingular Wireless Services Inc (NCWS), Tata Industries Ltd (TIL) WP Nos. 730 of 2009, 1837 of 2009, 38 of 2010, 345 of 2010

15 SMR Investments Ltd vs. DDIT – ITA Nos. 4084/Del/2006 & 46/Del/2006 dated 26th March, 2010

16 D B Zwirn Mauritius Trading Number 3 Limited (AAR 878 of 2010)

17 BASF Aktiengesellschaft (293 ITR 1)

18 Timken France SAS (AAR 739 of 2009)

19 Cairn U.K. Holdings Limited (AAR No. 950 of 2010)

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REFERENCE MATERIAL

Case Study 1: Issues relating to Discounting of Bills of Exchange in International Trade

1. Section 2(28A) of the Income-tax Act, 1961 (‘Act’)(28A) “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.

2. Section 9(1)(v) of the Act 9. Income deemed to accrue or arise in India

(1) The following incomes shall be deemed to accrue or arise in India —

(v) income by way of interest payable by—

(a) the Government; or

(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, 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; or

(c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India;

3. Circular Number 202 dated 5th July, 1976 explaining the amendments of the Finance Act, 1976[1976] 105 ITR (Stat) 17- Circular Number: 202 dated 5th July 1976

File Number: 131(6)/76-TPL

Subject: The Finance Act, 1976--Explanatory notes on provisions relating to direct taxes.

Source rule for “interest” - Sections 9(1)(i) & (v).

14.1 A non-resident taxpayer is chargeable to tax in India in respect of income from whatever source derived which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. Under section 9(1)(i) of the Income-tax Act, as it stood prior to its amendment by the Finance Act, any income accruing or arising “through or from any money lent at interest and brought into India in cash or in kind” was deemed to accrue or arise in India. It was judicially held that to satisfy the test of taxability, the lending of money abroad and the bringing of the same into India should be an integral part of a composite transaction and the bringing of money into India should be with the knowledge of the lender. Thus, interest on moneys borrowed abroad and brought without the knowledge of the lender was not chargeable to tax in India.



14.2 Section 9(1) has now been amended to replace the aforesaid provision by a simple and comprehensive source rule. Under the amended provision, interest income of the following types will be deemed to accrue or arise in India:-

(a) Interest payable by the Central Government or any State Government;

(b) Interest payable by a resident except in the following cases:-

(i) Interest payable by a resident in respect of any debt incurred, or any moneys borrowed and used, for the purposes of a business or profession carried on by him outside India; and

(ii) interest payable by a resident in respect of any debt incurred, or any moneys borrowed and used, for the purposes of making or earning any income from any source outside India.

It may be noted that where moneys borrowed by a resident for the purposes of a business or profession carried on by him outside India are actually used for any other purpose, interest payable thereon will be deemed to accrue or arise in India. Similarly interest payable on moneys borrowed by a resident for the purposes of making or earning any income from any source outside India will be deemed to accrue or arise in India if the moneys are actually used for any purpose in India.

(c) Interest payable by a non-resident in respect of any debt incurred, or money borrowed and used, for the purposes of a business or profession carried on by him in India.

It may be noted that interest payable by a non-resident in respect of any debt incurred, or moneys borrowed and used, for the purposes of making or earning any income from any source, other than a business or profession carried on by him in India, will not be deemed to accrue or arise in India. Thus, if a non-resident ‘A’ borrows moneys from a non-resident ‘B’ and invests the same in share of an Indian company, interest payable by ‘A’ to ‘B’ will not be deemed to accrue or arise in India. Similarly, if a lead bank obtains loans outside India from a consortium of foreign banks and lends the same to an Indian concern, interest paid by the lead bank to the members of the consortium will not attract liability towards income-tax in India.

14.3 The aforesaid amendment has come into force with effect from the 1st June, 1976, and is accordingly applicable for the deduction of income-tax at source from income by way of interest paid on or after that date and for assessment of such income for the assessment year 1977-78 and subsequent years [Section 4(a) & (b) (Part) of the Finance Act]

4. Circular Number 65 [F. No. 275/97-ITJ], dated 2nd September, 1971 in relation to bill discounting by banks

Supplier drawing hundi on buyer and routing it through his banker with instructions to charge interest on amount of hundi from date of acceptance to date of actual payment — Whether tax is deductible at source by party retiring hundi from interest at the time of making payment to bank



CLARIFICATION 11. I am directed to invite a reference to the Board’s Circular No. 48 [F. No. 275/195/70-ITJ],

dated 7-11-1970 [Clarification 2]. The Board has been requested to reconsider the views given in that circular. After a careful examination of the legal position the Board is of the view that to the following extent the earlier views need a modification. Where the supplier of goods makes over the usance bill/hundi to his bank which discounts the same and credits the net amount to the supplier’s account straightaway without waiting for realisation of the bill on due date, the property in the usance bill/hundi passes on to the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. For such cases of immediate discounting the net payment made by the bank to the supplier is in the nature of a price paid for the bill. Such a payment cannot technically be held as including interest and therefore no tax need be deducted at source from such payments by the bank. Further, the buyer need not deduct any tax from the payment made by him on due date to the bank in respect of such discounted bill inasmuch as these payments to a bank or a banking cooperative society, conforming to the exemption granted by section 194A(3)(iii)(a).

2. On the other hand, where there is no immediate discounting and the bank merely acting as agent receives on the expiry of the period the payment for the bill from the buyer on behalf of the supplier and credits it to him accordingly, the bank receives interest on behalf of the supplier and the instructions contained in the Board’s above-mentioned circular dated November 7, 1970 would apply and the buyer will have to deduct the tax from the interest.

Circular: No. 65 [F. No. 275/97-ITJ], dated 2-9-1971.

CLARIFICATION 21. I am directed to invite a reference to the Board’s Circular No. 22/68-IT(B) [F. No.

12/23/68-IT(B)], dated 28-3/13-5-1968, regarding the provisions of section 194A. Instances have been brought to the notice of the Board where in the case of outstation sale of goods the supplier draws a hundi on the buyer and routes it through his banker along with transport documents with instructions to deliver the documents on retirement of the hundi and to charge interest on the amount of hundi from the date of acceptance thereof to the date of actual payment. A question has been raised whether, in such circumstances, tax is deductible at source by the party retiring the hundi on the amount of interest at the time of making payment to the bank, or whether the exemption provisions of section 194A(3)(iii)(a) would be attracted in this behalf.

2. In the above case the interest paid by the buyer to the supplier is not to the bank as such but only routed through the bank. In accordance with section 194A(3)(iii)(a), no tax is to be deducted at source in respect of interest paid to a bank but where the interest from the buyer is not for the bank as such, but only routed through bank to the supplier who is the recipient, the buyer has to deduct tax at source under section 194A from the interest paid and routing of the interest through bank will not make any difference.

Circular: No. 48 [F. No. 275/195/70-ITJ], dated 7-11-1970.



5. Circular Number 647, dated 22 March 1993 - Clarification regarding applicability of provisions of section 194A to commercial papers and certificates of deposits

Clarification regarding applicability of provisions of section 194A to commercial papers and certificates of deposits

1. The Certificates of Deposits (CDs) and the Commercial Papers (CPs) are money-market related instruments which are traded in the secondary market. These are negotiable instruments in the nature of usance promissory notes which are issued and regulated in accordance with the instructions/guidelines issued by the Reserve Bank of India from time to time.

2. While, in terms of the Reserve Bank’s instructions pertaining to Certificates of Deposits and Commercial Papers, the conditions regarding their minimum face value, period of transferability/maturity, ceiling on the amount of issue, etc., differ, one aspect is common to both these instruments, namely, that they are issued at a discount to their face value and are freely transferable by endorsement and delivery. Thus, the issue price of these instruments is less than their face value.

3. A question has been recently raised as to whether the difference between the issue price and face value of these instruments should be treated as ‘interest’ in which case it would be liable to deduction of tax at source under section 194A of the Income-tax Act, 1961, or, it should be treated as ‘discount’ which is not liable to deduction of tax at source.

4. It is clarified for the information of all concerned that the difference between the issue price and the face value of the Commercial Papers and the Certificates of Deposits is to be treated as ‘discount allowed’ and not as ‘interest paid’. Hence, the provisions of the Income-tax Act relating to deduction to tax at source are not applicable in the case of transactions in these two instruments.

[Circular: No. 647, dated 22-3-1993]

6. Circular Number 2 of 2002 dated 15th February, 2002 - Clarifications regarding tax treatment of deep discount bonds and STRIPS (Separate Trading of Registered Interest and Principal of Securities)

Clarifications regarding tax treatment of deep discount bonds and STRIPS (Separate Trading of Registered Interest and Principal of Securities)

1. A review of the tax treatment of income arising from Deep Discount Bonds has been under consideration in the Board for some time. The Board had earlier clarified by way of certain letters issued to the Reserve Bank of India and others that the difference between the bid price (subscription price) and the redemption price (face value) of such bonds will be treated as interest income assessable under the Income-tax Act. On transfer of the bonds before maturity, the difference between the sale consideration and the cost of acquisition would be taxed as income from capital gains where the bonds were held as investment, and as business income where the bonds were held as trading assets. On final redemption, however, no capital gains will arise. It was further clarified that tax



would be deducted at source on the difference between the bid price and the redemption price at the time of maturity.

2. Such tax treatment of Deep Discount Bonds, however, has posed the following problems:

(i) Taxing the entire income received from such a bond in the year of redemption as interest income gives rise to a sudden and huge tax liability in one year whereas the value of the bond has been progressively increasing over the period of holding.

(ii) Where the bond is redeemed by a person other than the original subscriber, such person becomes taxable on the entire difference between the bid price and the redemption price as interest income, since he is not able to deduct his cost of acquisition from such income.

(iii) A company issuing such bonds and following the mercantile system of accounting may evolve a system for accounting of annual accrual of the liability in respect of such a bond and claim a deduction in its assessment for each year even though the corresponding income in the hands of the investor would be taxed only at the time of maturity.

(iv) Taxing the entire income only at the time of maturity amounts to a tax deferral.

3. The matter has now been examined in consultation with the Reserve Bank of India and the Ministry of Law. The practice followed in several countries outside India has also been examined. With a view to remove the anomalies in the existing system of taxation of income from Deep Discount Bonds, and to formulate a system which is more in line with international practice, the Board have decided that such income may hereafter be treated as follows.

General treatment

4. Every person holding a Deep Discount Bond will make a market valuation of the bond as on the 31st March of each Financial Year (hereafter referred to as the valuation date) and mark such bond to such market value in accordance with the guidelines issued by the Reserve Bank of India for valuation of investments. For this purpose, market values of different instruments declared by the Reserve Bank of India or by the Primary Dealers Association of India jointly with the Fixed Income Money Market and Derivatives Association of India may be referred to.

4.1 The difference between the market valuations as on two successive valuation dates will represent the accretion to the value of the bond during the relevant financial year and will be taxable as interest income (where the bonds are held as investments) or business income (where the bonds are held as trading assets).

4.2 In a case where the bond is acquired during the year by an intermediate purchaser (a person who has acquired the bond by purchase during the term of the bond and not as original subscription) the difference between the market value as on the valuation date and the cost for which he acquired the bond, will be taxed as interest income or business income, as the case may be, and



no capital gains will arise as there would be no transfer of the bond on the valuation date.

Transfer before maturity

5. Where the bond is transferred at any time before the maturity date, the difference between the sale price and the cost of the bond will be taxable as capital gains in the hands of an investor or as business income in the hands of a trader. For computing such gains, the cost of the bond will be taken to be the aggregate of the cost for which the bond was acquired by the transferor and the income, if any, already offered to tax by such transferor (in accordance with para 4 above) upto the date of transfer.

5.1 Since the income chargeable in this case is only the accretion to the value of the bond over a specific period, for the purposes of computing capital gains, the period of holding in such cases will be reckoned from the date of purchase/subscription, or the last valuation date in respect of which the transferor has offered income to tax, whichever is later. Since such period would always be less than one year, the capital gains will be chargeable to tax as short-term capital gains.

Redemption

6. Where the bond is redeemed by the original subscriber, the difference between the redemption price and the value as on the last valuation date immediately preceding the maturity date will be taxed as interest income in the case of investors, or business income in the case of traders.

6.1 Where the bond is redeemed by an intermediate purchaser, the difference between the redemption price and the cost of the bond to such purchaser will be taxable as interest or business income, as the case may be. For this purpose, again, the cost of the bond will mean the aggregate of the cost at which the bonds were acquired and the income arising from the bond which has already been offered to tax by the person redeeming the bond.

STRIPS

7. Apart from original issue of Deep Discount Bonds, such bonds can also be created by ‘stripping’, i.e., the process of detaching the interest coupons from a normal coupon bearing bond and treating the different coupons and the stripped bond as separate instruments or securities (‘strips’) capable of being traded in independently. Such a mechanism, referred to as STRIPS (Separate Trading of Registered Interest and Principal of Securities) creates instruments which are in the nature of Deep Discount or Zero Coupon Bonds from out of the normal interest bearing bonds. Accordingly, the tax treatment of the different components of principal and interest created by such stripping will be on the same lines as clarified in the preceding paragraphs in respect of Deep Discount Bonds.

7.1 The process of stripping of a normal interest-bearing bond into its various components will not amount to a transfer within the meaning of the Income-tax Act as it merely involves the conversion of the unstripped bond into the



corresponding series of STRIPS. Similarly, the reconstitution of STRIPS to form a coupon bearing bond will not amount to a transfer.

Tax deduction at source

8. The difference between the bid price of a deep discount bond and its redemption price, which is actually paid at the time of maturity, will continue to be subject to tax deduction at source under section 193 of the Income-tax Act. Under the existing provisions of that section, no tax is deductible at source on interest payable on Government securities. Further, the Central Government is empowered to specify any such bonds issued by an institution, authority, public sector company or co-operative society by way of notification, exempting them from the requirement of tax deduction at source.

Option to investors

9. Considering the difficulties which might be faced by small non-corporate investors in determining market values under the RBI guidelines and computing income taxable in each year of holding, it has further been decided that such investors holding Deep Discount Bonds upto an aggregate face value of rupees one lakh may, at their option, continue to offer income for tax in accordance with the earlier clarifications issued by the Board referred to in para 1 above.

[Circular: No. 2/2002, dated 15-2-2002]

7. Article 11 of the India-USA Double Taxation Avoidance Agreement ARTICLE 11 — Interest –

1. Interest 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 interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed:

(a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); and

(b) 15 per cent of the gross amount of the interest in all other cases.

3. Notwithstanding the provisions of paragraph 2 of this Article, interest arising in a Contracting State:

(a) and derived and beneficially owned by the Government of the other Contracting State, a political sub-division or local authority thereof, the Reserve Bank of India, or the Federal Reserve Bank of the United States, as the case may be, and such other institutions of either Contracting State as the competent authorities may agree pursuant to Article 27 (Mutual Agreement Procedure);



(b) with respect to loans or credits extended or endorsed

(i) by the Export Import Bank of the United States, when India is the first-mentioned Contracting State; and

(ii) by the EXIM Bank of India, when the United States is the first-mentioned Contracting State; and

(c) to the extent approved by the Government of that State, and derived and beneficially owned by any person, other than a person referred to in sub-paragraphs (a) and (b), who is a resident of the other Contracting State, provided that the transaction giving rise to the debt-claim has been approved in this behalf by the Government of the first-mentioned Contracting State;

shall be exempt from tax in the first-mentioned Contracting State.

4. The term “interest” as used in this Convention 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 or prizes attaching to such securities, bonds, or debentures. Penalty charges for late payment shall not be regarded as interest for the purposes of the Convention. However, the term “interest” does not include income dealt with in Article 10 (Dividends).

5. The provisions of paragraphs 2 and 3 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 interest is attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply.

6. Interest shall be deemed to arise in a Contracting State when the payer is that State itself or a political sub-division, local authority, or 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, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of the Convention.



Case Study 2: Taxation issues relating to Payment of Legal Fees to UK LLP

1. Section 9(1)(vii) of the Income-tax Act, 1961 Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or arise in India:-

(vii) income by way of fees for technical services payable by-

(a) the Government; or

(b) a person who is a resident, except where the fees are 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; or

(c) a person who is a non-resident, where the fees 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:

Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.

Explanation 1 - For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.

Explanation 2 - For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.

2. Articles 1, 3, 4, 5, 7 and 15 of the India-UK Tax Treaty ARTICLE 1 — Scope of the Convention –

1. This Convention shall apply to persons who are residents of one or both of the Contracting States.

2. This Convention extends to the territory of each Contracting State, including its territorial sea, and to those areas of the exclusive economic zone or the continental shelf adjacent to the outer limit of the territorial sea of each State over which it has, in accordance with international law, sovereign rights for the purpose of exploration and exploitation of the natural resources of such areas, and references in this Convention to the Contracting State or to either of them shall be construed accordingly.



ARTICLE 3 — General definitions—

1. In this Convention, unless the context otherwise requires :

(a) the term “United Kingdom” means Great Britain and Northern Ireland;

(b) the term “India” means the Republic of India;

(c) the term “tax” means United Kingdom tax or Indian tax, as the context requires but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Convention applies or which represents a penalty imposed relating to those taxes;

(d) the term “fiscal year” in relation to Indian tax means “previous year” as defined in the Income-tax Act, 1961 (43 of 1961) and in relation to United Kingdom tax means a year beginning with 6th April in one year and ending with 5th April in the following year;

(e) the terms “a Contracting State” and “the other Contracting State” mean India or the United Kingdom, as the context requires;

(f) the term “person” includes an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States, but, subject to paragraph 2 of this Article, does not include a partnership;

(g) the term “company” means any body corporate or any entity which is treated as a company or body corporate for tax purposes;

(h) the terms “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;

(i) the term “competent authority” means, in the case of the United Kingdom, the Commissioners of Inland Revenue or their authorised representative, and in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative;

(j) the term “international traffic” means any transport by a ship or aircraft operated by an enterprise of a Contracting State except when the ship or aircraft is operated solely between places in the other Contracting State;

(k) the term “Government” means the Government of a Contracting State or a political sub-division or local authority thereof. In relation to the United Kingdom, the term “political sub-division” shall include Northern Ireland.

2. A partnership which is treated as a taxable unit under the Income-tax Act, 1961 (43 of 1961) of India shall be treated as a person for the purposes of this Convention.

3. As regards the application of this Convention by a Contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes which are the subject of this Convention.



ARTICLE 4 — Fiscal domicile –

1. For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

2. Where by reason of the provisions of paragraph 1 of this Article an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules :

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests) ;

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both Contracting States or in either of them, he shall be deemed to be a resident of the Contracting State of which he is a national;

(d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.

ARTICLE 5 — Permanent establishment –

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.

2. The term “permanent establishment” shall include especially:

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) premises used as a sales outlet or for receiving or soliciting orders;

(g) a warehouse in relation to a person providing store facilities for others;



(h) a mine, an oil or gas well, quarry on other place of extraction of natural resources;

(i) an installation or structure used for the exploration or exploitation of natural resources;

(j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale or machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment;

(k) 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.

3. The term “permanent establishment” shall not be deemed to include:

(a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise;

(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade of



business of the enterprise. However, this provision shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State for any purpose or purposes other than the purposes specified in this paragraph;

(f) the maintenance of a fixed place of businesses solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of the paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

4. A person acting in a Contracting State for or on behalf of an enterprise of the other contracting State — other than an agent of an independent status to whom paragraph (5) of this Article applies, shall be deemed to be a permanent establishment of that enterprise in the first mentioned State if:

(a) he has, and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or

(b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or

(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and the enterprises controlling, controlled by, or subject to the same common control, as that enterprise.

5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph.

6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

7. For the purposes of this Article the term “control”, in relation to a company, means the ability to exercise control over the company’s affairs by means of the direct or indirect holding of the greater part of the issued share capital or voting power in the company.



ARTICLE 7 — Business profits –

1. 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 enter price may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment.

2. Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits which that permanent establishment 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 shall be treated for the purposes of paragraph 1 of this Article as being the profits directly attributable to that permanent establishment.

3. Where a permanent establishment takes an active part in negotiating, concluding or fulfilling contracts entered into by the enterprise, then, notwithstanding that other parts of the enterprise have also participated in those transactions, that proportion of profits of the enterprise arising out of those contracts which the contribution of the permanent establishment to those transactions bears to that of the enterprise as a whole shall be treated for the purpose of paragraph 1 of this Article as being the profits indirectly attributable to that permanent establishment.

4. Insofar as it has been customary in a Contracting State according to its law to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraphs 1 and 2 of this Article shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be necessary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this Article.

5. Subject to paragraphs 6 and 7 of this Article, in the determination of the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, which are allowed under the provisions of and subject to the limitations of the domestic law of the Contracting State in which the permanent establishment is situated.

6. Where the law of the Contracting State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and the restriction it relaxed or overridden by any Convention between that Contracting State and a third State which is a member of the Organisation for Economic Cooperation and Development or a State in a comparable stage of development, and that



Convention enters into force, after the date of entry into force of this Convention, the competent authority of that Contracting State shall notify the competent authority of the other Contracting State of the terms of the relevant paragraph in the Convention with that third state immediately after the entry into force of that Convention and, if the competent authority of the other Contracting State so requests, the provisions of this Convention shall be amended by protocol to reflect such terms.

7. Paragraph 5 of this Article shall not apply to amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, to by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to the permanent establishment; nor shall account be taken in the determination of the profits of a permanent establishment of amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment of the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or any way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to be head office of the enterprise or any of its other offices.

8. No profits shall be attributed to permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

9. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.

ARTICLE 15 — Independent personal services –

1. Income derived by an individual, whether in his own capacity or as a member of a partnership, who is a resident of a Contracting State in respect of professional services or other independent activities of a similar character may be taxed in that State. Such income may also be taxed in the other Contracting State if such services are performed in that other State and if:

(a) he is present in that other State for a period or periods aggregating to 90 days in the relevant fiscal year; or

(b) he, or the partnership, has a fixed base regularly available to him, or it, in that other State for the purpose of performing his activities;

but in each case only so much of the income as is attributable to those services.

2. For the purposes of paragraph 1 of this Article an individual who is a member of a partnership shall be regarded as being present in the other State during days on which, although he is not present, another individual member of the partnership is so present and performs professional services or other independent activities of a similar character in that State.



3. The term “professional services” includes independent, scientific, literary, artistic, educational or teaching activities as well as the independent activities or physicians, surgeons, lawyers, engineers, architects, dentists and accountants.

Case Study 3A: Tax implications of interest received / paid by a PE from / to a person in a Third State [Triangular Situation] & Case Study 3B: Taxation issues in respect of payment of dividends in cross border situations

Articles 1, 2, 3, 4, 5, 10, 11, 23A, 23B and 24 of the OECD Model ConventionARTICLE 1 — PERSONS COVERED

This Convention shall apply to persons who are residents of one or both of the Contracting States.

ARTICLE 2 — TAXES COVERED

1. This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied.

2. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

3. he existing taxes to which the Convention shall apply are in particular:

a) ................................................................. (in State A):

b) ................................................................. (in State B):

4. The Convention shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in their taxation laws.

ARTICLE 3 — GENERAL DEFINITIONS1. For the purposes of this Convention, unless the context otherwise requires:

a) the term “person” includes an individual, a company and any other body of persons;

b) the term “company” means any body corporate or any entity that is treated as a body corporate for tax purposes;

c) the term “enterprise” applies to the carrying on of any business;

d) the terms “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;

e) the term “international traffic” means any transport by a ship or aircraft operated by an enterprise that has its place of effective management in a Contracting State,



except when the ship or aircraft is operated solely between places in the other Contracting State;

f) the term “competent authority” means:

(i) ............................................. (in State A):

(ii) ............................................. (in State B):

g) the term “national”, in relation to a Contracting State, means:

(i) any individual possessing the nationality or citizenship of that Contracting State; and

(ii) any legal person, partnership or association deriving its status as such from the laws in force in that Contracting State;

h) the term “business” includes the performance of professional services and of other activities of an independent character.

2. As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

ARTICLE 4 — RESIDENT1. For the purposes of this Convention, the term “resident of a Contracting State” means

any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political sub-division or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);

b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;

c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;

d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.



ARTICLE 5 — PERMANENT ESTABLISHMENT1. 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.

2. The term “permanent establishment” includes especially:

a) a place of management;

b) a branch;

c) an office;

d) a factory;

e) a workshop; and

f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:

a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

e) the 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;

f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person — other than an agent of an independent status to whom paragraph 6 applies — is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.



6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.

7. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

ARTICLE 10 — DIVIDENDS1. Dividends paid by a company which is a resident of a Contracting State to a resident

of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:

a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends;

b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

3. The term “dividends” as used in this Article means income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident through a permanent establishment situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.

5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment situated in that other State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.



ARTICLE 11 — INTEREST1. Interest 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 interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.

3. 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.

4. 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 and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.

5. 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 in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment, then such interest shall be deemed to arise in the State in which the permanent establishment is situated.

6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

METHODS FOR ELIMINATION OF DOUBLE TAXATION

ARTICLE 23 A — EXEMPTION METHOD1. Where a resident of a Contracting State derives income or owns capital which,

in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall, subject to the provisions of paragraphs 2 and 3, exempt such income or capital from tax.

2. Where a resident of a Contracting State derives items of income which, in accordance with the provisions of Articles 10 and 11, may be taxed in the other Contracting State,



the first-mentioned State shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in that other State. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to such items of income derived from that other State.

3. Where in accordance with any provision of the Convention income derived or capital owned by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital.

4. The provisions of paragraph 1 shall not apply to income derived or capital owned by a resident of a Contracting State where the other Contracting State applies the provisions of this Convention to exempt such income or capital from tax or applies the provisions of paragraph 2 of Article 10 or 11 to such income.

ARTICLE 23 B — CREDIT METHOD1. Where a resident of a Contracting State derives income or owns capital which,

in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall allow:

a) as a deduction from the tax on the income of that resident, an amount equal to the income tax paid in that other State;

b) as a deduction from the tax on the capital of that resident, an amount equal to the capital tax paid in that other State.

Such deduction in either case shall not, however, exceed that part of the income tax or capital tax, as computed before the deduction is given, which is attributable, as the case may be, to the income or the capital which may be taxed in that other State.

2. Where in accordance with any provision of the Convention income derived or capital owned by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital.

ARTICLE 24 — NON-DISCRIMINATION1. Nationals of a Contracting State shall not be subjected in the other Contracting State

to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States.

2. Stateless persons who are residents of a Contracting State shall not be subjected in either Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of the State concerned in the same circumstances, in particular with respect to residence, are or may be subjected.

3. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other



State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.

4. Except where the provisions of paragraph 1 of Article 9, paragraph 6 of Article 11, or paragraph 4 of Article 12, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State.

5. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.

6. The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description.

Case Study 4: Business of Operation of Cruises by a Foreign Co. – Indian Tax implications

1. Articles 9 and 12 of the India-UK Treaty (For Articles 3, 5 and 7 please refer material under Case Study 2)

ARTICLE 9 — Shipping –

1. Income of an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that State.

2. The provisions of paragraph 1 of this Article shall not apply to income from journeys between places which are situated in a Contracting State.

3. For the purposes of this Article, income from the operation of ships includes income derived from the rental on a bareboat basis of ships if such rental income is incidental to the income described in paragraph 1 of this Article.

4. Notwithstanding the provisions of Article 7 (business profits) of this Convention, the provisions of paragraphs 1 and 2 of this Article shall likewise apply to income of an enterprise of a Contracting State from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) used for the transport of goods or merchandise.

5. The provisions of this Article shall apply also to income derived from participation in a pool, a joint business or an international operating agency.



6. Gains derived by an enterprise of a contracting State from the alienation of ships or containers owned and operated by the enterprise shall be taxed only in that State if either the income from the operation of the alienated ships or containers was taxed only in that State, or the ships or containers are situated outside the other Contracting State at the time of the alienation.

ARTICLE 12 — Interest –

1. Interest 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 interest may also be taxed in the Contracting State in which it arises and accordingly to the law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest.

3. Notwithstanding the provisions of paragraph 2 of this Article:

(a) where the interest is paid to a bank carrying on a bona fide banking business which is a resident of the other Contracting State and is the beneficial owner of the interest, the tax charged in the Contracting State in which the interest arises shall not exceed 10 per cent of the gross amount of the interest;

(b) where the interest is paid to the Government of one of the Contracting States or a political sub-division or local authority of that State or the Reserve Bank of India, it shall not be subject to tax by the State in which it arises.

4. Notwithstanding the provisions of Article 7 of this Convention and of paragraphs 2 and 3 of this Article:

(a) interest arising in India which is paid to any beneficially owned by a resident of the United Kingdom shall be exempt from tax in India if it is paid in respect of a loan made, guaranteed or insured, or any other debt-claim or credit guaranteed or insured by the United Kingdom Export Credits Guarantee Department; and

(b) interest arising in the United Kingdom which is paid to and beneficially owned by a resident of India shall be exempt from tax in the United Kingdom if it is paid in respect of a loan made, guaranteed or insured, or any other debt-claim or credit guaranteed or insured by the Export Credits and Guarantee Corporation of India and/or Export-Import Bank of India.

5. 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 but, subject to the provisions of paragraph 9 of this Article, shall not include any item which is treated as a distribution under the provisions of Article 11 (Dividends) of this Convention.



6. The provisions of paragraphs 1, 2 and 3(a) of this Article 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 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be shall apply.

7. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or 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 that permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

8. Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention.

9. Any provision in the laws of either Contracting State relating only to interest paid a non-resident company shall not operate so as to require such interest paid to a company which is a resident of the other Contracting State to be treated as a distribution or dividend by the company paying such interest or to be left out of account as a deduction in computing the taxable profits of the company paying the interest. The preceding sentence shall not apply to interest paid to a company which is a resident of one of the Contracting State in which more than 50 per cent of the voting power is controlled, directly or indirectly, by a person or persons who are residents of the other Contracting State.

10. The relief from tax provided for in paragraph 2 of this Article shall not apply if the beneficial owner of the interest :

(a) is exempt from tax on such income in the Contracting State of which he is a resident; and

(b) sells or makes a contract to sell the holding from which such interest is derived within three months of the date such beneficial owner acquired such holding.

11. The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.



3. US Model Convention Article 3

General Definitions1. For the purposes of this Convention, unless the context otherwise requires:

a) the term “person” includes an individual, an estate, a trust, a partnership, a company, and any other body of persons;

b) the term “company” means any body corporate or any entity that is treated as a body corporate for tax purposes according to the laws of the state in which it is organized;

c) the terms “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively an enterprise carried on by a resident of a Contracting State, and an enterprise carried on by a resident of the other Contracting State; the terms also include an enterprise carried on by a resident of a Contracting State through an entity that is treated as fiscally transparent in that Contracting State;

d) the term “enterprise” applies to the carrying on of any business;

e) the term “business” includes the performance of professional services and of other activities of an independent character;

f) the term “international traffic” means any transport by a ship or aircraft, except when such transport is solely between places in a Contracting State;

g) the term “competent authority” means:

i) in ---------, ------------------------; and

ii) in the United States: the Secretary of the Treasury or his delegate;

h) the term “--------” means;

i) the term “United States” means the United States of America, and includes the states thereof and the District of Columbia; such term also includes the territorial sea thereof and the sea bed and subsoil of the submarine areas adjacent to that territorial sea, over which the United States exercises sovereign rights in accordance with international law; the term, however, does not include Puerto Rico, the Virgin Islands, Guam or any other United States possession or territory;

j) the term “national” of a Contracting State means:

i) any individual possessing the nationality or citizenship of that State; and

ii) any legal person, partnership or association deriving its status as such from the laws in force in that State;

k) the term “pension fund” means any person established in a Contracting State that is:

i) generally exempt from income taxation in that State; and

ii) operated principally either:

A) to administer or provide pension or retirement benefits; or



B) to earn income for the benefit of one or more persons described in clause A).

2. As regards the application of the Convention at any time by a Contracting State any term not defined therein shall, unless the context otherwise requires, or the competent authorities agree to a common meaning pursuant to the provisions of Article 25 (Mutual Agreement Procedure), have the meaning which it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

Case Study 5: Tax implications of transfer of shares in an Indian Company between two non-residents

1. Sec. 48, 90, 112, 162, 163 and 195 of the Income-tax Act

Mode of computation48. The income chargeable under the head “Capital gains” shall be computed, by deducting

from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer ;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto:

Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company :

Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted:

Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government:

Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section:]



Provided also that no deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.

Explanation.—For the purposes of this section,—

(i) “foreign currency” and “Indian currency” shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973);

(ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf;

(iii) “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;

(iv) “indexed cost of any improvement” means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place;

(v) “Cost Inflation Index”, in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification 55 in the Official Gazette, specify, in this behalf.

Agreement with foreign countries or specified territories90. (1) The Central Government may enter into an agreement with the Government of any

country outside India or specified territory outside India,—

(a) for the granting of relief in respect of—

(i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or

(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or

(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or



(d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be,

and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.

Explanation 1. — For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.

Explanation 2. — For the purposes of this section, “specified territory” means any area outside India which may be notified as such by the Central Government.

Tax on long-term capital gains112. (1) Where the total income of an assessee includes any income, arising from the

transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of,—

(a) in the case of an individual or a Hindu undivided family, being a resident,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent:

Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent;



(b) in the case of a domestic company,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent:

(c) in the case of a non-resident (not being a company) or a foreign company,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent;

(d) in any other case of a resident,—

(i) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income; and

ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent.

Explanation. —

Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities or unit or zero coupon bond], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.

Explanation.— For the purposes of this sub-section,—

(a) “listed securities” means the securities—

(i) as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (32 of 1956); and

(ii) listed in any recognised stock exchange in India;

(b) “unit” shall have the meaning assigned to it in clause (b) of Explanation to section 115AB.

(2) Where the gross total income of an assessee includes any income arising from the transfer of a long-term capital asset, the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.

(3) Where the total income of an assessee includes any income arising from the transfer of a long-term capital asset, the total income shall be reduced by the amount of such income and the rebate under section 88 shall be allowed from the income-tax on the total income as so reduced.



Right of representative assessee to recover tax paid162. (1) Every representative assessee who, as such, pays any sum under this Act, shall

be entitled to recover the sum so paid from the person on whose behalf it is paid, or to retain out of any moneys that may be in his possession or may come to him in his representative capacity, an amount equal to the sum so paid.

(2) Any representative assessee, or any person who apprehends that he may be assessed as a representative assessee, may retain out of any money payable by him to the person on whose behalf he is liable to pay tax (hereinafter in this section referred to as the principal), a sum equal to his estimated liability under this Chapter, and in the event of any disagreement between the principal and such representative assessee or person as to the amount to be so retained, such representative assessee or person may secure from the Assessing Officer a certificate stating the amount to be so retained pending final settlement of the liability, and the certificate so obtained shall be his warrant for retaining that amount.

(3) The amount recoverable from such representative assessee or person at the time of final settlement shall not exceed the amount specified in such certificate, except to the extent to which such representative assessee or person may at such time have in his hands additional assets of the principal.

Who may be regarded as agent163. (1) For the purposes of this Act, “agent”, in relation to a non-resident, includes any

person in India—

(a) who is employed by or on behalf of the non-resident; or

(b) who has any business connection with the non-resident; or

(c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or

(d) who is the trustee of the non-resident;

and includes also any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India :

Provided that a broker in India who, in respect of any transactions, does not deal directly with or on behalf of a non-resident principal but deals with or through a non-resident broker shall not be deemed to be an agent under this section in respect of such transactions, if the following conditions are fulfilled, namely:—

(i) the transactions are carried on in the ordinary course of business through the first-mentioned broker; and

(ii) the non-resident broker is carrying on such transactions in the ordinary course of his business and not as a principal.

Explanation.—For the purposes of this sub-section, the expression “business connection” shall have the meaning assigned to it in Explanation 2 to clause (i) of sub-section (1) of section 9 of this Act.]



(2) No person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard by the Assessing Officer as to his liability to be treated as such.

Other sums195. (1) Any person responsible for paying to a non-resident, not being a company, or to a

foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode:

Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.

Explanation.— For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).

(4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation.



(5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.

(6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.

2. ARTICLE 13 — Capital gains of the India-Mauritius Treaty– 1. Gains from the alienation of immovable property, as defined in paragraph (2)

of Article 6, may be taxed in the Contracting State in which such property is situated.

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State.

3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this Article shall be taxable only in that State.

5. For the purposes of this article, the term “alienation” means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States.

3. Circular No. 333 [F. No. 506/42/81-FTD], dated 2-4-1982

Specific provisions made in double taxation avoidance agreement -Whether it would prevail over general provisions contained in Income-tax Act1. It has come to the notice of the Board that sometimes effect to the provisions

of double taxation avoidance agreement is not given by the Assessing Officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961.

2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general



provisions contained in the Income-tax Act. In fact that the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective countries except where provisions to the contrary have been made in the agreement.

3. Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is basic law, i.e., the Income-tax Act, that will govern the taxation of income.

4. Circular No. 682, dated 30-3-1994

Clarification regarding agreement for avoidance of double taxation with Mauritius1. A Convention for the avoidance of double taxation and prevention of fiscal

evasion with respect to taxes of income and capital gains was entered into between the Government of India and the Government of Mauritius and was notified on 6-12-1983. In respect of India, the Convention applies from the assessment year 1983-84 and onwards.

2. Article 13 of the convention deals with taxation of capital gains and it has five paragraphs. The first paragraph gives the right of taxation of capital gains on the alienation of immovable property to the country in which the property is situated. The second and third paragraphs deal with right of taxation of capital gains on the alienation of movable property linked with business or professional enterprises and ships and aircraft.

3. Paragraph 4 deals with taxation of capital gains arising from the alienation of any property other than those mentioned in the preceding paragraphs and gives the right of taxation of capital gains only to that State of which the person deriving the capital gains is a resident. In terms of paragraph 4, capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.

4. Paragraph 5 defines ‘alienation’ to mean the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights in it or its compulsory acquisition under any law in force in India or in Mauritius.


Correct rates of tax applicable in case of remittance to a country with which Double Taxation Avoidance Agreement is in force1. It has been represented to the Board that when making remittances of the nature

of royalties and technical fees, tax is being deducted at source at the rates specified in the Finance Act of the relevant year, without taking into account the



special rates for taxation of such income provided for under the Double Taxation Avoidance Agreement with the country concerned.

2. The expression “rates in force” has been defined in section 2(37A) of the Income-tax Act. Under sub-clause (iii) of section 2(37A), for purposes of deduction of tax under section 195, the expression is to mean the rate or rates of income-tax specified in this behalf in the Finance Act in the relevant year, or the rates of tax specified in a Double Taxation Avoidance Agreement entered into by the Central Government, whichever is applicable by virtue of the provisions of section 90 of the Income-tax Act, 1961.

3. It is hereby clarified that in view of the provisions of sub-section (2) of section 90 of the Act, in case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.


Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Tax Avoidance Convention (DTAC)1. The provisions of the Indo-Mauritius DTAC of 1983 apply to ‘residents’ of both

India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean “any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.” Foreign Institutional Investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. These entities are ‘liable to tax’ under the Mauritius Tax law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC.

2. Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of shareholding of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section 115A, etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly.

3. The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs, etc., which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of Article 13.



7. CIRCULAR NO. 1/2003, DATED 10-2-2003 Clarification regarding residential status under Indo-Mauritius Double Taxation Avoidance

Convention

Reference is invited to the Circular No. 789 dated 13-4-2000 issued by the Board where it was clarified that “wherever the certificate of residence is issued by the Mauritian authorities, such certificate will constitute sufficient evidence for accepting the status of residence, as well as beneficial ownership for applying DTAC accordingly.” The said circular specified the mode of proof of residence of an entity in Mauritius.

Certain doubts have been raised regarding the effect of the aforesaid circular, particularly whether the said circular would also apply to entities which are resident of both India and Mauritius. In order to remove all doubts on the subject, it is hereby clarified that where an assessee is a resident of both the contracting States, in accordance with para 1 of Article 4 of Indo-Mauritius DTAC, then, his residence is to be determined in accordance with para 3 of the said Article, which reads as under :—

“3. Where, by reason of the provisions of paragraph 1, a person other than an individual is resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which the place of effective management is situated.”

In view of the above, where an Assessing Officer finds and is satisfied that a company or an entity is resident of both India and Mauritius, he would be free to proceed to determine the residential status under para 3 of article 4 of DTAC. Where it is found as a fact that the company has its place of effective management in India, then notwithstanding its being incorporated in Mauritius, it would be taxed under the DTAC in India.



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Reference Material


Origins of Famous Brand Names

There are many companies / brands / products whose names were derived from strange circumstances.

Adobe — This came from name of the river ‘Adobe Creek’ that ran behind the house of founder John Warnock.

Apple Computers — It was the favourite fruit of founder Steve Jobs. He was three months late in filing a name for the business, and he threatened to call his company ‘Apple Computers’ if the other colleagues didn’t suggest a better name by 5 O’clock.

CISCO — It is not an acronym as popularly believed. It is short for San Francisco.

Compaq — This name was formed by using COMp, for computer, and PAQ to denote a small integral object.

Corel — The name was derived from the founder’s name Dr. Michael Cowpland. It stands for COwpland REsearch Laboratory.

Google — The name started as a joke boasting about the amount of information the search-engine would be able to search. It was originally named ‘Googol’, a word for the number represented by 1 followed by 100 zeros. After founders- Stanford graduate students Sergey Brin and Larry Page presented their project to an angel investor, they received a cheque made out to ‘Google’

Hotmail — Founder Jack Smith got the idea of accessing e-mail via the web from a computer anywhere in the world. When Sabeer Bhatia came up with the business plan for the mail service, he tried all kinds of names ending in ‘mail’ and finally settled for hotmail as it included the letters “html” the programming language used to write web pages. It was initially referred to as HoTMaiL with selective upper-casing.

Hewlett Packard — Bill Hewlett and Dave Packard tossed a coin to decide whether the company they founded would be called Hewlett-Packard or Packard-Hewlett.

Intel — Bob Noyce and Gordon Moore wanted to name their new company ‘Moore Noyce’ but that was already trademarked by a hotel chain so they had to settle for an acronym of INTegrated ELectronics.

Lotus (Notes) Mitch Kapor got the name for his company from ‘The Lotus Position’ or Padmasana’. Kapoor used to be a teacher of Transcendental Meditation of Maharishi Mahesh Yogi.

Microsoft — Coined by Bill Gates to represent the company that was devoted to MICRO computer SOFTware. Originally christened Micro-Soft, the ‘-’ was removed later on.

Yahoo! — The word was invented by Jonathan Swift and used in his book ‘Gulliver’s Travels’. It represents a person who is ‘repulsive in appearance and action’ and is barely human..! Yahoo! Founders Jerry Yang and David Filo selected the name because they considered themselves yahoos.

(Sourced from the World Wide Web)

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